Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes in response to various influences, such as the federal funds rate and the rate of inflation. Adjustable rate mortgages are attractive when interest rates are on a decline or when you plan to sell the property is five years or less.
Annual Percentage Rate (APR)
APR stands for annual percentage rate, and it is the interest rate charged on credit card balances expressed in a standardized, annualized way. The APR is applied each month that an outstanding balance is present on a credit card.
Bad credit
A term used to describe poor credit rating. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. “Bad Credit” can result in being denied future credit.
Bridge Loan
A short-term loan to provide contingency funds while waiting for the processing of longer-term financing.
Co-signer
A co-signer is a person who signs an agreement to pay off a loan for someone else if that someone else defaults. Co-signing is a technique often used among family and friends to allow a person with good credit to vouch for a person with new credit or bad credit to get a loan. The presence of a co-signer makes lenders more willing to approve loans for high-risk borrowers. While co-signing allows the person with bad credit to get a loan, it puts the person with good credit on the hook for the entire amount borrowed.
Collateral
Assets used to guarantee a loan in case of default.
Consumer credit file
A consumer credit file is the collection of an individual consumer’s debt repayment records, stored at a credit reporting agency (credit bureau). Credit scores are based on consumer credit files, and determine whether an individual will get a credit card or other loan, and at what rate.
Consumer credit report
The monthly Federal Reserve consumer credit report considers various types of consumer debt, including revolving credit — a loan category comprised almost entirely of credit card debt — as well as nonrevolving debt, which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers. Also known as the G.19 report.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau, or CFPB, is a federal agency charged with being a watchdog for consumer financial products, such as credit cards, payday loans, mortgages and student loans. Approved as part of the massive Wall Street reform bill signed by President Obama in July 2010, the agency officially launched in July 2011.
Credit bureau
A credit bureau is a company that catalogs and sells information regarding the payment behavior of consumers, and issues credit reports with related information. The three major national credit bureaus are Experian, Equifax and TransUnion. Also called a credit reporting agency.
Credit bureau
A credit bureau is a company that catalogs and sells information regarding the payment behavior of consumers, and issues credit reports with related information. The three major national credit bureaus are Experian, Equifax and TransUnion. Also called a credit reporting agency.
Credit history
Credit history is the record of use of debt. In the United States, three major credit bureaus — Experian, TransUnion and Equifax — track individuals’ and businesses’ credit histories, and compile them into credit reports. Credit card issuers and other lenders use credit histories to decide whether to provide customers with credit, and on what terms. What records are kept in your credit history, for how long and how they may be used are regulated by the federal Fair Credit Reporting Act.
Credit inquiry
A credit inquiry is created when a lender pulls someone’s credit record. It creates a record in a credit report of each time the borrower, a lender or a potential lender obtains a copy of the consumer’s credit report. Credit inquiries, especially multiple inquiries, may negatively impact credit scores. See hard inquiry and soft inquiry.
Credit score
A credit score is a three digit number that summarizes how well a person or business has handled debt. The higher the number, the better. Those with high scores can qualify for larger loans at better rates. Those with low scores will get poor terms, or be turned down. There are a variety of credit scores using different formulas; what they have in common is that they judge risk and try to predict future behavior. Credit lines outstanding, debt-to-income ratio and (especially) past payment behavior are among the factors in a person’s credit score. The firm FICO pioneered the use of credit scores, and its product, the FICO score, remains the best known.
Credit report
A credit report is a compilation of the credit history of an individual or business. It is compiled by one or more of the credit bureaus and contains the detailed history of borrowing, payment behavior and credit inquiries. Credit reports are viewed by lenders in deciding whether to extend credit and on what terms. Credit reports are distilled using complex formulas, into three-digit numbers called credit scores.
Default
Failure to fulfill the terms of a contract, for instance, failure to pay a debt.
Delinquent
A payment that is not made by the due date.
