Knowledge Is Power

Make sure you understand the main terms and phrases you’ll come across in your journey to become debt free

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  • a

  • Adverse Credit History
    Negative marks on a credit history like delinquencies, charge offs, bankruptcies and foreclosures.
  • Annual Percentage Rate (APR)
    The finance charge associated with a credit card expressed as an annual rate.
  • Available Credit
    The difference between the credit limit and the balance due.

  • b

  • Bad Credit
    Term used to describe a low credit rating. Delinquencies, defaults, repossessions, charge offs, foreclosures, high debt to limit ratios, the number of charge cards you own and bankruptcies are examples of actions that can damage and lower an individual’s credit rating.
  • Balance
    The amount owed on an account.
  • Bankruptcy
    A federal court procedure that allows consumers and businesses discharge unmanageable debt due to insolvency (chapter 7) or reorganize said debt for repayment (chapter 13).
  • Basis Point
    One basis point is equal to one one-hundredth of one percent. The difference between 7% and 7.25% is 25 basis points.
  • Budget
    A plan devised and used to determine the amount of money that is available and can be spent during a specific period of time; usually calculated by month or year.

  • c

  • Card Issuer
    Any company or financial institution, including banks and credit unions that either issue or cause the issuance of plastic cards to cardholders.
  • Cash Out Home Refinance
    A mortgage refinancing transaction in which equity from a home is used to pay off outstanding debts.
  • Charge Card
    A type of payment card which allows users to make purchases. Unlike credit cards which charge interest on a revolving balance, charge cards do not accrue interest and require users to pay off the balance owed in full by the stipulated due date. Also unlike credit cards which rely on payment from, and reimbursement to a 3rd party service, charge cards simply defer payment by the cardholder to the card issuer until a later time.
  • Charge-off
    A declaration made by a creditor that account is to be written off as uncollectable due to severe delinquency by the borrower. Revolving accounts like credit cards are charged off after 180 days delinquency. The write off is then used as a tax deduction under section 166 of the Internal Revenue Code. Charge offs have a negative effect on credit ratings.
  • Closed-end credit
    A loan or credit line with a designated repayment term.
  • Collateral
    Property or asset pledged by a borrower to reduce the risk associated with a loan. Collateral can be seized by a lender if the borrower defaults on the loan.
  • Collection
    The effort to recover money on a delinquent debt. Collection accounts negatively affect credit ratings.
  • Collection Account
    A past due account that has been transferred to a collection department or agency.
  • Collection Agency
    Also referred to as debt collectors, they are entities that specialize in the recovery of funds that are past due. Collection agencies can be a subsidiary of the lender, or a third party contingency based firm that is paid a fee or portion of the amount it recovers for the lender. Debt buyers can also be debt collectors if they directly engage in collection practices.
  • Collection Agent
    An individual, either employed by a creditor or a third party entity who specializes in the recovery of debt that is delinquent.
  • Collection-proof
    Also called judgment proof, the terms refers to debtors who possess so few assets that even with a judgment, a creditor cannot recover the balance owed. Individuals lacking assets whose income is derived from disability, social security, veterans benefits, unemployment benefits, worker’s compensation, welfare and child support are also said to be collection proof.
  • Compound Interest
    Also referred to as paying interest on interest, structured so interest is calculated on your initial balance as well as on previous interest charges on said balance. Credit cards have compound interest.
  • Consumer Credit Counseling
    Often referred to as simply “credit counseling”, it is a counseling service that provides personalized guidance and support for consumers with excessive debt. Companies provide budgeting tips, education and other tools. The ultimate goal of consumer credit counseling is to help consumers reduce and eliminate debt while avoiding bankruptcy.
  • Consumer Debt
    Money owed by people rather than a business or government.
  • Consumer Financial Protection Bureau
    An independent US government agency established in 2011 which is responsible for consumer protection in the financial sector. Also referred to as the CFPB.
  • Credit
    Reputation of solvency and probity, entitling a person to be trusted in buying or borrowing money.
  • Credit Card
    A type of payment card that offers a revolving line of credit to users. Unlike charge cards which defer a user’s payment for goods and services to a later date, charge no interest and require balances to be repaid in full each month, credit cards incorporate a 3rd party entity to pay for charges, accrue compounded interest (typically daily) and allow users to carry a balance from billing cycle to billing cycle. If it allows you to make minimum monthly payments, it’s a credit card.
  • Credit Card Accountability, Responsibility and Disclosure Act of 2009
    Also referred to as the Credit CARD Act of 2009 or the credit cardholder’s bill of rights, it is a federal statute with two main purposes, fairness and transparency. The Credit CARD Act prohibits unfair and abusive practices such as allowing customers to go over their limit, then imposing over limit fees or hiking up interest rates on an existing balance. The act also requires information relating to fees and rates easier to understand so consumers know how much they are paying and can compare different cards easier.
  • Credit History
    A record of a borrower’s debt repayment. It is used by financial institutions to evaluate the risk of lending to an applicant.
  • Credit Inquiry
    The record created when a person or entity obtains a copy of a consumer’s credit report. Inquiries are divided into two subgroups; hard inquiries and soft inquiries. Excessive hard inquiries can negatively impact credit scores.
  • Credit Limit
    The maximum amount that can be charged on a given line of credit.
  • Credit Mix
    One of the five factors used to calculate credit scores, it refers to a consumer’s ability to utilize different types of loans and lines of credit. Diversity of use can strengthen credit profiles and improve credit scores.
  • Credit Repair
    The process of improving credit scores by correcting mistakes and removing errors from a credit report.
  • Credit Repair Organizations Act
    A federal law passed in 1996, it requires credit repair companies to provide customers with written contracts detailing the scope and cost of the service they provide. The law prohibits advanced fees and also bans service providers from lying about negative credit information to credit reporting agencies. Additionally, the act also provides consumers with a 3 day right of rescission.
  • Credit Report
    The compilation of credit history for an individual or business.
  • Credit Score
    A numerical representation of an individual’s credit history. They are used by lenders to help determine a borrower’s creditworthiness.
  • Credit Utilization Ratio
    Also referred to as the balance to limit ratio and credit available to credit used ratio; it is the quantitative relation between the total amount of credit used to the total amount of credit available to a borrower, represented as a percentage. A low credit utilization ratio improves credit scores.
  • Creditors
    Individual or entity which lends money to others.
  • Creditworthiness
    The evaluation of a borrower’s ability to repay a debt based on the individual’s credit history and financial capacity.

