Always wondered what that financial term meant? Use our comprehensive financial glossary to look up the definition.
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Annual Percentage Rate (APR) – The yearly cost of a loan or credit, including interest and fees, expressed as a percentage rate. This rate does take into account the effect of compounding. This is a useful tool when comparing rates charged by different lenders.
Balance Transfer – The process of moving an unpaid credit card debt from one creditor’s card to another.
Balance Transfer Fee – A fee charged for transferring an outstanding balance from one credit card to another.
Bank – A commercial institution licensed as a taker of deposits, banks are mainly concerned with making and receiving payments, and supplying short-term loans to private individuals.
Bankruptcy – A court proceeding in which a debtor is relieved of debt liability, in whole or in part, depending on the type of bankruptcy filed. There are two primary filings: a Chapter 7 bankruptcy declaration allows for the liquidation of assets and the discharge of most debts; a Chapter 13 bankruptcy allows a borrower with a steady income to pay off bills over a 36- to 60-month period.
Billing Cycle – The interval of time during which bills are prepared for items purchased. Most often this is a month long cycle that repeats for as long as you keep your credit card open.
Billing Statement – The monthly bill sent by a creditor. It gives a summary of activity on an account, including balance, purchases, payments, credits, and finance charges.
Card Holder Agreement – The written statement of the terms and conditions of a credit card account, as required by Federal Reserve regulations. It must include the annual percentage rate, monthly minimum payment formula, annual fee, if applicable, and the cardholder’s rights in billing disputes. The terms and conditions can be changed by the issuer upon written notification to the cardholder.
Cash Advance Fee – A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance.
Cash Flow – The difference between what you earn and your expenses.
Charge Card – A card that requires a full payment of the charge by the due date. Unlike credit cards, charge cards do not allow the carrying of a balance, and no interest is charged. American Express and Diner’s Club are examples of charge cards.
Charge-Off – When your creditor elects to transfer a delinquent account to a category called “bad debt” or “loss” and turns the account over to a collection agency.
Co-Branded Cards – A type of credit card issued through a partnership between a bank and a retail company. These cards usually require lower credit scores but also carry very high interest rates.
Collateral – The underlying security, mortgage, or asset pledged or held in trust for the purpose of ensuring repayment of a loan.
Collection Agency – A company hired by a creditor to collect a debt that is owed. Creditors typically hire a collection agency only after they have made efforts to collect the debt themselves, usually through letters (called “dunning”) and telephone calls. Collection agencies are regulated by the federal Fair Debt Collection Practices Act.
Compound Interest – This is a type of interest that is calculated o the intial principle and also on the accumulated interest of previous periods of a deposit or loan.
Consolidation Loan – A borrower obtains a single loan in order to pay off multiple loans. A consolidated loan may offer a lower monthly payment but a longer repayment period. This process is also called debt consolidation.
Contingency – A condition that must be met before a contract is legally binding. Buyers and sellers often each add several contingencies.
Contract – An oral or written agreement to do or not to do a certain thing. In the finance sector, a contract often lays out the term of a loan or credit card program.
Credit – A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at a later date.
Credit Bureau (Credit Reporting Agency) – A company that collects and sells information about how consumers handle credit. The three major credit bureaus are Equifax, Experian, and TransUnion.
Credit Card – A plastic card with a coded magnetic stripe that, when signed, entitles its bearer to a revolving line of credit, whose size and interest rate are determined by the borrower’s creditworthiness. A credit card allows you to purchase items without cash and delays the payment for about 25 days or a full billing cycle. Some credit cards carry annual fees, and all assess interest for charges that are not paid by the end of the grace period. Other charges and fees may apply.
Credit Counseling – A form of credit assistance for financially distressed consumers who need help managing finances. This service is often called debt relief.
Credit History – Kept by a credit bureau, this record details a person’s line of credit and debt repayment history. It is used by lenders to help determine if a potential borrower is a good risk.
Credit Insurance – An insurance policy that pays off debts should the borrower lose their job, die, or become disabled.
Credit Limit – The maximum amount of credit granted to a borrower.
Credit Report – A report of a person’s credit history, prepared by a credit bureau, that lists how individuals manage their debts and make payments, how much untapped credit they have available, and whether they have applied for any loans. The reports are made available to individuals and to creditors who have a legitimate need for the information, like when they are evaluating someone for a loan.
Credit Score – A statistically derived, numerical score, based on various characteristics of an individual’s credit history, which measures creditworthiness. A higher credit score often leads to better opportunities when a borrower is looking to make a large purchase.
