Learn common credit terminology using our easy to read, free credit glossary:
1/1ARM: An adjustable-rate mortgage that has a set initial interest rate for thefirst year. After that period, the mortgage rate adjusts each year. Each annualrate adjustment is based on (or “indexed to”) another rate, often the yieldon a U.S. Treasury note.
10/1ARM: An adjustable-rate mortgage that has a set initial interest rate for thefirst 10 years. After that period, the mortgage rate adjusts each year.
3/1Interest-Only ARM: An adjustable rate mortgage in which none of the payments gotoward paying off the loan principal for the first three years.
3-in-1Credit Report: Also called a merged credit report, this type of report includesyour credit data from TransUnion, Equifax and Experian in a side-by-side formatfor easy comparison. You can order your 3-in-1 Credit Report online anytime.
80-10-10Loan: A combination of an 80% loan-to-value first mortgage, a 10% home equityloan and a 10% down payment. The loans can be used to eliminate the need forprivate mortgage insurance.
ACH:Automated Clearing House. This is a national network that allows fortransferring funds electronically between businesses, consumers and financialinstitutions.
AdjustableRate Mortgage (ARM): A home loan where the interest rate is changed periodicallybased on a standard financial index. ARM’s offer lower initial interest rateswith the risk of rates increasing in the future. In comparison, a fixed ratemortgage (FRM’s) offers a higher rate that will not change for the length ofthe loan. ARMs often have caps on how much the interest rate can rise or fall.You can shop and compare mortgage options securely online.
AlternativeMortgage: Any home loan that is not a standard fixed-rate mortgage. Thisincludes ARM’s, reverse mortgages and jumbo mortgages.
Alias:A note on your credit report that indicates other names used for your financialaccounts. Sometimes marked as “Also Known As” or “AKA.” This can includemaiden names or variations on the spelling and format of your full name.
Amortization:The process of gradually repaying a debt with regularly scheduled payments overa period of time.
AnnualCreditReport.com:The official website for obtaining your free credit report disclosures from thecredit bureaus, Equifax, Experian and TransUnion. You have the right to requestyour credit reports online, by phone or by mail for free once every 12 monthsunder FACT Act regulations. This free service can only be used once a year anddoes not include your credit scores or any credit monitoring services.
AnnualFee: 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 cardsor cards for subprime borrowers.
AnnualPercentage Rate (APR): The interest rate being charged on a debt, expressed as ayearly rate. Credit cards often have several different APR’s - one forpurchases, one for cash advances and one for balance transfers.
ApplicationFee: Amount a lender charges to process your loan application documents.Application fees are common with mortgage loans and many lenders will apply thecost of the application fee towards your closing costs. Application fees aregenerally non-refundable.
ApplicationScoring: A specific kind of statistical scoring that businesses use to evaluatean applicant for acceptance or denial. Similar to credit scoring, applicationscoring often factors in other relevant details such as employment status andincome to determine risk.
AppraisalFee: The amount charged to deliver a professional opinion about how much aproperty is worth. For a standard home or condominium, this fee is usuallyaround $200-500.
AppraisedValue: An educated opinion of how much a property is worth. An appraiserconsiders the price of similar homes in the area, the condition of the home andthe features of the property to estimate the value.
Asset:Assets are things owned by a person that have cash value. This can includehomes, cars, boats, savings and investments.
AuthorizedUser: Anyone who uses your credit cards or credit accounts with your permission.More specifically, someone who has a credit card from your account with theirname 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 beincluded in the authorized user's credit score calculation.
Back-EndRatio or Back Ratio: The sum of your monthly mortgage payment and all othermonthly debts (credit cards, car payments, student loans, etc.) divided by yourmonthly pre-tax income. Traditionally, lenders wouldn’t give people loans thatincreased this ratio past 36%, but they often do now. (See Debt-to-Income Ratio)
BalanceTransfer: The process of moving all or part of the outstanding balance on onecredit card to another account. Credit card companies often offer special ratesfor balance transfers. Compare your credit card options online today.