  • d

  • Date of First Delinquency
    Also referred to by its acronym “DOFD’, it is an important date for calculating when a bad debt will be removed from a credit report. Delinquent accounts will remain on a credit report for 7 years plus 180 days from the DOFD.
  • Debt
    Owed money.
  • Debt Buyer
    Term for debt collection companies, law firms and other investors who purchases the right to collect on delinquent or charged off consumer debt. Post charge off accounts are acquired for pennies on the dollar and collected on for the face value of the balance owed. Debt buyers often resell accounts they cannot collect on to other debt buyers.
  • Debt Consolidation
    A debt management strategy which refinances multiple debt obligations into one.
  • Debt Management Plan
    Also referred to as a DMP, a debt management plan is debt relief strategy in which a debtor and a creditor agree to a renegotiation of the repayment terms for an outstanding debt.
  • Debt Settlement
    A debt relief strategy in which a delinquent borrower renegotiates the balance of an outstanding debt with the lender, debt collector or debt buyer for pay off.
  • Debt-to-Income Ratio
    The quantitative relation between a borrower’s monthly gross income and their monthly debt obligations expressed as a percentage.
  • Debt-to-Limit Ratio
    Also referred to as balance-to-limit ratio and credit utilization ratio is the quantitative relation between the balance owed and the total credit limit expressed as a percentage.
  • Debtor
    An entity or person who has borrowed money.
  • Default
    A failure to meet a financial obligation. (i.e. not making payments)
  • Default Judgment
    A judgment that is granted in favor of a plaintiff because the defendant either did not responded to a summons or failed to appear at the hearing.
  • Deficiency Balance
    The remaining balance owed to a creditor after a collateral securing a loan is sold but the amount recovered from the sale is less than the outstanding debt. For example; A borrower has an automobile on which he owes $10K. Payments are not made so the automobile loan is in default. As a result the automobile is repossessed and sold at auction for $6K. The remaining $4K is a deficiency balance. Since this debt no longer has collateral backing it, it is no longer secured which means the balance can be negotiated and settled with the creditor.
  • Delinquency
    A failure to meet a financial obligation on time. (I.e. not making a payment on time)
  • Delinquent Account
    An account that is 30 days past due.
  • Discharge
    Debt that is forgiven or cancelled by a judge during a bankruptcy proceeding. Creditors can no longer collect on the debt and debtors are no longer legally obligated to pay back a discharged debt.
  • Discretionary Income
    The amount remaining from an individual’s income after taxes and all other monthly obligations and necessities have been paid.

