Our Financial Terms Glossary will help you learn the most common financial terms, words and phrases, as well as the meaning for dozens of legal terms.
1/1 ARM: An adjustable-rate mortgage that has a
set initial interest rate for the first year. After that period,
the mortgage rate adjusts each year. Each annual rate adjustment
is based on (or “indexed to”) another rate, often the
yield on a U.S. Treasury note.
10/1 ARM: An adjustable-rate mortgage that has a
set initial interest rate for the first 10 years. After that period,
the mortgage rate adjusts each year.
3/1 Interest-Only ARM: An adjustable rate mortgage
in which none of the payments go toward paying off the loan principal
for the first three years.
3-in-1 Credit Report: Also called a merged credit
report, this type of report includes your credit data from TransUnion,
Equifax and Experian in a side-by-side format for easy comparison.
80-10-10 Loan: A combination of an 80% loan-to-value
first mortgage, a 10% home equity loan and a 10% down payment. The
loans can be used to eliminate the need for private mortgage insurance.
ACH: Automated Clearing House. This is a national
network that allows for transferring funds electronically between
businesses, consumers and financial institutions.
Adjustable Rate Mortgage (ARM): A home loan where
the interest rate is changed periodically based on a standard financial
index. ARM’s offer lower initial interest rates with the risk
of rates increasing in the future. In comparison, a fixed rate mortgage
(FRM’s) offers a higher rate that will not change for the length
of the loan. ARMs often have caps on how much the interest rate can
rise or fall.
Alternative Mortgage: Any home loan that is not
a standard fixed-rate mortgage. This includes ARM’s, reverse
mortgages and jumbo mortgages.
Alias: A note on your credit report that indicates other names used for your financial
accounts. Sometimes marked as “Also Known As” or “AKA.” This
can include maiden names or variations on the spelling and format
of your full name.
Amortization: The process of gradually repaying
a debt with regularly scheduled payments over a period of time.
AnnualCreditReport.com: The official website for
obtaining your free credit report disclosures from the credit bureaus,
Equifax, Experian and TransUnion. You have the right to request your
credit reports online, by phone or by mail for free once every 12
months under FACT Act regulations. This free service can only be
used once a year and does not include your credit
Annual Fee: A charge sometimes required by credit
card companies for use of an account. Annual fees range between $10-50
a year and are most common with rewards cards or cards for subprime
Annual Percentage Rate (APR): The interest rate
being charged on a debt, expressed as a yearly rate. Credit cards
often have several different APR’s – one for purchases, one
for cash advances and one for balance transfers.
Application Fee: Amount a lender charges to process your
loan application documents. Application fees are common with mortgage loans and many lenders will apply the cost of
the application fee towards your closing costs. Application fees are generally non-refundable.
Application Scoring: A specific kind of statistical
scoring that businesses use to evaluate an applicant for acceptance
or denial. Similar to credit scoring, application scoring often factors
in other relevant details such as employment status and income to
Appraisal Fee: The amount charged to deliver a professional
opinion about how much a property is worth. For a standard home or
condominium, this fee is usually around $200-500.
Appraised Value: An educated opinion of how much
a property is worth. An appraiser considers the price of similar
homes in the area, the condition of the home and the features of
the property to estimate the value.
Asset: Assets are things owned by a person that
have cash value. This can include homes, cars, boats, savings and
Authorized User: Anyone who uses your credit cards
or credit accounts with your permission. More specifically, someone
who has a credit card from your account with their name on it. An
authorized user is not legally responsible for the debt. However, the account may appear on their credit
report which means it may also be included in the authorized user’s credit score calculation.
Back-End Ratio or Back Ratio: The sum of your monthly
mortgage payment and all other monthly debts (credit cards, car payments,
student loans, etc.) divided by your monthly pre-tax income. Traditionally,
lenders wouldn’t give people loans that increased this ratio
past 36%, but they often do now. (See Debt-to-Income Ratio)
Balance Transfer: The process of moving all or part
of the outstanding balance on one credit card to another account.
Credit card companies often offer special rates for balance transfers.