BalloonPayment: A loan where the payments don’t pay off the principal in full by theend of the term. When the loan term expires (usually after 5-7 years), theborrower must pay a balloon payment for the remaining amount or refinance.Balloon loans sometimes include convertible options that allow the remainingamount to automatically be transferred into a long-term mortgage. (SeeConvertible ARM)
Bankruptcy:A proceeding that legally releases a person from repaying a portion or all debtsowed. Bankruptcy damages your credit for 7-10 years and should only beconsidered as a last resort if you cannot repay your debts. (See Chapter 7-13Bankruptcy)
BeaconScore: The name of the FICO score from Equifax. There are thousands of slightlydifferent credit scoring formulas used by bankers, lenders, creditors, insurersand retailers. Each score can vary somewhat in how it evaluates your creditdata. Check your credit score online.
Bi-WeeklyMortgage: A mortgage that schedules payments every two weeks instead of thestandard monthly payment. The 26 bi-weekly payments are each equal to one-halfof a monthly payment. The result is that the mortgage is paid off sooner.
BrokerPremium: The amount a mortgage broker is paid for serving as the middlemanbetween a lender and a borrower. This premium comes from the surcharge a brokerapplies to a discounted loan before offering it to a borrower.
Borrower:The individual who is requesting the loan and who will be responsible for payingit back.
Cardholder:The person who is issued a credit card and/or any authorized users.
CashAdvance: A cash loan requested from your creditor, usually by using your creditcard at an ATM machine or through a loan advance on your paycheck. These loansinclude special interest rates charged on the amount of the advance.
Cash-OutRefinance: A new mortgage for an existing property in which the amount borrowedis greater than the amount of the previous mortgage. The difference is given tothe borrower in cash when the loan is closed.
Chapter7 Bankruptcy: A type of consumer bankruptcy where your responsibility for yourdebts is cleared entirely. With this kind of bankruptcy you are not required topay back debts you owe from before your filing. To qualify for a Chapter 7bankruptcy your income must be below your state's median income. Chapter 7bankruptcy filing records remain on your credit report for 10 years and therecord of each account included in your filing will remain on your report for 7years.
Chapter11 Bankruptcy: A complex type of bankruptcy usually filed by businesses thatwish to restructure their debts.
Chapter12 Bankruptcy: A type of bankruptcy specifically for farmers and fishermen.Similar to Chapter 13 bankruptcy but with a few special benefits.
Chapter13 Bankruptcy: A type of bankruptcy where the consumer must pay off some oftheir debts over time. Chapter 13 bankruptcy filing records remain on yourcredit report for 7 years from the discharge date or 10 years from the filingdate if it is not discharged. Each account included in the filing will remain onyour report for 7 years.
Charge-Off:When a creditor or lender writes off the balance of a delinquent debt, no longerexpecting it to be repaid. A charge-off is also known as a bad debt. Charge-offrecords remain on your credit report for 7 years and will harm your creditscore. 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 thisdata to banks when you apply for a new checking account. Negative records, suchas bounced checks, can be kept in their database for up to five years. If thereare errors on your ChexSystems record, you can contact the company to submit adispute.
ClosingCosts: The amounts charged to a consumer when they are transferring ownership orborrowing against a property. Closing costs include lender, title and escrowfees 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 torecover the amounts owed. Credit card debts, medical bills, cell phone bills,utility charges, library fees and video store fees are often sold tocollections. Collection agencies attempt to recover past-due debts by contactingthe borrower via phone and mail. Collection records can remain on your creditreport for 7 years from the last 180 day late payment on the original debt. Yourrights are defined by the Fair Debt Collection Practices Act.
CombinedLoan-to-Value Ratio: The total amount you are borrowing in mortgage debtsdivided by the home’s fair market value. Someone with a $50,000 first mortgageand a $20,000 equity line secured against a $100,000 house would have a CLTVratio of 70%.
