Here are some of the most important financial terms you need to know:
Adverse credit history:
A credit history that shows regular late or missed payments on one or more loans or lines of credit. It can also be used to describe a credit history that includes default judgments against an applicant, bankruptcy … basically a credit history that has multiple blemishes is considered “adverse.”
This is interest that has accumulated on the principal of a loan since your last payment. This is a common phrase for student loan borrowers. These borrowers are given the choice of whether to pay off interest while they are in school or to allow it to pile up on their balance owed until their repayment period begins. That pile of interest charges is your “accrued interest.”
Once a year, banks and other financial institutions charge their customers a fee for using their loans or lines of credit. That fee is the “annual fee”, and the amount will be disclosed on your contract.
Annual Percentage Rate (APR):
The amount you can be charged in interest each year for as long as your card or loan carries a balance. The total amount is broken down into monthly payments and added to your balance due.
The relation of your payment status to your payment due dates. Typically, it is used to describe an account that hasn’t been paid by the account’s stated due date.
Anything that provides the owner with economic benefit either now or in the future. For example, your car is considered an asset. A government bond that is guaranteed to be worth a specific amount on a specific date in the future is also an asset.
Your account “balance” is how much you currently owe to your lender or creditor.
A legal process involving a person or business who is unable to repay outstanding debts. Chapter 7 and Chapter 13 are the two filing options when dealing with personal debt.
Better Business Bureau:
A nonprofit organization dedicated to “advancing marketplace trust.” Businesses and other organizations buy membership into the Bureau. The Bureau then gives the business/organization a letter grade that is based on their performance and reliability. They also help facilitate communications and resolutions between companies and customers with complaints.
A person who borrows money from a lender or creditor. More often than not, the borrower is going to be you.
An estimate of income and spending for a set period of time. The general rule of thumb is to have enough savings set aside to cover at least three months of living expenses. Budgeting apps can help you get started.
Cash advance app:
Loans that help users bridge the gap between paydays. Unlike payday lenders, cash advance apps analyze a user’s banking history to determine both their eligibility for and the amount that can be advanced. Payments are automatically deducted for users’ bank accounts.
Chapter 7 bankruptcy:
In Chapter 7 bankruptcy the court appoints a trustee who sells off the petitioner’s non-exempt assets. These assets can include personal belongings, property, automobiles, etc. The money brought in via these sales is used to pay off as much of the petitioner’s debt as possible. If there is any debt left after the sale proceeds are used up, that debt is written off. This is sometimes called “straight” bankruptcy or “liquidation” bankruptcy.
Chapter 13 bankruptcy:
Chapter 13 is also called “wage earner’s” bankruptcy. This is where the petitioner works with the courts to come up with a debt-repayment plan. The plan lasts 3-5 years and is designed to pay off as much of the debt as possible. Under Chapter 13, the petitioner can keep their stuff, but is supposed to dedicate a substantial amount of their earnings to their debt repayment plan. Some courts can even make the petitioner use 100% of their “disposable” income to pay the debt off.
Something that you offer to a lender to help “secure” the loan. If you default on the loan, you will lose whatever you submitted as “collateral.” Title loans and secured credit cards are good examples of loans/credit that require collateral.
A company that lenders and creditors can employ to help collect money that they are owed. They are typically employed after a borrower/debtor has defaulted on their payment plans by failing to make payments for a number of months. The exact number of months will be spelled out in the contract between the lender and the borrower.
The process of turning many debts into a single debt. For example, taking out a personal loan to pay off several credit cards is called “consolidating” debt.
Debt that accumulates via personal (individual or household) purchases. For example, if you use your credit card to pay for a new TV for your house, that is a type of consumer debt. It does not refer to debts owed by businesses or governments.
Consumer Financial Protection Bureau:
An independent bureau that exists within the Federal Reserve system. Its purpose is to educate and advocate for individuals who need help making the best personal finance decisions for themselves.
The final decision of a lawsuit. It will include details like how much debt is owed, to whom it is owed, and when it is due. All parties involved in the lawsuit must follow the rules laid out in a court judgment.
Court orders are like court judgments in that they are decisions made by the court. With a court order, however, the decision happens during a lawsuit instead of at the end. For example, a judge might issue a court order to have you appear either in person or online.
Credit builder loan:
These are small loans — typically less than $1,000 — where the money is set aside for you in a secured savings account or CD (certificate of deposit) while you pay off the loan. These loans allow you to build credit while you save money.
Organizations that record and monitor consumers’ information from lenders and creditors. They run that information through an algorithm to give you a credit score. They also do research on consumer trends and economic issues. The three major credit bureaus are Equifax, Experian and TransUnion.