Debt-to-income ratio
Debt-to-income ratio is the ratio of all personal debt — including credit card debt — to gross personal income. For consumers, debt-to-income ratio comes into play when they attempt to qualify for loans. A high amount of credit card debt can force a consumer into paying higher rates on a mortgage, or could even cause it to be denied. Debt-to-income ratio can also come into play for entrepreneurs trying to start businesses by affecting their ability to get loans.
Debt-to-limit ratio
A debt-to-limit ratio is used in the calculation of credit scores. It compares the amount of credit being used to the total credit available to the borrower. Having a low ratio — in other words, not much debt but a lot of available credit — is good for your credit score. Also known as a balance-to-limit ratio and credit utilization ratio.
Debt consolidation
Debt consolidation is the combination of multiple loans with a new, single loan offering a lower monthly interest rate and payment, or a longer repayment period. In the context of credit card debt, this often involves a balance transfer from several high-interest cards to a single lower interest card.
FICO
FICO is the name of the data analytics company that pioneered the concept of credit scoring through its signature three-digit FICO score. FICO was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac. It changed names from Fair Isaac Corp. to FICO in 2009, and is based in Minneapolis.
FICO score
A FICO score is a particular type of credit score — one offered by FICO, the company that pioneered their use. Like other credit scores, a FICO score is a three- digit numeric value that assesses a borrower’s credit risk. Your FICO score can range from 300 to 850. The higher the number, the more likely the loan is to be repaid. People with low FICO scores get charged higher interest rates to make up for the added risk. People with high FICO scores get the best deals. FICO scores are calculated using complex formulas that predict future debt repayment behavior. Income, credit lines outstanding, debt to income ratio, mix of credit and past payment behavior all factor into a person’s FICO score.
Finance charge
A finance charge is the total cost of borrowing, including interest and fees, expressed in a dollar amount.
Fixed rate (or fixed APR)
An annual percentage rate that does not change throughout the year, unlike an introductory APR that changes after a specific period of time.
Fixed Rate Mortgages
Mortgages with an interest rate that remains the same for the entire payment period of the loan.
Fair and Accurate Credit Transactions Act
The Fair and Accurate Credit Transactions Act of 2003 is a federal law that established consumers’ rights to obtain their credit reports from credit bureaus, free, once a year. The act led to the establishment of the website, www.annualcreditreports.com, that provides the access to the three major credit bureaus. The act also gives consumers the right to place an alert on their credit reports if they suspect fraud. And the Fair and Accurate Credit Transactions Act requires merchants to truncate the credit card account number shown on receipts.
Fair Credit Reporting Act
The Fair Credit Reporting Act was enacted to govern how credit bureaus maintain, share and correct information in credit reports. It sets out, for example, a method by which consumers can force inaccurate information to be removed from credit files. A 2003 amendment to the act granted consumers the right to get a free copy of their credit reports yearly from each of the three major credit bureaus.
Fair Debt Collection Practices Act (FDCPA)
Congress passed the U.S. Fair Debt Collection Practices Act in 1977 to fight harassment, deception and other abuses. The law applies to “third-party” debt collectors, meaning those who collect on behalf of creditors. It restricts when collectors may call and what they may say. It also gives individuals the right to sue collectors in order to enforce the law’s consumer protection provisions.
Federal Trade Commission
The Federal Trade Commission, or FTC, is the federal agency responsible for stopping business practices that are either anticompetitive, or deceptive or unfair to consumers. Its chief strategic goals are to protect consumers and to prevent mergers that would stifle business competition.
Guaranteed Loan
A loan backed by a pledge from a third party to cover the loan if the original debtor defaults on the loan.
Good credit
On the FICO scale of 300 to 850, good credit is a score anywhere from 670 to 739.
Grace period
The grace period is the time during which you are allowed to pay your credit card bill without having to pay interest. The Credit CARD Act of 2009 requires that if issuers have grace periods, they must last at least 21 days. The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers; instead, interest charges start right away.