CommitmentFee: A fee paid by a borrower to a lender in exchange for a promise to lendmoney on certain terms for a specified period. Usually charged in order toextend a loan approval offer for longer than the 30-60 day standard period.Quality lenders don’t usually charge these fees.
ConformingLoan: A mortgage that meets the requirements for purchase by Fannie Mae andFreddie Mac. Requirements include size of the loan, type and age. Current loansize limits for single-family homes range between $200,000 and $400,000. Loansthat exceed the conforming size are considered jumbo mortgages and usually havehigher interest rates.
Co-Signer:An additional person who signs a loan document and takes equal responsibilityfor the debt. A borrower may want to use a co-signer if their credit orfinancial situation is not good enough to qualify for a loan on their own. Aco-signer is legally responsible for the loan and the shared account will appearon their credit report.
ConvenienceCheck: Checks provided by your credit card company that you can use to accessyour available credit. These checks often have different rates and terms thanyour standard credit card charges.
ConvertibleARM: An adjustable rate mortgage that can be converted to a fixed-rate mortgageunder specified conditions.
CreditBureaus: Also known as credit reporting agencies, these companies collectinformation from creditors and lenders about consumer financial behavior. Thisdata is then provided to businesses that want to evaluate how risky it would beto lend money to a potential borrower. Once a low-tech system of regional creditreporting agencies, the industry is now consolidated into the three nationalcredit bureaus - Equifax, Experian and TransUnion.
CreditCounseling: A service that helps consumers repay their debts and improve theircredit. Usually non-profit companies, most of these agencies offer helpful andaffordable services. Consumers should be aware that there are also creditcounseling agencies that are expensive, ineffective and even damaging to theclient’s credit (see Credit Repair). Consumers should carefully review thecompany’s reputation and services before signing up.
CreditFile: Another term for your credit report. The term credit file is usually usedto indicate the full record of your credit history maintained by a creditbureau. Your credit report may not include all the information in your creditfile.
CreditHistory: Another term for the information on your credit report. Your credithistory is a record of how you have has repaid your credit obligations in thepast.
CreditLimit: The total amount that a company will allow you to charge to a credit cardor credit line. It’s best for your credit score to keep your credit cardbalances below 10% of your credit limit.
CreditObligation: An agreement where a person becomes legally responsible for payingback borrowed money.
CreditRepair: A generally unscrupulous or illegal form of credit counseling thatpromises the impossible, such as erasing accurate records from your creditreport.
CreditReport: The individual records of consumer financial behavior kept by creditbureaus and provided to businesses when they want to evaluate potentialborrowers. Credit reports include records on: consumer name, current and formeraddresses, employment, credit and loan histories, inquiries, collection records,and public records such as bankruptcy filings and tax liens. You can purchaseyour credit reports online anytime.
CreditScore: A numerical evaluation of your credit history used by businesses toquickly understand how risky a borrower you are. Credit scores are calculatedusing complex mathematical formulas that look at your most current paymenthistory, debts, credit history, inquiries and other factors from your creditreport. Credit scores usually range from 300-850, the higher the score, thebetter. There are thousands of slightly different credit scoring formulas usedby bankers, lenders, creditors, insurers and retailers. Each score can varysomewhat in how it evaluates your credit data. Check your credit score online.
Debt:The amount of money owed.
DebtConsolidation: A process of combining debts into one loan or repayment plan.Debt consolidation can be done on your own, with a financial institution orthrough a counseling service. Student loans are often consolidated in order tosecure a lower interest rate. (See Debt Counseling and Debt Settlement)
DebtCounseling: A type of credit counseling that focuses specifically on helpingpeople with debt issues. Instead of consolidating debts into one loan, debtcounseling agencies negotiate with your creditors using pre-set agreements andspread your payments over a longer period in order to reduce the monthly amountdue. Usually non-profit companies, most of these agencies offer helpful andaffordable services. Consumers should be aware that there are also debtcounseling agencies that are expensive, ineffective and even damaging to theclient’s credit score (see Credit Repair).
