Glossary
Acceleration Clause: Allows the lender in a loan agreement to demand early payment certain reasons, such as defaulting on the loan, destruction of property, or transfer of title.
Accrue: The process whereby interest accumulates on your loan. When we speak of "interest accruing on your loan," we mean that the interest due on your loan is accumulating.
Additional Principal Payment: Extra money that is included in a monthly payment above what is necessary. It is applied to the outstanding balance and allows a debt to be paid off more quickly.
Adjusted Balance: The remaining balance on a debt after payments have been subtracted from the original balance, not including interest or fees. A consumer-friendly practice, it allows the interest rate to be based on the adjusted amount instead of on the original amount.
Amortization: Paying off debt gradually in partial payments rather than in one lump sum.
Annual Fee: A fee charged by the card issuer for being a card holder. Most commonly associated with frequent flyer credit cards and cards designed to rebuild your credit.
Annual Percentage Rate (APR): The cost of a loan expressed as a yearly rate. The monthly interest rate simply is the APR divided by 12. By law, creditors are obligated to reveal the APR.
Arrears: The amount of overdue payments on a debt.
Assets: Property and possessions or anything of value that you own.
Average Daily Balance -- The amount computed by determining how much is owed on a debt for an average day during a particular billing period. It is the method by which most credit card companies and banks determine due interest.
Bad Credit: Describes the status of someone who is considered “high risk” for credit lenders. Variables which can lead to such a label include non-payments, late payments, overuse of credit, or filing bankruptcy.
Bankruptcy: If you are unable to repay your debts it is possible for you to be declared bankrupt. In this case any assets you have can be used to raise money, which is then distributed to your creditors.
Billing Cycle: The amount of time between billing statements, typically 25 days.
Buydown: Lowering of the interest rate and/or monthly payments on debt due to a substantial additional payment while the debt is new. In other words, borrowers “buy” better rates.
Capitalization: Adding accumulated interest to the loan principal rather than having the borrower make interest payments. Capitalizing interest increases the principal amount of the loan and the total cost of the loan. Capitalizing is also known as compounding.
Cash Advance Loan: A loan that is granted to borrowers when a small amount of money is needed to cover funds until they receive their next paychecks. Once the paycheck is received, the cash advance loan must be repaid, often at a very high interest rate. Also known as a Payday Loan.
Chapter 7: The chapter of the Bankruptcy Code providing for the liquidation, or sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.
Chapter 11: A reorganization bankruptcy, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time.
Chapter 13: The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
Charge Card: Unlike revolving credit card accounts, which allow you to carry balances from month to month, charge card accounts must be paid in full every month.
Charge-off: When a debt is considered uncollectible and is removed from active accounts, and when the balance due is removed from the record of the creditor’s assets. Payment may be demanded in full or negotiated to a lesser amount, or the account may be sold to a collections agency.
Consumer Bankruptcy: A legal debt relief option for those gravely in debt without other financial alternatives. A declaration that one cannot pay the debts for which he or she is liable, filing bankruptcy can discharge debts or reduce them within the context of a realistic payment plan.
Consolidation: Combining multiple loans into a single loan, often at a lower interest rate and with smaller monthly payments.
Collateral: Property of value (such as a house or car) that is used as security for the repayment of a loan. Should the borrower fail to pay, the lender may take and sell the property as payment.
Co-Signer: Person who, along with the primary borrower, accepts responsibility for repaying the debt. Also referred to as co-borrowers or co-applicants, co-signers are often required when the primary borrower applying is not creditworthy for one reason or another.
Credit: Funds provided from a lender to a borrower that must be repaid.
Credit Bureau -- An agency that records consumer credit history and provides credit reports and scores. The three main agencies are Experian, Equifax, and TransUnion.
Credit Card: Unlike charge cards, these cards allow you to "revolve" your charges, that is, carry over portions of your balance from month to month. However, if you do not pay your balance in full, you are assessed finance charges. To protect your credit rating, be sure to pay at least the minimum amount due by the payment due date.