  • e

  • Equifax
    One of the three major credit reporting agencies.
  • Experian
    One of the three major credit reporting agencies.

  • f

  • Fair Credit Reporting Act
    Often referred to by its acronym, the FCRA is a federal law passed in 1970 which regulates how consumer information is collected, distributed and used. It promotes the privacy, accuracy and fairness of your personal information. Because of the Fair Credit Reporting Act, you can view your credit report, correct mistakes, and remove errors. The FCRA and the Fair Debt Collection Practices Act form the foundation of consumer protection laws in the US. Governmentally, the FCRA is enforced by the Federal Trade Commission and the Consumer Financial Protection Bureau.
  • Fair Debt Collection Practices Act
    Often referred to by its acronym, the FDCPA is an amendment to the Consumer Credit Protection Act. Passed in 1977, the FDCPA safeguards consumers against abuse and deceptive debt collection practices and provides recourse should those rights be violated. Additionally, the Fair Debt Collection Practices Act allows consumers to dispute and request validation of information relating to an accounts in collections. The FDCPA and the Fair Credit Reporting Act for the foundation of consumer protection laws in the US. Governmentally the FDCPA is enforced by the Consumer Financial Protection Bureau.
  • Fair Isaac
    Founded in 1956 as a data analytics company, Fair Isaac is the original name for FICO. They are best known for creating FICO scores..
  • Federal Trade Commission
    Often referred to by its acronym, the FTC is an independent federal agency, created in 1914 to prevent anticompetitive and deceptive business practices that can harm consumers. The FTC promotes fairness, competition and consumer protection.
  • FICO score
    A credit scoring model based on an algorithm introduced by Fair Isaac Corporation in 1989. FICO scores are used by financial institutions to determine a borrower’s creditworthiness when reviewing a loan application. FICO Scores range between 300 and 850.
  • Financial Hardship
    The inability to meet contractual debt obligations because of unexpected events or unforeseen changes that impact cash flow. A financial hardship can be caused by many reasons including unemployment, a reduction of income due to reduced hours or wages, medical emergencies, divorce or death.
  • Forbearance
    Programs created by lenders to give temporary relief to financially distressed borrowers. Forbearance programs can postpone payments, lower minimum monthly payment, reduce interest rate and eliminate fees. It is important to note that forbearance is not forgiveness. Debtors in a forbearance agreement still must repay the debt they owe.
  • Fraud
    Using deception to gain a financial advantage.

  • g

  • Garnishment
    A court ordered action after a judgment has been secured which allows a debtor or plaintiff creditor to receive a portion of an individual’s wages to satisfy an owed debt.