Credit card debt:
The amount of money you owe on your credit cards.
Professionals who provide information and advice to consumers who need help managing their credit and finances. Credit counseling agencies are often nonprofit. Credit counselors are often employed by people who hope to avoid bankruptcy.
The record of how you have handled your personal finances over a period of years. The length of your credit history (how long you have been using credit) is a factor in your credit score. Typically, the credit bureaus only use the most recent seven years of your credit history to determine your score, but that can vary depending on where you live.
The work you do to make sure your credit score and report are accurate and that your score is as high as possible. This can include removing false information from your report, making regular payments on balances due, etc.
A number that determines how much of a financial asset or liability you are. The higher your credit score, the more of an asset you are. The lower your score, the more of a liability you appear to be. Your score is often used to determine whether to lend you money, rent you an apartment, hire you for a job, etc.
People and companies who extend you a line of credit on the condition that you agree to repay what you spend in a timely fashion.
The criteria that lenders and creditors use when deciding whether to loan you money.
How much money (in total) you owe to creditors and lenders.
Debt-to-income ratio (DTI):
The ratio of how much money you owe compared to how much money you earn. For example, if you make $50,000 a year and your debt total is $18,500, your DTI is 37%. It is good to keep this ratio below 30%.
Condensing multiple types of debt and into a single lump sum that is owed only to one entity, ideally with a lower interest rate.
Debt Management Plan:
DMPs are offered by non-profit credit counseling agencies. They are, essentially, debt consolidation. The main difference is that, instead of consolidating the debts yourself, the agency negotiates with your creditors and lenders to reduce what you owe, your interest rates, etc. They bundle the result into a single sum that you pay back via the agency.
When your creditors/lenders reorganize your debts to help reduce the amount of money you owe or give you a longer repayment period. The goal is to make it easier for you to repay your debt.
When a debtor agrees to accept less than what you owe. The amount is decided on an individual basis.
When you fail to make your loan or credit card payments for 3-6 months, depending on the terms of your contract. Once you have defaulted on a debt you can no longer make payments on it. The entire amount is due (usually immediately).
The period before you are declared to be in default. Any account that goes more than 30 days without a payment is said to be “delinquent.” You can get yourself out of delinquency by catching up on the payments you owe.
The amount of money you have left over after taking care of your other expenses like rent/mortgage payments, buying food, paying your credit cards, etc. You can spend or save this money however you like.
The deadline for making your monthly loan or credit card payment.
The amount of value an asset (aka possession) has after accounting for all the debts associated with it. For example, in real estate, a home’s equity is the difference between the fair market rate of the house (if you decided to sell it right then) and how much money you still owe on that house’s mortgage loans.
Where two parties use a third party to hold onto funds until conditions allow the transfer of funds from one party to the other. For example: when you are buying a house, the bank will often hold your down payment in escrow until two things happen:
1. The funds legitimately clear your account and are available to transfer.
2. The seller completes the terms of your sales contract.
Fair Credit Reporting Act (FCRA):
A federal law that is designed to protect consumers’ interests. It does this by making sure that all the consumer information held by the credit bureaus is accurate, up to date, and kept safe.
Fair Debt Collection Practices Act (FDCPA):
A law that protects consumers from abusive collection agents. It spells out what a collection agent is and is not allowed to do while trying to get you to pay your debt.
Fair Market Value (FMV):
The price a seller can get for an asset when selling to an informed and willing buyer.
Federal Trade Commission (FTC):
An independent agency within the federal government that focuses on consumer protection and stopping competitive entities who take inappropriate actions that are deceptive, unfair or anti-competitive.
A type of credit score. It uses information from your credit reports, history, etc. to come up with a score between 300 and 850. The higher your score, the better you look to lenders and creditors.
A company that deals with monetary issues like loans, deposits, investments, currency exchanges, etc. Banks and stock brokerages are examples of financial institutions.
An interest rate that does not change. Some loans offer a fixed rate over the lifetime of a loan. Others might only offer the fixed rate for a period of time. For example, a credit card that offers you 0% interest on balance transfers for a year is a fixed-rate interest plan.
Where a borrower can put off their payments until later. This is a common occurrence among student loan borrowers.
The process by which a lender tries to get the balance due on a loan by seizing a borrower’s assets. The most common type of this is when the bank forecloses on a home because the homeowner has failed to make their mortgage payments. Car repossession is another example.
Basically, anything done deceitfully or wrong to take financial advantage of another person.
The court orders a third party’s money or property be seized to pay off a debt. The most common version of this is wage garnishment. Where, instead of depositing your paycheck into your bank account, the bank sends a portion of your paycheck (or even the entire paycheck) to your lender or creditor until the debt has been paid off.