Balloon Payment: A loan where the payments don’t
pay off the principal in full by the end of the term. When the loan
term expires (usually after 5-7 years), the borrower must pay a balloon
payment for the remaining amount or refinance. Balloon loans sometimes
include convertible options that allow the remaining amount to automatically
be transferred into a long-term mortgage. (See Convertible ARM)
Bankruptcy: A proceeding that legally releases a
person from repaying a portion or all debts owed. Bankruptcy damages
your credit for 7-10 years and should only be considered as a last
resort if you cannot repay your debts. (See Chapter 7-13 Bankruptcy)
Beacon Score:The name of the FICO score from Equifax. There are thousands of slightly different credit scoring
formulas used by bankers, lenders, creditors, insurers and retailers.
Each score can vary somewhat in how it evaluates your credit data.
Bi-Weekly Mortgage: A mortgage that schedules payments
every two weeks instead of the standard monthly payment. The 26 bi-weekly
payments are each equal to one-half of a monthly payment. The result
is that the mortgage is paid off sooner.
Broker Premium: The amount a mortgage broker is
paid for serving as the middleman between a lender and a borrower.
This premium comes from the surcharge a broker applies to a discounted
loan before offering it to a borrower.
Borrower: The individual who is requesting the loan
and who will be responsible for paying it back.
Cardholder: The person who is issued a credit card
and/or any authorized users.
Cash Advance: A cash loan requested from your creditor,
usually by using your credit card at an ATM machine or through a loan
advance on your paycheck. These loans include special interest rates
charged on the amount of the advance.
Cash-Out Refinance: A new mortgage for an existing
property in which the amount borrowed is greater than the amount
of the previous mortgage. The difference is given to the borrower
in cash when the loan is closed.
Chapter 7 Bankruptcy: A type of consumer bankruptcy
where your responsibility for your debts is cleared entirely. With
this kind of bankruptcy you are not required to pay back debts you
owe from before your filing. To qualify for a Chapter 7 bankruptcy your
income must be below your state’s median income.
Chapter 7 bankruptcy filing records
remain on your credit report for 10 years and the record of each
account included in your filing will remain on your report for 7
Chapter 11 Bankruptcy: A complex type of bankruptcy
usually filed by businesses that wish to restructure their debts.
Chapter 12 Bankruptcy: A type of bankruptcy specifically
for farmers and fishermen. Similar to Chapter 13 bankruptcy but with
a few special benefits.
Chapter 13 Bankruptcy: A type of bankruptcy where
the consumer must pay off some of their debts over time. Chapter
13 bankruptcy filing records remain on your credit report for 7 years
from the discharge date or 10 years from the filing date if it is
not discharged. Each account included in the filing will remain on
your report for 7 years.
Charge-Off: When a creditor or lender writes off
the balance of a delinquent debt, no longer expecting it to be repaid.
A charge-off is also known as a bad debt. Charge-off records remain
on your credit report for 7 years and will harm your credit score.
After a debt is charged-off, it can be sold to a collections agency.
ChexSystems: A credit reporting company that tracks
your banking history and provides this data to banks when you apply
for a new checking account. Negative records, such as bounced checks,
can be kept in their database for up to five years. If there are
errors on your ChexSystems record, you can contact the company to
submit a dispute.
Closing Costs: The amounts charged to a consumer
when they are transferring ownership or borrowing against a property.
Closing costs include lender, title and escrow fees and usually range
from 3-6% of the purchase price.
Collateral: An asset or property used as security
against a loan. (See Secured Credit Card)
Collections: When a business sells your debt for
a reduced amount to an agency in order to recover the amounts owed.
Credit card debts, medical bills, cell phone bills, utility charges,
library fees and video store fees are often sold to collections.
Collection agencies attempt to recover past-due debts by contacting
the borrower via phone and mail. Collection records can remain on
your credit report for 7 years from the last 180 day late payment
on the original debt. Your rights are defined by the Fair
Debt Collection Practices Act.
Combined Loan-to-Value Ratio: The total amount you
are borrowing in mortgage debts divided by the home’s fair
market value. Someone with a $50,000 first mortgage and a $20,000
equity line secured against a $100,000 house would have a CLTV ratio
Commitment Fee: A fee paid by a borrower to a lender
in exchange for a promise to lend money on certain terms for a specified
period. Usually charged in order to extend a loan approval offer
for longer than the 30-60 day standard period. Quality lenders don’t
usually charge these fees.