Credit Card Insurance: Protects you if you are unable to pay your credit card bills because of illness, unemployment, or other severe conditions. Under these circumstances, the insurance provider will pay your minimum payments.
Credit Counseling: Professional advice given to consumers about financial planning, budget management, and methods of debt repayment. Also known as CCCA.
Credit History: A record of a person’s ‘borrowing’ within a period of time that shows how much you may owe and your payment habits, it is used by lenders to gauge your credit risk.
Credit Insurance: A policy that protects the lender in the event that the borrower passes away, becomes unemployed, or becomes ill before the debt is fulfilled. Payment is made through the policy.
Credit Limit: The maximum amount of money that one may charge on a credit card, or may take out in a loan.
Credit Line: The most you can charge on your credit card account. When you receive a new credit card, you're usually issued a set credit line. Under some circumstances, your card issuer may increase or decrease it.
Credit Report: A document that records the credit history of a particular individual. Consumers have a report at each of the three main consumer credit agencies – Experian, Exuifax, and TransUnion. It may be examined by creditors to determine “credit worthiness”.
Credit Score: A score between 300 and 900 that is determined by one’s credit history, and is a representation of one’s “credit worthiness”. It may be used by creditors to decide whether or not to extend credit, as well as what interest rate one may receive.
Creditor: The person or company to which borrowers owe money for goods or services, or for repayment of a loan. One who extends credit; the lender in a loan situation.
Debit Card: A convenient way to "pay as you go," this enhanced ATM card subtracts money from your deposit account when you use it to make a purchase or get cash.
Debt: Money that is owed to a person or a business in exchange for goods or services, or for repayment of a loan.
Debt Collection: Refers to an organization that has been appointed to collect money you owe to another firm. In some cases such an organization will actually “buy” your debt and so replace the firm to which you originally owed money. Some may call at your home but there are laws governing what action they can take.
Debt Consolidation Loan: A loan obtained to pay off multiple other loans. Such loans tend to have lower interest rates, and also allow the borrower to make only one payment per month instead of many.
Debt Management Plan: A method of debt relief that involves formulating payment plans with one’s creditors to pay down debts while sticking to a realistic budget. Credit counseling agencies often promote DMPs as the best alternative, and sometimes they are.
Debt Settlement: A process of negotiating with creditors to accept payment that is less than the full amount of the debt owed. Funds accumulate in a special account until enough has been saved to pay off one creditor, and then the process repeats until the debts have been repaid.
Debtor: A consumer who owes money to a creditor in exchange for goods or services, or for repayment of a loan.
Debt-to-Income Ratio: A comparison of monthly expenses to monthly earnings expressed as percentages.
Default: Failure to pay as required by law or contract, such as in a mortgage or deed of trust agreement. Generally, a loan is considered in default if payment is 30 days past due, and collections actions may be initiated.
Delinquency: Failure to make monthly payments on a debt on time.
Disbursement: Payment of loan proceeds by the lender. During consolidation, this term refers to sending payoffs to the loan holders of the underlying loans being consolidated.
Discharge: A borrower is relieved of liability for repayment of debt. This usually is accomplished through filing bankruptcy.
Equity: Usually defined as the difference between the market value of a piece of property and any debts against it, such as outstanding mortgages, claims, liens, rights or liabilities. Equity in a home rises as such debts decrease and/or as the value of the property increases.
Equal Credit Opportunity Act: Federal law passed by Congress in 1974 that prohibits discrimination against credit applicants based on race, color, religion, national origin, sex, marital status, age, or public assistance.
Equifax/Experian: Two of the main credit reference agencies, who hold information on applicants seeking forms of credit. See Credit Reference Agency.
Equity: The difference between the market value of your home and the outstanding balance on your mortgage.