Hard inquiry
A hard inquiry is a credit scoring term that describes an initial step taken by lenders in evaluating consumers’ loan applications.The potential lender checks the consumer’s credit report, which creates a small negative impact on the consumer’s credit score. An occasional hard inquiry has only a small negative impact on a credit score. Hard inquiries stay on your credit report for two years. What hurts a credit score most are multiple hard inquiries over a long period, which the credit scoring algorithms treat with suspicion, since they could signal hard times have befallen the borrower. A hard inquiry is also known as a “hard pull.”
Hard pull
A hard pull is a credit scoring term that describes an initial step taken by lenders in evaluating consumers’ loan applications.The potential lender checks the consumer’s credit report, which creates a small negative impact on the consumer’s credit score. An occasional hard pull has only a small negative impact on a credit score. Hard pulls stay on your credit report for two years. What hurts a credit score most are multiple hard pulls over a long period, which the credit scoring algorithms treat with suspicion, since they could signal hard times have befallen the borrower. A hard pull is also known as a “hard inquiry.”
Installment loan
An installment loan is a loan in which equal, periodic payments are made for a defined period of time. A typical car loan is an example of an installment loan: You pay the same amount each month, with part going toward interest and part going toward principal, until the loan is paid off. Successfully paying an installment loan is good for your credit score, as credit scoring formulas reward those who show the ability to handle different types of loans.
Interest rate
Simply put, an interest rate is the price a lender charges for loaning money. On credit cards, interest rates are a little trickier, because lenders set multiple interest rates. For example, you may have a low, teaser (introductory) rate when you open an account, followed by a higher standard rate for purchases, which turns into a penalty rate if you pay late. So you may end up owing a balance to a credit card company with multiple interest rates. Interest rates on credit cards are expressed in a standardized way so consumers can more easily compare cards. That standard way is known as the APR, which stands for annual percentage rate.
Late payment fee
A late payment fee (a late charge) is charged to a borrower who misses paying at least their minimum payment by the payment deadline. In order to avoid late fees, ensure that you pay at least the minimum amount by the due date. Late payments may affect your credit history negatively, even if your entire outstanding balance is later paid in full. Occasional late fees are capped at $25 under federal regulations.
Line of credit
A line of credit is an open-ended, revolving loan, in which the borrower may access money up to a certain limit, pay it back and borrow it again. Periodic interest charges will go up and down, depending on how much is borrowed. Lines of credit may be secured (as with home equity lines of credit) or unsecured (as with credit cards). Interest rates on lines of credit are usually variable.
Loan modification
The mortgage terms are revised to reduce the monthly payments by lowering the interest rate or extending the term of the loan.
Net pay
The remaining amount on an employee’s paycheck after deductions, such as income tax or Social Security, are made.
Opt out
Under the Credit CARD Act of 2009, consumer gained the right to opt out of interest rate increases, fee increases and other significant changes in terms. Issuers must give 45 days’ notice of the changes and notify consumers of their opt-out rights and procedures. However, to discourage spending sprees, the law also calls for the new interest rate to apply to new purchases after 14 days. Consumers who opt out have a minimum of five years to pay off their existing debt under the old terms.
Origination Fee
An origination fee is an upfront fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan and are generally between 0.5 and 1% on mortgage loans in the United States.
Payday loan
Payday loans are small loans taken out by borrowers as advances against their next paychecks. When figured on an annualized basis, their interest rates are extremely high. These high rates — and the fact that many people “roll over” the loans again and again, racking up huge costs — have made payday loans controversial. Many states have banned them or severely restricted them.
Payment history
Payment history is a critical element in determining whether a person or business has good or bad credit. A long record of on-time payments is the most important element in obtaining loans, and at favorable rates.
Prime credit
A person with prime credit has a credit record that is strong enough to be offered good or excellent terms by someone extending credit. People with subprime credit get worse deals offered, if they get any at all. There is no one exact score that divides prime credit and subprime credit consumers; it depends on the product and each creditor sets its own rules.