Conforming Loan: A mortgage that meets the requirements
for purchase by Fannie Mae and Freddie Mac. Requirements include
size of the loan, type and age. Current loan size limits for single-family
homes range between $200,000 and $400,000. Loans that exceed the
conforming size are considered jumbo mortgages and usually have higher
Co-Signer: An additional person who signs a loan
document and takes equal responsibility for the debt. A borrower
may want to use a co-signer if their credit or financial situation
is not good enough to qualify for a loan on their own. A co-signer
is legally responsible for the loan and the shared account will appear
on their credit report.
Convenience Check: Checks provided by your credit
card company that you can use to access your available credit. These
checks often have different rates and terms than your standard credit
Convertible ARM: An adjustable rate mortgage that
can be converted to a fixed-rate mortgage under specified conditions.
Credit Bureaus: Also known as credit reporting agencies,
these companies collect information from creditors and lenders about
consumer financial behavior. This data is then provided to businesses
that want to evaluate how risky it would be to lend money to a potential
borrower. Once a low-tech system of regional credit reporting agencies,
the industry is now consolidated into the three national credit bureaus
– Equifax, Experian and TransUnion.
Credit Counseling: A service that helps consumers
repay their debts and improve their credit. Usually non-profit companies,
most of these agencies offer helpful and affordable services. Consumers
should be aware that there are also credit counseling agencies that
are expensive, ineffective and even damaging to the client’s
credit (see Credit Repair). Consumers should carefully review the
company’s reputation and services before signing up.
Credit File: Another term for your
credit report. The term credit file is usually used to indicate
the full record of your credit history maintained by a credit
bureau. Your credit report may not include all the information
in your credit file.
Credit History: Another term for the information
on your credit report. Your credit history is a record of how you
have has repaid your credit obligations in the past.
Credit Limit: The total amount that a company will
allow you to charge to a credit card or credit line. It’s best
for your credit score to keep your credit card balances below 10% of your credit limit.
Credit Obligation: An agreement where a person becomes
legally responsible for paying back borrowed money.
Credit Repair: A generally unscrupulous or illegal
form of credit counseling that promises the impossible, such as erasing
accurate records from your credit report.
Credit Report: The individual records of consumer
financial behavior kept by credit bureaus and provided to businesses
when they want to evaluate potential borrowers. Credit reports include
records on: consumer name, current and former addresses, employment,
credit and loan histories, inquiries, collection records, and public
records such as bankruptcy filings and tax liens.
Credit Score: A numerical evaluation of your credit
history used by businesses to quickly understand how risky a borrower
you are. Credit scores are calculated using complex mathematical
formulas that look at your most current payment history, debts, credit
history, inquiries and other factors from your credit report. Credit
scores usually range from 300-850, the higher the score, the better. There are thousands of slightly
different credit scoring formulas used by bankers, lenders, creditors, insurers and retailers.
Each score can vary somewhat in how it evaluates your credit data.
Debt: The amount of money owed.
Debt Consolidation: A process of combining debts
into one loan or repayment plan. Debt consolidation can be done on
your own, with a financial institution or through a counseling service.
Student loans are often consolidated in order to secure a lower interest
rate. (See Debt Counseling and Debt Settlement)
Debt Counseling: A type of credit counseling that
focuses specifically on helping people with debt issues. Instead
of consolidating debts into one loan, debt counseling agencies negotiate
with your creditors using pre-set agreements and spread your payments
over a longer period in order to reduce the monthly amount due. Usually
non-profit companies, most of these agencies offer helpful and affordable
services. Consumers should be aware that there are also debt counseling
agencies that are expensive, ineffective and even damaging to the
client’s credit score (see Credit Repair).
Debt Settlement: A process where you pay an agency
to negotiate directly with your creditors in the hopes of making
significantly reduced settlements for your debts. Working with a
debt settlement company can result in damaged credit from numerous
late payments and collection records. Consumers should fully investigate
the practices, reputation and costs of working with a debt settlement
company before signing up.
Debt-to-Available-Credit Ratio: The amount of money
you owe in outstanding debts compared to the total amount of credit
you have available though all credit cards and credit lines. This
ratio measures how much of your available credit you are using. The
higher your debt to available credit ratio, the more risky you appear
to potential lenders.
Debt-to-Income Ratio: The percentage of your monthly
pre-tax income that is used to pay off debts such as auto loans,
student loans and credit card balances. Lenders look at two ratios:
The front-end ratio is the percentage of monthly pre-tax earnings
that are spent on house payments. In the back-end ratio, the borrower’s
other debts are factored in along with the house payments.