Fair Credit Billing Act: Federal law passed by Congress in 1975 to protect consumers from billing and computational errors. Additionally, it requires that payments be credited the day they are received. Consumers may sue if a creditor is in violation of the act.
Fair Credit Reporting Act: Federal law passed by Congress in 1970 that regulates consumer credit reporting and disclosure of credit information. Among other protections, it gives consumers the right to view their credit reports once per year, and outlines methods to correct false information.
Fair Debt Collection Practices Act: Federal law passed by Congress in 1977 that protects consumers against harassment or abuse from collections agencies.
Finance Charge: The total cost of credit including service fees, late fees, and transaction fees.
Fixed APR: Unlike a "variable APR," this type of APR does not automatically fluctuate based on changes in an index such as Prime Rate or LIBOR. A "fixed APR" does not mean that the rate is guaranteed not to change, though. Refer to your account terms for information on your issuer's ability to change the APR on your account.
FICO Scores: The Credit Bureau Risk Scores are formed with the help of the models created by Fair Isaac Corporation and are called FICO scores. These scores are used by creditors and others to judge the credit risk of potential borrowers or existing debtors. Proper credit and marketing decisions are the results of this score. The information obtainable on credit bureau reports result in derivation of these scores.
Fixed Interest Rate: A charge (usually 1% to 2%) is imposed by the credit card issuer, based on the expenditure, when a cardholder uses the credit card outside United States. This is termed the fixed interest rate.
Forbearance: A period during which your monthly loan payments are temporarily suspended or reduced. You may qualify for forbearance if you are willing but unable to make loan payments due to certain types of financial hardships.
Grace Period: A period of time during which a payments on a debt are not yet due. A common example is the six to nine month grace period after college graduation for repayment of federal student loans.
Graduated Payment: A type of loan repayment schedule in which payments start out small and increase gradually over time.
Grant -- Financial assistance that does not need to be repaid.
Gross Income: Total earnings before any taxes, deductions, or expenses are taken out.
Interest: An expense of borrowing money that is calculated as a percentage of the amount borrowed.
Loan: Money borrowed that must be repaid.
Loan Principal: The total sum of money borrowed.
Index: A statistic that indicates some current economic of financial condition. Indexes are used to make adjustments in variable rate loans.
Insolvency – The state of being unable to repay your debts.
Insurance Premium --The amount charged to a borrower by a guarantee agency for insuring the lender against losses on guaranteed loans.
Interest Rate: A fee charged for the use of credit expressed as a percentage of the debt. It is calculated for a certain period of time, often over a year.
Introductory Rate: A low initial interest rate charged on credit that eventually rises once the specified introductory period is over. It is offered to attract new customers.
IVA: An Individual Voluntary Arrangement is a legally binding agreement between you and your creditors where you pay an agreed amount over a fixed term – usually five years- and can only be administered by an Insolvency Practitioner. Once agreed, your creditors cannot add or change the arrangement without your consent. At the end of the period, any remaining debt is written off.
Late Fee: This is a charge made to a credit card account when the payment is made after the payment due date.
Late Payment: A late payment is a delinquent payment. It is a unsuccessful payment of a loan or debt on or prior to the time decided.
Liability: Legal responsibility or obligation to something. Consumers who are in debt are liable for repayment.
Lien: A claim against the property for the payment of a debt, judgment, mortgage or taxes.
Line of Credit: An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower.
Minimum Payment: The smallest amount of money that one may pay on a debt in order to keep the account from going into default. Often it encompasses only the interest on a debt, so it may be impossible to pay off some debts by making only such payments.
National Foundation for Consumer Credit: A national nonprofit agency whose members are cerfified, professional credit counselors. A reputable place to search for a counselor.
Negative Amortization: The situation in which partial payments are made on in debt, but instead of lowering the debt gradually, it increases the debt gradually. This can occur if payments made do not cover the interest, which then is added to the balance over time.
Over-limit Fee: A fee that is charged to credit borrowers who expand their balances past the allowable credit limits.
