Commonly Used Credit Terms

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It can sometimes be a little difficult to understand all of the terms used in the credit and credit card world. Therefore, we've put together a short list of some of the more common ones. Here is a list of some commonly-used credit and credit-related terms and phrases.

Commonly-Used Credit Terms and Phrases

Adjusted Balance: A method used by some card issuers by which they subtract all payments made during the month, and then add the finance charges.

Affinity Card: A card offered by two organizations, one a lending institution, the other a non-financial group. Usually, use of the card entitles holders to special discounts or deals from the non-financial group.

Annual Fee: A bank charge for use of a credit card. The charge is levied each year and billed directly to the customer's monthly statement.

Annual Percentage Rate (APR): The interest rate reflecting the total yearly cost of the interest on a loan, expressed as a percentage rate.

Applicant: Any person who applies to a creditor for credit.

Asset: Property that can be used to repay a debt such as cash, real estate, or personal property.

Average Daily Balance: This is the method by which most credit cards calculate their payments due. An average daily balance is determined by adding each day's balance, then dividing that total by the number of days in a billing cycle. The average daily balance is then multiplied by a card's monthly periodic rate, which is calculated by dividing the annual percentage rate by 12.

Balance Transfer: The process of moving an unpaid credit card debt from one issuer to another.

Bankruptcy: There are two forms of bankruptcies, Chapters 7 and 13, which can be filed by consumers. Companies seeking bankruptcy protection file chapter 11.

  • Chapter 7: The court would discharge most of the debts, however, the debtor's assets, excluding certain property exempted under federal and state laws, would be subject to liquidation to satisfy those debts. In other words, you could lose your personal property and even your home. This is reported as a bankruptcy on your credit report for 7 to 10 years.
  • Chapter 11: Reorganization proceedings, generally for business entities; the debtor maintains control of the business in Chapter 11 (unless the Court appoints a trustee).
  • Chapter 13: The bankruptcy court would restructure the repayment terms of the debtor's liabilities. The court would elect a trustee to disburse the excess income provided by the debtor to satisfy their debts. The debtor still has to make payments to the creditors. This is reported as a bankruptcy on your credit report for 7 to 10 years.

Billing Period: The period during which your charges are applied to your credit card. This is also the period used to calculate your balances and monthly finance charge.

Cash Advance: The process of using your credit card to obtain cash at an ATM machine. The cash is deducted from your credit limit and, sometimes, carries a higher interest rate than purchases. Your card issuer may also charge you a fee for these transactions.

Charge Card: A card used to buy goods and services from the issuing merchant on credit. Charge card accounts are usually due in 30 days.

Charge-Off: An account that has been written off by the creditor as a "bad debt." Each creditor has different guidelines as to when they will actually charge-off an account, but generally it occurs after 180 days. These accounts are reported to the credit bureaus and may stay on your credit report for a period of 7 to 10 years. Charged-off accounts will typically be sold to collection agencies.

Collateral: Property or any tangible assets (car, boat or jewelry etc.) used as security to get a loan. Banks can lend more money easier if there is collateral because they know if the consumer defaults on the loan, the lender can take the consumer's collateral.

Cosigner: Another individual who signs for a loan and assumes equal liability for the debt.

Credit Bureau (Credit Reporting Agency): A company that collects and sells information about how people handle credit. It issues credit reports that list how individuals manage their debts and make payments, how much untapped credit they have available and whether they have applied for any loans.

Credit Limit: The maximum amount of charges that a cardholder may apply to the account. The Consumer Federation of America suggests people carry credit lines no greater than 20% of their gross household income. For example, people with a gross income of $50,000 would cap their credit lines at $10,000.

Credit Rating: An evaluation by a creditor or credit reporting agency that reflects a debtor's past credit history based on their payment pattern.

Credit Reports: These are documents that are reviewed by loan companies, banks etc., giving them past credit history information so that they can evaluate whether a debtor should be extended credit.

Creditor: A person or company to whom a consumer owes an outstanding debt.

Debit Card: A bankcard with direct access to a cardholder's account, usually a checking or savings account. The card acts like a check in that the money is withdrawn from the existing account balance. The withdrawal of funds is immediate with online debit cards, delayed a day or two with offline debit cards. Debit cards that carry the logo of either MasterCard or VISA can be used at any location that displays that network's logo.

Debtor: Any individual who owes money.

Delinquent: Any account that is not paid in accordance with the payment guidelines stipulated by the creditor and agreed to by the debtor.

Fair Credit Billing Act: Passed by Congress in 1975 to help customers resolve billing disputes with card issuers. Disputes include everything from computational errors and incorrect charges to the crediting of payments. The act requires issuers to credit payments to a customer's account the day they are received. To be protected under the law, the consumer must write to the issuer within 60 days of the mailing date on any bill with an error. The issuer is then required to investigate the issue within two billing cycles, and either correct the mistake or explain why the bill is correct. The issuer also must acknowledge a customer's complaint in writing within 30 days. Each issuer is allowed to set specific payment guidelines. If any of the guidelines are not met, the issuer can take as many as five days to credit the payment.