Default: The status of a debt account that has not
been paid. Accounts are usually listed as being in default after
they have been reported late (delinquent) several times. Defaults
are a serious negative item on a credit report.
Delinquency: A term used for late payment or lack
of payment on a loan, debt or credit card account. Accounts are usually
referred to as 30, 60, 90 or 120 days delinquent because most lenders
have monthly payment cycles. Delinquencies remain on your credit
report for 7 years and are damaging to your credit score.
Demand Draft Checks: A type of electronic check
that can be created online by entering account numbers listed on
the bottom of a personal check and that can be cashed without a signature.
This system was originally designed to help telemarketers take check
payments over the phone. Now it is one of the fastest growing fraud
Dispute: The process of submitting a request to
the credit bureaus to have an error on your
credit report corrected. Disputes are investigated and updates
made to your credit report over a 30 day period. If your correction
is made, you will receive a letter from the credit bureaus and
a copy of your updated credit report. If your dispute is rejected,
you will receive a letter explaining why the credit bureau could
not verify the correction.
Divorce Decree: A court order that grants a divorce
and outlines terms for child support, alimony and the separation
of assets. While a divorce decree may define responsibility for shared
debts (your spouse pays the car loan, you pay the mortgage) it does
not legally separate responsibility for these accounts. In order
to stop double responsibility and credit reporting of shared accounts,
the debts must be closed or refinanced directly with the lender.
Empirica Score: A co-signer is legally responsible for the loan and
the shared account will appear on their credit report. There are thousands of slightly different credit scoring
formulas used by bankers, lenders, creditors, insurers and retailers.
Each score can vary somewhat in how it evaluates your credit data.
Equal Credit Opportunity Act (ECOA): A law that
protects consumers from discrimination on the basis of race, sex,
public assistance income, age, marital status, nationality or religion
in the credit and lending process.
Equifax: One of the three national credit bureaus
(also known as credit reporting agencies) that collects and provides
consumer financial records.
Equity: The fair market value of a home minus the
unpaid mortgage principal and liens. You build up equity in a home
as you pay down your mortgage and as the property value increases.
Also called the lendable value or net value.
Experian: One of the three national credit bureaus
that collects and provides consumer financial records. Experian (formerly
known as TRW) operates the ConsumerInfo, FreeCreditScore and CreditExpert
Expiration Term: The set number of years that a
record will remain on your credit report as mandated by the FCRA.
Most negative records stay on your
credit report for 7-10 years. The shortest expiration term
is two years for inquiry records. The longest expiration term
is 15 years for paid tax liens or indefinitely for unpaid tax
liens. Positive information can also stay on your credit report
Fair and Accurate Credit Transaction (FACT) Act: The
FACT Act was signed into law December 2003 and includes several consumer
credit industry regulations. This law requires credit bureaus to
provide all US residents with a free copy of their credit report
once every 12 months. The law also includes new privacy regulations,
identity theft protections and dispute procedure requirements.
First passed in the 1970’s that promotes accuracy, confidentiality
and proper use of information in the files kept by credit reporting
agencies. This law specifies the expiration terms of records on your
credit report, defines who can access your credit data and grants
consumers the right to view and dispute their credit records.
Fannie Mae: The largest mortgage investor. A government-sponsored
enterprise that buys mortgages from lenders, bundles them into investments
and sells them on the secondary mortgage market. Formerly known as
the Federal National Mortgage Association.
Federal Housing Administration (FHA): A division
of the Department of Housing and Urban Development (HUD) that provides
mortgage insurance and sets construction and underwriting standards.
FICO Score: A specific credit score developed by
Fair Isaac Corporation. There are thousands of slightly different
credit scoring formulas used by bankers, lenders, creditors, insurers
and retailers. Each score can vary somewhat in how it evaluates your
File Freeze: Consumers can request
that the credit bureaus freeze their credit reports. This freeze
stops new credit from being issued in your name by blocking creditors,
lenders, insurers and other companies from accessing your credit
data. In some cases, a $10 fee for each credit bureau is required
to process the file freeze. The freeze can also be temporarily or
permanently undone for an additional fee.
Finance Charge: The total cost of using credit.
Besides interest charges, the finance charge may include other costs
such as cash-advance fees.
First Mortgage: The primary loan on a real estate
property. This loan has priority over all other “secondary” loans.
Fixed Rate: An interest rate for a credit card or
loan that remains constant.
