- Adverse Credit HistoryNegative 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 CreditThe difference between the credit limit and the balance due.
- Bad CreditTerm 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.
- BalanceThe amount owed on an account.
- BankruptcyA 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 PointOne basis point is equal to one one-hundredth of one percent. The difference between 7% and 7.25% is 25 basis points.
- BudgetA 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.
- Card IssuerAny company or financial institution, including banks and credit unions that either issue or cause the issuance of plastic cards to cardholders.
- Cash Out Home RefinanceA mortgage refinancing transaction in which equity from a home is used to pay off outstanding debts.
- Charge CardA 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-offA 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 creditA loan or credit line with a designated repayment term.
- CollateralProperty 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.
- CollectionThe effort to recover money on a delinquent debt. Collection accounts negatively affect credit ratings.
- Collection AccountA past due account that has been transferred to a collection department or agency.
- Collection AgencyAlso 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 AgentAn individual, either employed by a creditor or a third party entity who specializes in the recovery of debt that is delinquent.
- Collection-proofAlso 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 InterestAlso 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 CounselingOften 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 DebtMoney owed by people rather than a business or government.
- Consumer Financial Protection BureauAn independent US government agency established in 2011 which is responsible for consumer protection in the financial sector. Also referred to as the CFPB.
- CreditReputation of solvency and probity, entitling a person to be trusted in buying or borrowing money.
- Credit CardA 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 2009Also 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 HistoryA record of a borrower’s debt repayment. It is used by financial institutions to evaluate the risk of lending to an applicant.
- Credit InquiryThe 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 LimitThe maximum amount that can be charged on a given line of credit.
- Credit MixOne 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 RepairThe process of improving credit scores by correcting mistakes and removing errors from a credit report.
- Credit Repair Organizations ActA 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 ReportThe compilation of credit history for an individual or business.
- Credit ScoreA numerical representation of an individual’s credit history. They are used by lenders to help determine a borrower’s creditworthiness.
- Credit Utilization RatioAlso 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.
- CreditorsIndividual or entity which lends money to others.
- CreditworthinessThe evaluation of a borrower’s ability to repay a debt based on the individual’s credit history and financial capacity.
- Date of First DelinquencyAlso 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.
- DebtOwed money.
- Debt BuyerTerm 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 ConsolidationA debt management strategy which refinances multiple debt obligations into one.
- Debt Management PlanAlso 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 SettlementA 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 RatioThe quantitative relation between a borrower’s monthly gross income and their monthly debt obligations expressed as a percentage.
- Debt-to-Limit RatioAlso 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.
- DebtorAn entity or person who has borrowed money.
- DefaultA failure to meet a financial obligation. (i.e. not making payments)
- Default JudgmentA 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 BalanceThe 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.
- DelinquencyA failure to meet a financial obligation on time. (I.e. not making a payment on time)
- Delinquent AccountAn account that is 30 days past due.
- DischargeDebt 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 IncomeThe amount remaining from an individual’s income after taxes and all other monthly obligations and necessities have been paid.
- EquifaxOne of the three major credit reporting agencies.
- ExperianOne of the three major credit reporting agencies.
- Fair Credit Reporting ActOften 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 ActOften 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 IsaacFounded 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 CommissionOften 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 scoreA 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 HardshipThe 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.
- ForbearancePrograms 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.
- FraudUsing deception to gain a financial advantage.
- GarnishmentA 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.
- Hard InquiryAlso 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 EquityThe 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 CreditOften 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 LoanA 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.
- Identity TheftAlso referred to ID theft, it is generally defined as the use of another person’s information to commit fraud.
- Interest RateThe cost of borrowing money based on the risk associated with a loan. Typically shown as an annual percentage of the outstanding loan.
- Interest Rate CapThe 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 RateAlso 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.
- JudgmentA decision rendered by a court that resolves a legal action and determines the rights and liabilities of the parties involved.
- LevyA 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.
- LienA 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 CreditAn amount of credit extended to a borrower.
- Loan TermThe duration of time in which a debt obligation must be repaid.
- Means TestPer 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 PaymentThe 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.
- Nondischargeable DebtAny 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.
- Open-end creditAlso 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.
- Paid In FullA status on credit reports that shows a debt has been paid in full rather than reduced or settled.
- Payday LoanIllegal 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 HistoryAn 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 LoanAlso 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.
- Re-agingThe 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.
- RepossessionThe seizure of an item used as collateral by a creditor due to default on the loan by the borrower.
- Revolving BalanceThe 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 PricingLending 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.
- Satisfaction and ReleaseAn 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 CardsDesigned 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 DebtA 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 CardPayment 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 InterestInterest 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 InquiryAlso 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 LimitationsThe duration of time in which a legal action can be pursued.
- Stipulated JudgmentA 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 CreditA 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 CardA 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.
- TermThe duration of time in which a loan must be paid back.
- Time-barred debtA 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.
- TransUnionOne of the three major credit reporting agencies.
- Unsecured debtLoans not backed by any form of collateral. Unsecured debt can be discharged through bankruptcy.
- UsuryThe lending of money at exorbitant interest rates.
- Variable RateAn interest rate that adjusts periodically due to changes in an underlying benchmark interest rate or index.
- Wage GarnishmentA 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.
- Zombie DebtA 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.
Learn How to Become Debt Free
Get instant access when you sign up now