  • h

  • Hard Inquiry
    Also referred to as a “hard pull”, they are the result of instances when a financial institution has to review a credit report to determine an applicant’s creditworthiness. Hard inquiries stay on an applicant’s credit report for 2 years. Excessive hard inquiries can lower FICO scores.
  • Home Equity
    The difference between the market value of a home and outstanding mortgage balances. If a property is worth $200,000 and all liens and encumbrances equal $150,000, the remaining $50K is equity.
  • Home Equity Line of Credit
    Often referred to by its acronym, HELOCs are a type of secondary financing available to home owners. Unlike Home Equity Loans, HELOC’s are structured as a revolving line of credit with an adjustable rate.
  • Home Equity Loan
    A type of secondary financing extended to homeowners. Unlike a Home Equity Line of Credit, a Home Equity Loan is typically structured as a closed end loan with a fixed rate.

  • i

  • Identity Theft
    Also referred to ID theft, it is generally defined as the use of another person’s information to commit fraud.
  • Interest Rate
    The cost of borrowing money based on the risk associated with a loan. Typically shown as an annual percentage of the outstanding loan.
  • Interest Rate Cap
    The maximum amount of interest that can be charged on an account. Interest rate caps can be set by federal laws, state regulations or by the credit card agreement.
  • Introductory Rate
    Also referred to as an Intro APR or a teaser rate, introductory rates are low rates offered by lenders as an incentive to apply for a specific credit card or loan product. Typically the APR will adjust once the introductory period is over. The Credit CARD act of 2009 requires teaser rates must last at least 6 months.

  • j

  • Judgment
    A decision rendered by a court that resolves a legal action and determines the rights and liabilities of the parties involved.

  • l

  • Levy
    A legal right granted through the court system to a person or entity with a judgment to seize the property of the debtor in an attempt to collect on a debt.
  • Lien
    A legal right granted by the owner of a property or otherwise acquired by a creditor. A lien is used by creditors to guarantee repayment of a loan or debt obligation.
  • Line of Credit
    An amount of credit extended to a borrower.
  • Loan Term
    The duration of time in which a debt obligation must be repaid.

  • m

  • Means Test
    Per the Bankruptcy Abuse Prevention and Consumer Protection Act which went into effect in 2005, a means test limits the ability of high wage earners to discharge their debts through a chapter 7 bankruptcy. Due to the variance in cost of living, the bankruptcy means test varies from state to state.
  • Minimum Payment
    The lowest amount of money necessary to satisfy the monthly obligation for an account. Minimum payments are typically calculated as either 3-5% of the total balance due or all fees and interest due for the month plus 1% of the principal balance.

  • n

  • Nondischargeable Debt
    Any type of debt that cannot be discharged by filing bankruptcy. Federal student loans, unpaid taxes, child support, alimony and fines related to a criminal charge are examples of nondischargeable debt.

  • o

  • Open-end credit
    Also referred to as lines of credit or revolving credit, open-end loans differ from closed-end loans because they have a variable interest rate no set pay off period. Loan balances can be paid down and new charges can be made allowing for greater user flexibility. Credit Cards are open-end credit lines.

  • p

  • Paid In Full
    A status on credit reports that shows a debt has been paid in full rather than reduced or settled.
  • Payday Loan
    Illegal in some states, these are small loans secured as an advance against the borrower’s paycheck. They are considered controversial because they typically have a very high APR and borrowers tend to roll one loan into another loan resulting in high costs to the borrower.
  • Payment History
    An indicator used by lenders and creditors when assessing a borrower’s creditworthiness, payment history accounts for 35% of an individual’s FICO score calculation. A lack of derogatory information in a payment history results in higher FICO scores.
  • Personal Loan
    Also referred to as signature loans, personal loans are a type of unsecured loan (no collateral necessary) granted solely on the basis of a borrower’s creditworthiness.

  • r

  • Re-aging
    The resetting of the statute of limitations for a time-barred account. Re-aging happens when a debtor agrees to make a payment, or makes a payment on a time barred account. Resetting of the Statute of Limitations means that the collector can once again sue the debtor in court for a judgment.
  • Repossession
    The seizure of an item used as collateral by a creditor due to default on the loan by the borrower.
  • Revolving Balance
    The carried balance remaining on a credit card at the end of a billing cycle. This balance is subject to interest and other stipulated finance charges. Paying off the entire balance on a card eliminates the revolving balance.
  • Risk-based Pricing
    Lending methodology where the risk associated with lending to a perspective borrower affects the cost of that loan. A borrower who poses a lower risk of default receives better rates and lower finance charges.