Past Due: A term used to describe an account when there is an outstanding payment due on the account which has not been made.
Payday Loan: A loan that is granted to borrowers when a small amount of money is needed to cover funds until they receive their next paychecks. Once the paycheck is received, the cash advance loan must be repaid, often at a very high interest rate. Also known as a Cash Advance Loan.
Point-of-Sale: The literal place and time at which a transaction or agreement takes place.
Power of Attorney: Written documentation that authorizes a person to act on behalf of another person in certain specified situations, or in general.
Prime Rate: Rate that banks charge their best commercial customers for loans. The prime changes often, is reported daily in The Wall Street Journal, and is used as a reference point for many businesses. For instance, the prime rate is used by some financial institutions to set the APR for credit cards.
Principal: The amount of an original debt that has not yet been paid. It does not include interest, but rather is the balance on which interest is based.
Principal Loan Balance Outstanding: The total principal amount outstanding on a borrower's Direct Loan. Principal balance will include the original amount disbursed for the loan, any adjustments made to the loan disbursement amount, and any interest capitalized on the account.
Promissory Note -- The binding legal document that borrowers sign when they obtain loans. Promissory notes define the conditions under which funds are provided and the terms under which borrowers agree to pay back the loan. Promissory notes include information about the interest rate and about deferment and cancellation provisions.
Re-age: The status of an account (current, delinquent, etc.) is updated to reflect the present situation.
Revolving Line of Credit: A loan agreement in which a certain amount of money is able to be borrowed. As long as the loan is repaid, the borrower may obtain more money up to the limit of the agreement without having to apply for a new loan. Home equity lines of credit and credit cards utilize this method.
Secured Credit Card: A great "first credit card" or way to reestablish your credit rating, this kind of card is "secured" by money you deposit in a designated savings account. For instance, if you deposit $500, your credit card limit generally will be for that amount. If for some reason you cannot pay your credit card bills, your credit card issuer will be paid from the savings account.
Secured Debt/Loan: A loan that is backed by the assets of the borrower such as their home, in order to decrease the risk taken on by the lender.
Servicer -- An entity designated to track and collect a loan on behalf of a loan holder.
Simple Daily Interest: The method used to calculate interest on student loans.
Stafford Loans: Low-interest subsidized and unsubsidized loans guaranteed by the federal government and available to students to fund education.
Subsidized Loan: A loan for which a borrower is not responsible for the interest while in an in-school, grace, or deferment status. Subsidized loans include Direct Subsidized, Direct Subsidized Consolidation Loans, Federal Subsidized Stafford Loans and Federal Subsidized Consolidation Loans.
Teaser Rate: A low initial interest rate on a mortgage or credit card.
Unsecured Debt/Loan: A loan taken on without the borrowers assets as security.
Unsubsidized Loan: A loan for which a borrower is fully responsible for paying the interest regardless of the loan status. Interest on unsubsidized loans accrues from the date of disbursement and continues throughout the life of the loan. Unsubsidized loans include: Direct Unsubsidized Loans, Direct PLUS Loans, Direct Unsubsidized Consolidation Loans, and Federal Unsubsidized Stafford Loans, Federal PLUS Loans, and Federal Unsubsidized Consolidation Loans.
Usury: Charging a rate of interest greater than that permitted by law.
Variable Interest: The rate of interest charged on a loan that changes annually and fluctuates with a stated index.
Verification Certification: The process by which a consolidation lender requests that a loan holder certify a loan's payoff balance.
Wraparound: An old loan is combined with a new loan, which results in an interest rate somewhere between the individual interest rates.
Zero Balance: A zero balance reflects on a credit cardholder’s bill when the outstanding balance has been paid and new charges have not been made all through the billing cycle.
Zero Point Option: An option which allows the borrower to opt to pay a slightly higher loan interest rate in lieu of paying the loan origination points generally charged for the particular loan product.