Creditor – A person or business from whom you borrow or to whom you owe money.
Creditworthiness – Past and future ability to repay debts.
Debit Card – A bank card with direct access to a cardholder’s account, usually a checking or savings account. The card acts more like cash, with the money being withdrawn from the existing account balance upon payment .
Debt – An amount of money owed from one person or firm to another.
Debt Service – The cash required to cover the repayemnt of the interest and principal on a debt for a particular period. If an individual is planning to take out a loan, the borrower needs to figure out the annual debt service required on all existing loans. If a lender thinks the borrower cannot earn enough income to service their current debt, the lender won’t make the loan.
Debtor – A person or entity (such as a bank) that owes money
Debt-to-Income Ratio – A measure of creditworthiness that calculates your debts as a percentage of income, and is calculated by dividing the total of your long-term debt payments by your gross income.
Default – An account on which the payments have not been made according to the terms.
Defendant – A person charged in a legal action.
Discharge of Debts – A bankruptcy court’s erasure of the debts of a person or business that has filed for bankruptcy.
Dischargeable Debts – Debts that can be erased through bankruptcy. Most debts incurred prior to declaring bankruptcy are dischargeable, including back rent, credit card bills, and medical bills. Compare to non-dischargeable debts.
Electronic Fund Transfer (EFT) Systems – A variety of systems and technologies for transferring funds electronically rather than by check.
Equity – The value of an asset minus any liabilities on the asset. It can be represent by the following equation: Assets-Liabilities=Equity
Escrow – A process in which a neutral third party holds documents, money, or other property until agreed upon conditions are fulfilled.
Federal Deposit Insurance Corporation (FDIC) – An agency created by the federal government to protect depositors against losses arising from the financial failure of a bank. This means is a bank fails, the FDIC ensures your bank accounts up to a certain amount so you do not suffer financial loss as well.
Federal Reserve System – The nation’s central banking system, designed by Congress to help provide the United States with a safe and stable monetary and financial system. It regulates U.S. monetary policy, and has the power to influence key, short-term interest rates, and control the amount of money and credit flowing through the U.S. economy
Finance Charge – The cost for using credit, comprised of interest costs and other fees.
Financial Planner – A financial adviser, ideally with broad knowledge of all areas of personal finance. Fee-only planners are paid solely by their clients—that is, they do not receive sales commissions or other compensation from other sources. Fee-plus-commission planners charge fees for advice and other services, and also on the sale of investment and insurance products
Forbearance – Voluntarily refraining from doing something, such as asserting a legal right. For example, a creditor may forbear on its right to collect a debt by temporarily postponing or reducing the borrower’s payments.
401(k) Plan – An employer-sponsored, tax-deferred, retirement savings plan funded by employees with contributions that are deducted from pre-tax pay. Employers frequently add matching contributions up to a set limit. Employees are responsible for managing the money themselves by allocating the funds among a selection of stock, bond, and cash investment funds. Investment gains are not taxed until the money is withdrawn.
Fraud – A dishonest and illegal practice.
Full Faith and Credit – An unconditional commitment to pay interest and principal on debt; usually issued or guaranteed by the U.S. Treasury.
Garnishment – A legal proceeding in which money or property that is owed to you is applied to the payment of the debt. Also called wage garnishment.
Gold Card – A credit card that offers a bigger line of credit than a standard card, generally $5,000 and up. The income requirements on this type of card are higher, usually a $35,000 minimum. In addition, issuers provide extra perks or incentives to cardholders.
Good Faith Estimate – A preliminary estimate of the fees associated with closing a loan that is given to you within three business days of submitting a loan application.
Grace Period – A period of time when no interest or fees accrue.
Guarantee – A promise by one party to pay a debt or perform an obligation if the person with primary liability fails to pay or perform, as required.
Home Equity Loan – A fully funded loan, obtained for a variety of purposes, secured by a second mortgage and based on the equity in your home. Interest paid is usually tax deductible.
Index – A published, market-based figure, used to establish a lending rate. Common indices include the one-year Treasury Constant Maturity Yield, the Federal Home Loan Bank (FHLB) 11th District Cost of Funds, and the prime rate, as listed in The Wall Street Journal.
Installment Loan / Installment Credit – An account in which the debt is repayed in regular installments. These installments are in a set amount that are to be paid successively at specific intervals set by the terms of the loan.
Interest – The cost of borrowing money. Also, the earnings on invested money.
Interest Rate – The fee charged or paid for money lent, expressed as a percentage of the principal.
Introductory Rate – The low interest rate charged by a lender for an initial period to encourage 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. Often called a teaser rate or intro rate.