  • s

  • Satisfaction and Release
    An official document signed by a creditor showing that a judgment has been fulfilled. A judgment and its satisfaction are noted in the public records section of a credit report.
  • Secured Credit Cards
    Designed for consumers with no credit and bad credit, they are payment cards which require collateral (usually cash) to be placed with the issuing entity. Activity and payment history are recorded on a user’s credit report allowing the consumer to build credit without the risk of default on the balance owed.
  • Secured Debt
    A loan that is guaranteed by collateral to reduce the risk associated with lending. In the case of default, the lender gains control of the collateral.
  • Semi-secured Credit Card
    Payment cards issued by some lenders to consumers who are rebuilding their credit. Typically these cards are issued to borrowers as a secured credit card however after establishing a record of on time payments the credit line can be extended beyond its secured limit.
  • Simple Interest
    Interest calculation formula in which the principal balance is multiplied by the interest rate multiplied by the duration of the loan (P x I x N). For example; to calculate the amount of interest paid on a $100K mortgage (P) with a 4% rate (I) and a 30 year term (N), multiply the original balance by the rate and then by the term. $100,000 x 4% x 30 = $120,000. Add the $120,000 of interest paid over 30 years to the original balance of $100,000 to calculate the total cost for that loan.
  • Soft Inquiry
    Also referred to as a “soft pull”, they are the result of credit evaluations that don’t result in the extension of new credit. Checking one’s own credit, periodic checks by existing creditors, credit checks by employers, landlords and insurance companies are examples of soft credit inquiries. Unlike hard inquiries, excessive soft pulls do not negatively affect credit scores.
  • Statute of Limitations
    The duration of time in which a legal action can be pursued.
  • Stipulated Judgment
    A legally binding agreement made between a creditor and delinquent debtor which settles a case. Per a stipulated judgment the debtor agrees to make payments on a delinquent account while the creditor agrees to reduce the balance owed, eliminate interest charges and fees or accept a lower monthly payment. If the debtor does not honor the agreement, the creditor has the right to sue, obtain a judgment and collect on the full balance owed.
  • Subprime Credit
    A general term used to describe low FICO scores. Historically, borrowers with FICO scores below 640 are said to have subprime credit. The term can also be used for credit extended to consumers with low credit scores. Since most financial products use risk based pricing, these loans are characterized by higher interest rates and finance charges, poor quality collateral and less favorable terms to compensate for the borrowers higher credit risk.
  • Subprime Credit Card
    A payment card designed for consumers with little or bad credit history. These cards are characterized by higher interest rates and finance charges to offset the higher risk of default involved with subprime lending.

  • t

  • Term
    The duration of time in which a loan must be paid back.
  • Time-barred debt
    A delinquent account that has exceeded its Statute of Limitations. Creditors and collectors can no longer pursue legal action to collect on the balance owed. Time barred debt can be re-aged by making payments or agreeing to make payments to collectors. Re-aging a time barred account resets the statute of limitations, once again allowing the collector to pursue legal action against a delinquent debtor.
  • TransUnion
    One of the three major credit reporting agencies.

  • u

  • Unsecured debt
    Loans not backed by any form of collateral. Unsecured debt can be discharged through bankruptcy.
  • Usury
    The lending of money at exorbitant interest rates.

  • v

  • Variable Rate
    An interest rate that adjusts periodically due to changes in an underlying benchmark interest rate or index.

  • w

  • Wage Garnishment
    A court ordered action after a judgment has been secured which allows a debtor or plaintiff creditor to receive a portion of an individual’s wages to satisfy an owed debt.

  • z

  • Zombie Debt
    A term used to describe delinquent debt which is past its statute of limitations but is still actively being collected on by a collector or debt buyer.

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