DebtSettlement: A process where you pay an agency to negotiate directly with yourcreditors in the hopes of making significantly reduced settlements for yourdebts. Working with a debt settlement company can result in damaged credit fromnumerous late payments and collection records. Consumers should fullyinvestigate the practices, reputation and costs of working with a debtsettlement company before signing up.
Debt-to-Available-CreditRatio: The amount of money you owe in outstanding debts compared to the totalamount 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 higheryour debt to available credit ratio, the more risky you appear to potentiallenders.
Debt-to-IncomeRatio: The percentage of your monthly pre-tax income that is used to pay offdebts such as auto loans, student loans and credit card balances. Lenders lookat two ratios: The front-end ratio is the percentage of monthly pre-tax earningsthat are spent on house payments. In the back-end ratio, the borrower’s otherdebts are factored in along with the house payments.
Default:The status of a debt account that has not been paid. Accounts are usually listedas being in default after they have been reported late (delinquent) severaltimes. 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 cardaccount. Accounts are usually referred to as 30, 60, 90 or 120 days delinquentbecause most lenders have monthly payment cycles. Delinquencies remain on yourcredit report for 7 years and are damaging to your credit score.
DemandDraft Checks: A type of electronic check that can be created online by enteringaccount numbers listed on the bottom of a personal check and that can be cashedwithout a signature. This system was originally designed to help telemarketerstake check payments over the phone. Now it is one of the fastest growing fraudtools.
Dispute:The process of submitting a request to the credit bureaus to have an error onyour credit report corrected. Disputes are investigated and updates made to yourcredit report over a 30 day period. If your correction is made, you will receivea letter from the credit bureaus and a copy of your updated credit report. Ifyour dispute is rejected, you will receive a letter explaining why the creditbureau could not verify the correction.
DivorceDecree: A court order that grants a divorce and outlines terms for childsupport, alimony and the separation of assets. While a divorce decree may defineresponsibility for shared debts (your spouse pays the car loan, you pay themortgage) it does not legally separate responsibility for these accounts. Inorder to stop double responsibility and credit reporting of shared accounts, thedebts must be closed or refinanced directly with the lender.
EmpiricaScore: A co-signer is legally responsible for the loan and the shared accountwill appear on their credit report. There are thousands of slightly differentcredit scoring formulas used by bankers, lenders, creditors, insurers andretailers. Each score can vary somewhat in how it evaluates your credit data.Check your credit scores online.
EqualCredit Opportunity Act (ECOA): A law that protects consumers from discriminationon 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 reportingagencies) that collects and provides consumer financial records. You canpurchase your credit report from Equifax online anytime.
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 propertyvalue increases. Also called the lendable value or net value.
Experian:One of the three national credit bureaus that collects and provides consumerfinancial records. Experian (formerly known as TRW) operates the ConsumerInfo,FreeCreditScore and CreditExpert brands. You can purchase your credit reportfrom Equifax online anytime.
ExpirationTerm: The set number of years that a record will remain on your credit report asmandated by the FCRA. Most negative records stay on your credit report for 7-10years. The shortest expiration term is two years for inquiry records. Thelongest expiration term is 15 years for paid tax liens or indefinitely forunpaid tax liens. Positive information can also stay on your credit reportindefinitely.
Fairand Accurate Credit Transaction (FACT) Act: The FACT Act was signed into lawDecember 2003 and includes several consumer credit industry regulations. Thislaw requires credit bureaus to provide all US residents with a free copy oftheir credit report once every 12 months. The law also includes new privacyregulations, identity theft protections and dispute procedure requirements. Forfull details on the law, see FACTA's Free Credit Reports Usher in a New Era.first passed in the 1970’s that promotes accuracy, confidentiality and properuse of information in the files kept by credit reporting agencies. This lawspecifies the expiration terms of records on your credit report, defines who canaccess your credit data and grants consumers the right to view and dispute theircredit records. You can review all your rights under the FCRA online in ourLearning Center.