Joint Credit – Any account owned by two or more people where all parties are responsible for repaying the debt.
Late Payment Fee – A charge to customer whose monthly payment has not been received by the due date or stated deadline for payment, as shown on the billing statement.
Liability – A financial obligation or other amount you owe.
Loan – When a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the borrowed money, along with interest, at a predetermined date in the future.
Loan Commitment – A written agreement between a lender and borrower to loan money at a future date, subject to the specified terms and conditions.
Loan-to-Value Ratio (LTV) – A ratio expressed as a percentage, determined by dividing the loan amount by the sales price or appraised value of the asset, expressed as a percentage.
Lock In – A commitment obtained from a lender assuring a particular interest rate or feature for a specified time period. This provides protection to the borrower should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan.
Minimum Payment – The minimum amount, usually 2-3 percent of the outstanding balance, a cardholder can pay to keep a credit card account from going into default.
Monthly Periodic Rate – The interest rate factor used to calculate the interest charges on a monthly basis. The factor equals the annual percentage rate divided by 12. See periodic rate.
Negotiable Instrument – A written document that represents an unconditional promise to pay a specified amount of money upon the demand of its owner. Examples include checks and promissory notes. Negotiable instruments can be transferred from one person to another, as when you write “pay to the order of” on the back of a check and turn it over to someone else.
Non-Dischargeable Debts – Debts that cannot be erased through bankruptcy. Examples of non-dischargeable debts include alimony, child support, many student loans, and most income tax debts. Compare to dischargeable debts.
Open-End Credit – A line of credit that may be used over and over again, including credit cards, overdraft credit accounts, and home equity lines.
Origination Fee – A loan processing fee paid to the lender as a percentage of the loan amount, where one percent equals one point.
Overdraft Checking – A checking account with a line of credit that allows the borrower to write checks or draw funds for more than the actual account balance.
Over-the-Limit Fee – A fee charged for exceeding the credit limit on a credit card.
Penalty Rate – Several percentage points higher than a credit card’s current annual percentage rate, which goes into effect after a predetermined number of late payments.
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.
Personal Loan – A loan secured by property other than real estate, or unsecured.
Platinum Card – A credit card with a higher limit and more perks than a gold card.
Points – Charges paid to the lender, usually at closing. One point is 1% of the mortgage face amount.
Power of Attorney – A legal document that allows someone to appoint an attorney in fact to conduct personal and financial business, even in the event of legal incompetence. It expires upon the giver’s death.
Pre-Approval – A process used to assess a prospective borrower’s ability to pay back a loan. It determines how much money a prospective homebuyer can borrow before an actual application is made.
Prepayment Penalty – A charge imposed by the lender if a borrower pays off a loan early. The charge is usually expressed as a percent of the loan balance at the time of the prepayment.
Prequalification – A process used to assess a prospective borrower’s ability to pay back a loan. It determines how much money a prospective homebuyer can borrow before an actual application is made.
Previous Balance – An interest calculation method used by some credit card issuers where finance charges are based on the amount owed at the end of the previous billing cycle.
Prime Rate – The interest rate banks use to price loans to their best or “prime” customers. Many institutions quote prime rates established by large money center commercial banks, such as Citibank or Chase Manhattan. There is also a prime rate average listed in The Wall Street Journal that is an average of the largest commercial banks.
Principal – The original or remaining amount of money invested or lent, not including profits or interest earned or due on that money.
Qualifying Ratios – The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you could afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments, which are divided by your gross monthly income.
Refinancing – Paying off one loan with the proceeds from another loan.
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 Card – A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the card holder defaults on payments. It is typically used by people new to credit, or those trying to rebuild their poor credit ratings.
Secured Debt – A debt on which collateral has been pledged by the borrower. The creditor can institute a foreclosure or repossession, or take the property identified by the lien, called the collateral, to satisfy the debt if you default. Compare to unsecured debt.
Standard Card – The basic credit card offered by issuers.
Teaser Rate – The low rate charged by a lender for an initial period to encourage 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. Often called a teaser rate or intro rate.
Total Debt Ratio – Total monthly debt plus housing payments divided by your gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.
Two-Cycle Billing – With 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 back to the purchase date.
Underwriting – The process of verifying data and approving a loan.
Unsecured Debt – Debt, such as most credit cards, that is not secured with collateral. Compare to secured debt.
Unsecured Loan – A loan based on your promise to pay without savings or other collateral as a guarantee; sometimes called a signature loan.
Variable Interest Rate – An interest rate that changes up or down on a set schedule based on an economic index such as the prime rate.