Fixed-Rate Option: A home equity line of credit
financing option that allows borrowers to specify the payments and
interest on a portion of their balance. This can be done a few times
during the life of the loan, usually for an additional fee.
Fixed Rate Mortgage (FRM): A mortgage with an interest
rate that remains constant for the entire duration of the loan. FRM’s
have longer terms (15-30 years) and higher interest rates than adjustable
rate mortgages but are not at risk for changing interest rates. You
can shop and compare mortgage
options securely online.
Foreclosure: When a borrower is in default on a
loan or mortgage, the creditor can enact a legal process to claim
ownership of the collateral property. Foreclosure usually involves
a forced sale of the property where the proceeds go toward paying
off the debt.
Fraud Alert: If you suspect that you are a victim
of identity theft, you may contact the credit bureaus to request
that a 90-day fraud alert is placed on your credit reports. If you have been a victim
of identity theft you only need to contact one bureau to have a temporary
90 day alert added to all three of your
credit reports. This 90-day alert notifies potential creditors
that your identity may have been stolen and suggests that they
take extra steps to confirm your identity before opening a new
account. If it turns out that your identity has been stolen, you
can request an extended 7 year alert by providing documentation
of the crime (such as a police report). There is also a special
1 year fraud alert available for military personnel on activity
Freddie Mac: Formerly known as the Federal Home
Loan Mortgage Corporation, this is a government-sponsored firm that
buys mortgages from lenders, pools them with other loans and sells
them to investors.
Front-End Ratio or Front Ratio: A calculation of
the percentage of your monthly pre-tax income that goes toward a
house payment. The general rule is that your front ratio shouldn’t
Garnishment: When a creditor receives legal permission
to take a portion of your assets (bank account, salary, etc) to repay
a delinquent debt.
Ginnie Mae: Also known as the Government National
Mortgage Association. A part of the Department of Housing and Urban
Development that buys mortgages from lending institutions and pools
them to form securities, which it then sells to investors.
Grace Period: A period of time, often about 25 days,
during which you can pay your credit card bill without incurring
a finance charge. With most credit card accounts, the grace period
applies only if you pay your balance in full each month. It does
not apply if you carry a balance forward or in the case of cash advances.
If your account has no grace period, interest will be charged on
a purchase as soon as it is made.
Hard Inquiry: A record of a business request to
see your credit report data
for the purpose of an application for credit. Hard inquiries appear
on your credit report each time you complete an application for a
credit card, loan, cell phone, etc. Hard inquiries remain on your credit report for 2 years but are
only included in your credit score for the first 12 months.
High-LTV Equity Loan: A specific kind of home loan
that causes your loan-to-value ratio to be 125% or more. When the
total principal of a loan leaves the borrower with debt that exceeds
the fair market value of the home, the interest paid on the portion
of the loan above that value may not be tax deductible.
Home Equity Line of Credit: Often called a HELOC, is an open-ended loan that is
backed by the part of a home’s value that the borrower owns outright.
This type of loan is used much like a credit card. This type of loan is used much like a credit card. Home
equity lines of credit can be effective ways to borrow large sums
of money with a relatively low interest rate. These types of loans should
be used with caution. If a borrower is unable to pay back the
loan for some reason (loss of job, illness, etc.) they risk loosing
the home they used as collateral.
Home Equity: The part of a home’s value that
the mortgage borrower owns outright. This is the difference between
the fair market value of the home and the principal balances of all
Home Ownership and Equity Protection Act: A law
designed to discourage predatory lending in mortgages and home equity
Housing Expense Ratio: The percentage of your monthly
pre-tax income that goes toward your house payment. The general rule
is that this ratio shouldn’t exceed 28%. This is also known
as the “front ratio.”
Individual Taxpayer Identification Number (ITIN): This
nine digit identification number is issued by the Internal Revenue
Service to taxpayers who don’t have a Social Security number,
such as people who are not US citizens. This number can be used to
apply for credit and loans or to access credit reports.
Income Verification: Loan applications may require
fully documented proof of an applicant’s income.
Inquiry: A record on your credit report that shows every time you,
one of your creditors, or a potential creditor requests a copy of your credit report data.
(See Soft Inquiry, Promotional Inquiry and Hard Inquiry).