Periods of time during which a person who fails to make a payment will not be punished. For instance, your apartment’s rent is due on the 1st, but if you pay it by the 5th you won’t be charged any fees or be evicted. Those four days are your grace period.
A pull of your credit report that is recorded on your credit history and affects your credit score.
Home Equity Line of Credit (HELOC):
A line of credit that uses the equity you’ve built up in your house as collateral. The amount of credit you are granted is based on several factors including your credit score, deb-to-income ratio, equity, etc.
Home equity loan:
Also called a “second mortgage.” This is where you borrow against the amount of equity you’ve built up in your home. The amount you can borrow is based on the fair market value of your home -vs- how much you still must pay on your mortgage loan.
A tax imposed by local, state, and federal governments on individuals’ incomes. The amount you pay in tax is based on your income, investments, and other factors.
When you don’t pay your bills because you can’t afford the payments. It can happen for several reasons.
What you pay to your lender in exchange for them lending you funds. The amount of money you will pay in interest over the life of your loan (or line of credit) will vary depending on your credit score, history, income, and a variety of other factors.
Payments that are made after the due date and the grace period have passed but before the next payment comes due.
A person or company that loans you money.
Something you owe money on. It can be a loan, a line of credit, etc. It’s the opposite of an asset.
The claim or right to claim ownership of an asset that can be used to pay off a debt. It’s sort of like collateral except that, instead of offering something up to secure your loan, a lien is assigned to property after you fail to make payments.
When a lender decides that a borrower does not have to pay off the entire remaining balance of their loan. Sometimes only a percentage of the remaining balance is forgiven. Sometimes the entire loan is forgiven.
The terms and conditions of your loan contract, like how much interest you will be charged, any fees that can be levied, etc.
A loan used to purchase a home, land or other types of real estate. Mortgages have fixed or variable interest rates. The loans are usually repaid over 15 years or 30 years.
A loan that is taken out for the purchase of real estate. You’ve likely heard it used for home loans. The term can also refer to loans used to purchase land and other types of real estate property.
When you fail to pay the money that you owe to your lenders or creditors.
When you spend more money than your bank account balance can cover but the bank pays for the transaction anyway. This sends your bank account into a negative balance, meaning that you have to repay the bank before you will have access to your deposits. Many banks charge fees for overdrafting.
How much you still owe on any debt with an interest rate attached to it.
The total amount that you owe to your creditors and lenders.
Payday Alternative Loan (PAL):
Small loans (usually offered by credit unions) that can be accessed quickly. The balance due is automatically deducted from your next deposit. They are a lot like payday loans, but they are safer and charge lower interest rates.
A short-term loan that you take out against your next paycheck or direct deposit. Payday loans are notorious for having an exorbitantly high amount of interest and other fees. More than 90% of borrowers end up regretting their original payday loan.
A loan that you get from a bank, credit union, or other financial institution that you make payments on over time.
The amount of money you borrowed and agreed to pay back before interest charges are added to it.
When you renegotiate or reconfigure your debts to get better rates or payment terms.
The amount of time you are given to pay back your loan. This is usually measured in months or years.
Your lender retakes possession of your property after you fail to make payments according to the terms of your loan. This can happen quickly and is done without going to court.
Debt that is secured by some form of collateral. If you fail to make your payments, the collateral you used to secure the loan will be confiscated by your lender. Secured credit cards are a good example of this.
Federal insurance system that provides funds to people who are unemployed, disabled, elderly, or who are considered to have “insufficient income.”
Also called a soft pull. It is used as a screening process for identity verification, background checks, etc. A soft inquiry does not affect your credit score.
Statute of Limitations:
The amount of time one entity is allowed to bring legal action against another for an offense. For example, if your creditors want to sue you for non-payment they must do so within a specific window of time. That window varies depending on the laws in your state.
When you put up an asset that you own as collateral to get a loan or other types of financing. If you default on the loan, your lender can take possession of that asset. For instance, when you put up the title of your car to secure a loan.
A total amount is, well, a total amount. It’s the sum of multiple numbers added together.
How much debt you have in total.
A financial entity that offers payday or installment loans that is not bound by state or federal regulations. This is because the financial entity is owned and/or operated by a federally recognized Native American tribe’s governmental body. Therefore, it is subject only to the laws and regulations of that tribe.
Debt that is not secured by any sort of collateral.
A score that was developed by the three major credit reporting bureaus: Experian, TransUnion, and Equifax. Like the credit scores from those bureaus, your VantageScore is determined by an algorithm that factors your credit history, debt to income ratio, etc.
An interest rate that fluctuates over time, depending on which financial index your lender or creditor uses as a benchmark.