When dealing with credit, there are a multitude of terms that you should understand. These terms are used frequently when dealing with credit and will help you better comprehend exactly what is involved in your credit. Read through this credit terminology guide and educate yourself on the world of credit.
Amortization- The gradual reduction of debt through regular payments of principal and interest.
Annual Percentage Rate (APR) - APR is the yearly rate lenders charge borrowers to borrow money (also called the cost of credit). Lenders must divulge the APR they are charging prior to finalizing the deal. Lenders can not reveal or make changes to the APR after the lender/borrower contract has been signed. However, some credit card companies and loan companies state in their agreement that they can change your APR when interest rates or indexes change.
Average Daily Balance or Adjusted Balance- Methods of calculating a credit balance and interest on a debt. Average Daily Balance is the practice of crediting an account from the day a payment is received or debiting an account on the day a charge is made. It is a daily tracking of what is owed. The lender adds the beginning balance for each day in the billing period to the charges made that day, and then subtracts any payments and/or credits made to the account that day. Adjusted Balance adds charges and subtracts payments made during the billing cycle from the balance at the end of the previous billing cycle. This method is more advantageous to borrowers and credit card holders. Unlike Average Daily Balance calculations, new purchases during the billing cycle are not included in Adjusted Balance calculations, and interest is only applied to the balance remaining after payments are credited to the account
Bankruptcy- Bankruptcy is a form of financial protection sometimes sought by a borrower who is unable to pay rent or mortgage payments, has no credit or means of paying for it, and is unable to reconcile with collection agencies. There are two methods of filing for personal bankruptcy: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy eliminates most types of debt (notable exceptions include taxes, alimony, and most student loan debt) by liquidating all non-exempt property (as set forth in the Chapter 7 filing) to pay debts, and wiping out anything left over after the liquidation. A Chapter 13 bankruptcy allows a borrower with a steady income to establish a full or partial debt repayment plan, usually over a 36- to 60-month period.
Credit Score- A number between 300 and 850 that measures an individual's creditworthiness based on credit history. Scores are calculated using mathematical methods that incorporate credit history, amount of credit used and available, number of late and on-time payments, whether any payments due are in default, and other variables
FICO- FICO is a mathematical equation/calculation lenders use to evaluate the risk associated with lending you money. FICO stands for Fair Isaac Company, the company that originally created the formula.
Liquidation- Liquidation is the process of converting assets into cash to pay off creditors. This process is used in personal and corporate bankruptcy as a solution to getting out of debt with lenders.
Repossession- Repossession is the forced or voluntary surrender of merchandise as a result of the customer's failure to pay what is owed. If you purchase an item on credit and fail to pay for it, the entity that sold it to you reclaims it.
Revolving Account- A revolving account is an account that requires a minimum payment each month in addition to a service charge. When the balance decreases, the service charge/interest also declines.
Credit terminology can be confusing. If you're investigating credit options and want to know what's involved, use this guide to get you up to speed on some of the more common credit terms.