Installment Account: A type of loan where the borrower
makes the same payment each month. This includes personal loans and
automotive loans. Mortgage loans are also installment accounts but
are usually classified by the credit reporting system as real-estate
Interest Rate Cap: A limit on how much a borrower’s
percentage rate can increase or decrease at rate adjustment periods
and over the life of the loan. Interest rate caps are used for Adjustable Rate Mortgage ARM
loans where the rates can vary at certain points.
Interest Rate: A measure of the cost of credit,
expressed as a percent. For variable-rate credit card plans, the
interest rate is explicitly tied to another interest rate. The interest
rate on fixed-rate credit card plans, though not explicitly tied
to changes in other interest rates, can also change over time.
Interest: The money a borrower pays for the ability
to borrow from a lender or creditor. Interest is calculated as a
percentage of the money borrowed and is paid over a specified time.
Interest-Only Loan: A type of loan where the repayment
only covers the interest that accumulates on the loan balance and
not the actual price of the property. The principal does not decrease
with the payments. Interest-only loans usually have a term of 1-5
Introductory Rate: A temporary, low interest rate
offered on a credit card in order to attract customers. Under the CARD Act, an introductory rate must remain in effect
for a minimum of 6 months before converting to a normal or variable rate.
Joint Account: An account shared by two or more
people. Each person on the account is legally responsible for the
debt and the account will be reported to each person’s credit
Judgment: A decision from a judge on a civil action
or lawsuit; usually an amount of money a person is required to pay
to satisfy a debt or as a penalty. Judgment records remain on your
credit report for 7 years and harm your credit score significantly.
Jumbo Mortgage: A loan that exceeds the limits set
by Fannie Mae and Freddie Mac (usually when the loan amount is more
than $200,000-400,000). Also known as a non-conventional or non-conforming
loan, these mortgages usually have higher interest rates than standard
Late Payment: A delinquent payment or failure to
deliver a loan or debt payment on or before the time agreed. Late
payments harm your credit score for up to 7 years and are usually
penalized with late payment charges.
Late Payment Charge: A fee charged by your creditor
or lender when your payment is made after the date due. Late payment
charges usually range from $10-50.
Lender: The individual or financial institution
who will be providing the loan.
Lien: A legal claim against a person’s property,
such as a car or a house, as security for a debt. A lien (pronounced “lean”)
may be placed by a contractor who did work on your house or a mechanic
who repaired your car and didn’t get paid. The property cannot
be sold without paying the lien. Tax liens can remain on your credit
report indefinitely if left unpaid or for 15 years from the date
Loan Origination Fee: A fee charged by a lender
for underwriting a loan. The fee often is expressed in “points;” a
point is 1% of the loan amount.
Loan Processing Fee: A fee charged by a lender for
accepting a loan application and gathering the supporting paperwork.
Loan-to-Value Ratio (LTV): The percentage of a home’s
price that is financed with a loan. On a $100,000 house, if the buyer
makes a $20,000 down payment and borrows $80,000, the loan-to-value
ratio is 80%. When refinancing a mortgage, the LTV ratio is calculated
using the appraised value of the home, not the sale price. You will
usually get the best deal if your LTV ratio is below 80%.
Low-Documentation Loan: A mortgage that requires
less income and/or assets verification than a conventional loan.
Low-documentation loans are designed for entrepreneurs or self-employed
borrowers – or for borrowers who cannot or choose not to reveal information
about their incomes.
Low-Down Mortgages: Secured loans that require a
small down payment, usually less than 10%. Often, low-down mortgages
are offered to special kinds of borrowers such as first-time buyers,
police officers, veterans, etc. These kinds of loans sometimes require
that private mortgage insurance (PMI) is purchased by the borrower.
Maxed Out: A slang term for using up the entire
credit limit on a credit card or a line of credit. Borrowing the
maximum limit on credit cards hurts your credit score.
Merged Credit Report: Also called a 3-in-1 Credit
Report, this type of report shows your credit data from TransUnion,
Equifax and Experian in a side-by-side format for easy comparison. Order
a merged credit report.
Minimum Payment: The minimum amount that a credit
card company requires you to pay toward your debt each month.
Mortgage Banker: A person or company that originates
home loans, sells them to investors (such as Fannie Mae) and processes
Mortgage Broker: A person or company that matches
lenders with borrowers who meet their criteria. A mortgage broker
does not make the loan directly like a mortgage banker, but receives
payment for their services. (See Broker Premium)
Mortgage Interest Expense: A tax term for the interest
paid on a loan that is fully deductible, up to certain limits, when
you itemize income taxes.