Piggyback Loan
A secondary mortgage loan to make up the difference between a prospective homeowner’s down payment and the standard 20 percent down payment. Piggyback loans are often used to avoid Private Mortgage Insurance (PMI).
Predatory Lending
Lending or credit practices that impose unfair burdens on borrowers, including hidden fees, excessively high interest rates and stiff prepayment penalties. Many payday lenders follow predatory lending practices.
Prepayment Penalty
A fee charged to borrowers who pay off their loans before the repayment period ends. Most payday loans include stiff prepayment penalties.
Prime Rate
The benchmark interest rate for loans dictated by the Federal Reserve Bank (the Fed). Usually, prime rate is only available to the most creditworthy customers.
Principle
The actual amount borrowed.Interest and taxes are calculated based on a percentage of the principle.
Principle, Interest, Taxes and Insurance (PITI)
Principal, Interest, Taxes and Insurance or PITI stands for all the costs that are figured in a monthly mortgage statement.
Private Mortgage Insurance (PMI)
A requirement for market-rate borrowers seeking mortgages who do not provide at least 20 percent down payment or a piggyback loan. FHA loans do not require PMI because of the government guarantee.
Promissory Note
A promise to pay a certain amount during a prescribed period.
Revolving line of credit
A revolving line of credit refers to a bank or merchant offering a certain amount of always available credit to an individual or corporation for an undetermined amount of time. The debt is repaid periodically and can be borrowed again once it is repaid. Borrowing using a credit card is an example of using a revolving line of credit.
Rollover
Commonly applied to payday loans, rollovers are an extension of an original loan granted when a borrower cannot pay the entire balance due. Instead, borrowers pay a fee that renews the loan but usually does not reduce the principle.
Signature Loan
A loan that does not require collateral but is based on a borrower’s demonstrated ability to pay. Payday loans are a type of signature loan.
Subprime lender
A subprime lender is one that specializes in issuing credit cards or other loans to those those with bad credit. Because subprime borrowers are more likely to default, subprime lenders tend to charge higher interest rates and fees.
Super-prime credit
People with super-prime credit have credit records that are so pristine that they are offered the best available terms by those extending credit. The term “super-prime” credit came into use during the recession, when creditors wanted to restrict lending to such a tiny slice of elite customers that the old term — prime — wasn’t good enough. No exact score divides the super-prime tier of credit from its lesser credit cousins prime and subprime; it depends on the product and each creditor sets its own rules.
Title loan
A type of loan that requires borrowers to surrender the titles to their vehicles to lenders as collateral. Only people who own their vehicles outright with no outstanding liens are eligible for title loans. The borrower is allowed to continue driving the car while he or she repays the title loan. If the borrower misses a payment, the lender can repossess the car or truck and sell it. These loans typically carry high interest rates compared to others types of loans.
Truth in Lending Act
The Truth in Lending Act (TILA) is the primary federal law governing the extension of consumer credit by lenders in the United States. Congress instituted the the Truth in Lending Act in 1968 to ensure more accurate disclosure of credit terms so that consumers could compare the various credit terms available in the credit marketplace, to avoid the uninformed use of credit, and to protect themselves against inaccurate and unfair credit billing and credit card practices. The regulation that implements TILA’s requirements is Regulation Z, which is administered by the Federal Reserve. Under Regulation Z, card issuers are required to disclose the terms and conditions to potential and existing cardholders at various times.
Usury
The lending of money, especially at exorbitant interest rates. Many states have usury laws that cap interest rates, but a 1978 Supreme Court rulings allowed credit cards or other lenders to ignore those laws if the lender is headquartered in a state that does not have them. Most major card issuers have located their headquarters in states with no usury laws. That effectively negated state usury laws, and hence there is no cap on most credit cards’ interest rates. They can charge usurious rates, legally.
Utilization ratio
Utilization ratio is used in the calculation of credit scores. It compares the amount of credit being used to the total credit available to the borrower. Having a low ratio — in other words, not much debt but a lot of available credit — is good for your credit score. Also known as a balance-to-limit ratio.