FICO Score: A credit score named for the California company (Fair, Isaac and Co.) that developed the system upon which it is based. The score is supposed to distill all the information in a consumer's credit report. Scores range from the 300s to about 900, with the vast majority of scores falling in the 600 to 700 range. The higher the score, the better. Click here to learn more about credit scores.

Finance Charge: The charge for using a credit card, comprised of interest costs and other fees.

Foreclosure: The right of a creditor, such as a mortgage lender that has a lien on your property, to force a sale of your property to recover what is owed if you have stopped making payments.

Garnishment: Wage attachment. If an account were severely delinquent, a portion of the debtor's income would be deducted from their paycheck and sent directly to the creditor as payment.

Grace Period: If the credit card user does not carry a balance, the grace period is the interest-free period of time a lender allows between the transaction date and the billing date. The standard grace period is usually between 20-30 days. If there is no grace period, finance charges will accrue the moment a purchase is made with the credit card. People who carry a balance on their credit cards have no grace period.

Gross income: The amount you earn before taxes and expenses are taken out.

Household Income: The total income for all members of a household. Household income is an important yardstick used by credit card issuers evaluating applications for joint credit.

Introductory Rate: The initial low rate charged by a lender to entice borrowers to accept the credit terms. After the introductory period is over, the rate charged increases to the indexed rate or the stated interest rate. The introductory rate is often called a teaser rate.

Judgment: A court ruling, stating that a debt is valid and must be paid. This can be used as a first step in obtaining a wage garnishment.

Late Payment Fee: A charge to a customer whose monthly payment has not been received as of the due date or stated deadline for payment as shown on the billing statement.

Lien: The legal right to hold property or to have it sold or applied for the payment of a claim owed to a creditor. A lien is usually placed on real estate. (See: foreclosure?)

Minimum Payment: The minimum amount a cardholder can pay to keep the account from going into default. Some card issuers will set a high minimum if they are uncertain of the cardholder's ability to pay. Most card issuers require a minimum payment of 2% of the outstanding balance.

Monthly Periodic Rate: The interest rate factor used to calculate the interest charges on a monthly basis. The factor equals the yearly rate divided by 12.

Net income: The amount of money left from your paycheck after taxes and expenses are paid.

Over limit fee: A fee charged for exceeding the credit limit on the card.

Pay-Off: The resolution of an account by full balance payment.

Periodic Rate: The interest rate described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month; the daily periodic rate is the cost of credit per day.

Pre-Approval: A credit card offer boasting that it has been "pre-approved"? only means that a potential customer has passed a preliminary credit-information screening.

Previous Balance: A method used by some card issuers by which they base their finance charges on the amount owed at the end of the previous billing cycle.

Prime Rate: The interest rate a bank charges to its best or "prime" customers. Each bank will quote a prime-lending rate. The rate given to consumers on their credit cards is often based on the prime rate, plus a certain percentage. This represents the lender's assessment of the risk of lending, plus its profit margin.

Repossession: When a debtor fails to make payments on a secured loan, the creditor may take the item(s) used as security for payment of the debt.

Revolving Line of Credit: An agreement to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. Most credit cards offer revolving credit.

Secured Credit Card: A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. Secured cards are primarily used by people new to credit, or by people trying to rebuild their poor credit rating.

Secured Debt: A secured debt is a specific item used as collateral to guarantee payment. If the payments cease, the creditor is entitled to the item designated as collateral.

Settlement: This occurs when a consumer pays the creditor a percentage of the balance on an account, and the account is considered paid in full. The unpaid balance may be considered as income, and could possibly be taxable. A settlement can also be reported on the consumer's credit report as either a charged-off account or paid as agreed.

Subprime Lender: This term refers to lenders who charge higher interest rates to compensate for potential losses from customers who may run into trouble or default on loans. Subprime borrowers have either missed payments on a debt or have been late with payments.

Truth in Lending Act: A federal law that requires lenders to provide specific information so borrowers can compare one loan to another. The most important facts lenders must provide are: finance charges in dollars and as an annual percentage rate (APR); the credit issuer or company providing the credit line and the size of the credit line; the length of their grace period, if any, before payment must be made; the minimum payment required; any annual fees; and fees for credit insurance, if any.

Two-Cycle Billing: In the two-cycle method, the average daily balance is calculated from two billing cycles rather than one, and finance charges are typically higher. This method, in effect, wipes out the grace period for customers who carry a balance. If the bill is not paid in full at the first billing, interest becomes retroactive to the purchase date. Most credit card issuers use the single-cycle average daily balance method to calculate finance charges.

Unsecured Debt: A debt that has no collateral attached to it. If the debt is not paid, the creditor must sue the consumer to try and collect the amount owed.