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Glossary Page
Annual Percentage Rate (APR) The annual rate charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of borrowing money over the term (or “time period”) of the loan. This figure includes any fees or additional costs associated with the transaction. (See “Interest Rates and APR.”)
Bankruptcy: A legal proceeding designed to help people in severe financial difficulty get a fresh start by relieving them of their current debts. Bankruptcies usually stay on a credit report for 7 to 10 years.
Charge-off: An unpaid portion of a bill that a lender has decided will never be paid and has recorded on the books as a bad debt. It is a serious negative item on a credit report.
Collection: A creditor’s attempt to recover a past-due payment by turning the account over to a collection department or company. Having a debt in collection is a serious negative item on a credit report.
Credit bureau: A credit-reporting agency that is a clearinghouse for information on the credit rating of individuals or companies. It is often called a “credit repository” or “consumer reporting agency.” The three largest are Equifax, Experian and TransUnion.
Equifax
1-800-685-1111
Credit Information Services
PO Box 740241
Atlanta, GA 30374
www.equifax.com
Experian
1-888-397-3742
National Consumer Assistance Center
PO Box 2002
Allen, TX 75013
www.experian.com
TransUnion
1-800-888-4213
Consumer Disclosure Center
PO Box 1000
Chester, PA 19022
www.transunion.com
Credit history: A record of a person’s use of credit over time.
Credit limit: The most that can be charged on a credit card or a credit line.
Credit report: A document containing financial information about a person, focusing on his or her history of paying obligations. It includes current balances on outstanding debts, the individual’s amount of available credit, public records such as bankruptcies, and inquiries about credit from various companies.
Credit risk: The measure of a person’s creditworthiness. People with a history of paying their debts on time are considered a better risk by lenders, and will be charged lower interest rates for borrowing money.
Debt-to-income ratio: The amount of money a person has in outstanding debt, compared to the amount of income a person has. The higher a person’s debt ratio, the more risky the individual appears to potential lenders. Anything below 40 percent is considered good.
Debt Cycle: A condition or situation borrowers can find themselves in when they continue to borrow more money than they are able to repay, and their debt keeps increasing. “Breaking the debt cycle” is a common reference in describing financial strategies to pay off seemingly endless debt.
Default: A designation on a credit report that indicates a person has not paid a debt. Accounts usually are listed as being in default after several reports of delinquency. Defaults are very serious and are considered as negatives on a credit report.
Delinquent: A designation on a credit report that means a person hasn’t made the minimum payment on a debt by the due date. On credit reports, delinquencies are usually shown as being 30, 60, 90 or 120 days delinquent. Delinquencies are a serious negative item on a credit report.
FICO score: The most commonly used credit score. The name comes from the Fair Isaac Corporation, which developed the scoring model, and is used to predict the likelihood that a person will pay his or her debts.
Grace Period: Typically describes the time you have before a credit card company starts charging you interest on your new purchases -- usually a period of 20 to 25 days. But this "free ride" on finance charges does not work the same way on all credit cards. In fact, on most credit cards, you will be charged interest on your new purchases immediately -- unless you have paid off your credit card in full the previous month.
Hard inquiry: An item on a person’s credit report that indicates that someone has asked for a copy of the individual’s report. Hard inquiries are requests that result from a person applying for credit, and are included in the formula for determining a person’s credit score. Too many hard inquiries can negatively affect your credit score.
Installment credit: A type of credit, such as a loan, in which the monthly payment is the same every month and the time period to repay the loan is fixed.
Interest Rates and APR: Interest is the fee charged by a lender to a borrower for the use of borrowed money, and is usually expressed as a percentage. The interest rate is dependent upon many factors, including inflation rates, interest rates charged by the Federal Reserve Board, and is primarily dependent on the credit risk of the borrower. Every state controls the interest rate that a lender may charge on each loan, but many states also allow the lender to charge fees for processing the loan. Since every state is different, the Federal Government established a uniform method known as Annual Percentage Rate (APR) to define the total cost of the loan to the borrower, including all interest and fees. The Interest Rate determines the amount of interest charged on each loan, and the Annual Percentage Rate discloses the total cost, including interest and fees.
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