Mortgage Refinance: The process of paying off and
replacing an old loan with a new mortgage. Borrowers usually choose
to refinance a mortgage to get a lower interest rate, lower their
monthly payments, avoid a balloon payment or to take cash out of
Negative Amortization: When your minimum payment
toward a debt is not enough to cover the interest charges. When this
occurs, your debt balance continues to increase despite your payments.
Opt-Out: You can opt-out from pre-approved credit
card offers, insurance offers and other third party marketing offers or solicitations by
calling 1-888-5-OPT-OUT. Calling this number will stop mail offers
that use your credit data from all three credit bureaus. You can
also call this number to ask to opt-in again.
Over-Limit Fee: A fee charged by a creditor when
your spending exceeds the credit limit set on your card, usually
$10-50. Under the CARD Act, credit card issuers must first get your consent before charging
over-limit fees and they are only allowed to charge one over-limit fee per billing cycle.
Periodic Rate: The interest rate you are charged
each billing period. For most credit cards, the periodic rate is
a monthly rate. You can calculate your card’s periodic rate
by dividing the APR by 12. A credit card with an 18% APR has a monthly
periodic rate of 1.5%.
Permissible Purpose: Specific guidelines regulating
when your credit data can be reviewed and by what type of business.
These guidelines are part of the FCRA laws under Section 604. Permissible purposes of consumer reports.
Person to Person Loan: Usually applied to auto loans;
this loan is a request for direct financing for a vehicle rather
than a loan through a dealership.
PITI: Acronym for the four elements of a mortgage
payment: principal, interest, taxes and insurance.
Point: A unit for measuring fees related to a loan;
a point equals 1% of a mortgage loan. Some lenders charge “origination
to cover the expense of making a loan. Some borrowers pay “discount
points” to reduce the loan’s interest rate.
Pre-Approval Letter: A document from a lender or
broker that estimates how much a potential homebuyer could borrow
based on current interest rates and a preliminary look at credit
history. The letter is a not a binding agreement with a lender. Having
a pre-approval letter can make it easier to shop for home and negotiate
with sellers. It is better to have a pre-approval letter than an
informal pre-qualification letter.
Prepayment Penalty: A fee that a lender charges
a borrower who pays off their loan before the end of its scheduled
term. Prepayment penalties are not charged by most standard lenders.
Subprime borrowers should review the terms of their loan offers carefully
to see if this fee is included.
Pre-Qualification Letter: A non-binding evaluation
of a prospective borrower’s finances to determine how much
he or she can borrow and on what terms. A pre-qualification letter
is a less formal version of a pre-approval letter.
Principal: The amount of money borrowed with a loan
or the amount of money owed, excluding interest.
Private Mortgage Insurance (PMI): A form of insurance
that protects the lender by paying the costs of foreclosing on a
house if the borrower stops paying the loan. Private mortgage insurance
usually is required if the down payment is less than 20% of the sale
Promotional Inquiry: A type of soft inquiry made
by a creditor, lender or insurer in order to send you a pre-approved
offer. Only limited credit data is made available for this type of
inquiry and it does not harm your credit score.
Public Records: Information that is available to
any member of the public. Public records like a bankruptcy, tax lien,
foreclosure, court judgment or overdue child support harm your credit
report and credit score significantly.
Qualifying Ratios: As calculated by lenders, the
percentage of income that is spent on housing debt and combined household
Rate Shopping: Applying for credit with several
lenders to find the best interest rate, usually for a mortgage or
a car loan. If done within a short period of time, such as two weeks,
it should have little impact on a person’s credit score.
Reaffirmation Agreement: An agreement by a bankrupt
debtor to continue paying a dischargeable debt after the bankruptcy,
usually to keep collateral or a mortgaged property that would otherwise
Re-aging Accounts: A process where a creditor can
roll-back an account record with the credit bureaus. This is commonly
used when cardholders request that late payment records are removed
because they are incorrect or resulting from a special circumstance.
However, re-aging can also be used illegally by collections agencies
to make a debt account appear much younger than it actually is. Some
collections agencies use this tactic to keep an account from expiring
from your credit report in order to try to get you to pay the debt.
Repayment Period: The period of a loan when a borrower
is required to make payments. Usually applies to home equity lines
of credit. During the repayment period, the borrower cannot take
out any more money and must pay down the loan.
Repossession: When a loan is significantly overdue,
a creditor can claim property (cars, boats, equipment, etc.) that
was used as collateral for the debt.
Reverse Mortgage: A mortgage that allows elderly
borrowers to access their equity without selling their home. The
lender makes payments to the borrower with a reverse mortgage. The
loan is repaid from the proceeds of the estate when the borrower
moves or passes away.
Revolving Account: An account where your balance
and monthly payment can fluctuate. Most credit cards are revolving
Rewards Card: A credit card that rewards spending
with points, cash back programs or airline miles. These types of
cards usually require that borrowers have good credit and commonly
involve an annual fee.
Risk Score: Another term for a credit score. (See
Credit Score, FICO Score, Beacon Score and Empirica Score)
Schumer Box: An easy to use chart that explains
the rates, fees, terms and conditions of a credit account. Creditors
are required to provide this on credit applications by the U.S. Truth
in Lending Act and it usually appears on statements and other documents.
Scoring Model: A complex mathematical formula that
evaluates financial data to predict a borrower’s future behavior.
Developed by the credit bureaus, banks and FICO, there are thousands
of slightly different scoring models used to generate credit scores.
Second Mortgage: A loan using a home’s equity
as collateral. A first mortgage must be repaid before a second mortgage
in a sale.
Secured Credit Card: A consumer credit account that
requires the borrower to produce some form of collateral—usually
a cash deposit equal to the amount of the credit limit on the card.
Secured credit cards are easier to obtain than standard credit accounts
and are helpful for borrowers with poor credit or no credit.
Secured Debt: A loan that requires a piece of property
(such as a house or car) to be used as collateral. This collateral
provides security for the lender, since the property can be seized
and sold if you don’t repay the debt.
Settlement: An agreement reached with a creditor
to pay a debt for less than the total amount due. Settlements can
be noted on your credit report and can negatively impact your credit score. The only time it is a good idea to settle a
debt is if the debt has already gone to collections or is significantly past due.
Settling a debt that is current and in good standing can have a severe negative impact on your credit score.
Social Security Number: Also referred to as a SSN.
This unique nine digit number is meant to track your Social Security
savings but is also used by creditors, lenders, banks, insurers, hospitals,
employers and numerous other businesses to identify your accounts.
People who do not have a SSN, such as non-US citizens, use a nine
digit Individual Taxpayer Identification Number (ITIN) instead.
Soft Inquiry: A type of inquiry that does not harm
your credit score. Soft inquires are recorded when a business accesses
your credit data for a purpose other than an application for credit.
Soft inquiries include your request to see your own credit report
and employment-related requests. This type of inquiry is recorded
by the credit bureaus but does not usually appear on a credit report
purchased by you or a business.
Subprime Borrower: A borrower who does not meet
the qualifications for standard or “prime” credit and loan offers. Usually a
subprime borrower has poor credit (a score under 650) due to late
payments, collection accounts or public records. Lenders often grade
them based on the severity of past credit problems, with categories
ranging from “A-” to “D” or lower. Subprime
borrowers can qualify for loans and credit, but usually at a higher
interest rate or with special terms.
Teletrack: A credit reporting system that specifically
tracks subprime borrowers or borrowers with no official credit. Data
about payday loan payments, rent payments and non-standard lenders
is collected to develop accurate risk predictions for borrowers who
may not be included in the standard credit reporting system.
Tradeline: The official term for an account listed
on a credit report. Each account’s details (including payment
history, balances, limits and dates) are recorded in a separate tradeline.
TransUnion: One of the three national credit bureaus
that collects and provides consumer financial records. TransUnion
operates the TrueCredit and FreeCreditProfile brands.
TRW: A former credit reporting agency that is now
part of Experian.
Universal Default Clause: A credit card policy that
allows a creditor to increase your interest rates if you make a late
payment on any account, not just on their account. Universal default clauses were banned under
the CARD Act – credit card issuers are no longer allowed to use this practice to increase cardholder interest rates.
Unsecured Debt: A loan on which there is no collateral.
Most credit card accounts are unsecured debt.
Utilization Ratio: The ratio between the credit
limits on your accounts and the outstanding balances. This ratio
shows lenders how much of your available credit you are using overall.
Variable Rate: A type of adjustable rate loan tied
directly to the movement of some other economic index. For example,
a variable rate might be prime rate plus 3%; it will adjust as the
prime rate does.