FannieMae: The largest mortgage investor. A government-sponsored enterprise that buysmortgages from lenders, bundles them into investments and sells them on thesecondary mortgage market. Formerly known as the Federal National MortgageAssociation.
FederalHousing Administration (FHA): A division of the Department of Housing and UrbanDevelopment (HUD) that provides mortgage insurance and sets construction andunderwriting standards.
FICOScore: A specific credit score developed by Fair Isaac Corporation. There arethousands of slightly different credit scoring formulas used by bankers,lenders, creditors, insurers and retailers. Each score can vary somewhat in howit evaluates your credit data. Check your credit score online.
FileFreeze: Consumers can request that the credit bureaus freeze their creditreports. This freeze stops new credit from being issued in your name by blockingcreditors, lenders, insurers and other companies from accessing your creditdata. In some cases, a $10 fee for each credit bureau is required to process thefile freeze. The freeze can also be temporarily or permanently undone for anadditional fee.
FinanceCharge: The total cost of using credit. Besides interest charges, the financecharge may include other costs such as cash-advance fees.
FirstMortgage: The primary loan on a real estate property. This loan has priorityover all other “secondary” loans.
FixedRate: An interest rate for a credit card or loan that remains constant.
Fixed-RateOption: A home equity line of credit financing option that allows borrowers tospecify the payments and interest on a portion of their balance. This can bedone a few times during the life of the loan, usually for an additional fee.
FixedRate Mortgage (FRM): A mortgage with an interest rate that remains constant forthe entire duration of the loan. FRM’s have longer terms (15-30 years) andhigher interest rates than adjustable rate mortgages but are not at risk forchanging interest rates. You can shop and compare mortgage options securelyonline.
Foreclosure:When a borrower is in default on a loan or mortgage, the creditor can enact alegal process to claim ownership of the collateral property. Foreclosure usuallyinvolves a forced sale of the property where the proceeds go toward paying offthe debt.
FraudAlert: If you suspect that you are a victim of identity theft, you may contactthe credit bureaus to request that a 90-day fraud alert is placed on your creditreports. If you have been a victim of identity theft you only need to contactone bureau to have a temporary 90 day alert added to all three of your creditreports. This 90-day alert notifies potential creditors that your identity mayhave been stolen and suggests that they take extra steps to confirm youridentity before opening a new account. If it turns out that your identity hasbeen stolen, you can request an extended 7 year alert by providing documentationof the crime (such as a police report). There is also a special 1 year fraudalert available for military personnel on activity duty.
FreddieMac: Formerly known as the Federal Home Loan Mortgage Corporation, this is agovernment-sponsored firm that buys mortgages from lenders, pools them withother loans and sells them to investors.
Front-EndRatio or Front Ratio: A calculation of the percentage of your monthly pre-taxincome that goes toward a house payment. The general rule is that your frontratio shouldn’t exceed 28%.
Garnishment:When a creditor receives legal permission to take a portion of your assets (bankaccount, salary, etc) to repay a delinquent debt.
GinnieMae: Also known as the Government National Mortgage Association. A part of theDepartment of Housing and Urban Development that buys mortgages from lendinginstitutions and pools them to form securities, which it then sells toinvestors.
GracePeriod: A period of time, often about 25 days, during which you can pay yourcredit card bill without incurring a finance charge. With most credit cardaccounts, the grace period applies only if you pay your balance in full eachmonth. It does not apply if you carry a balance forward or in the case of cashadvances. If your account has no grace period, interest will be charged on apurchase as soon as it is made. Compare credit cards offers online today.
HardInquiry: A record of a business request to see your credit report data for thepurpose of an application for credit. Hard inquiries appear on your creditreport each time you complete an application for a credit card, loan, cellphone, etc. Hard inquiries remain on your credit report for 2 years but are onlyincluded in your credit score for the first 12 months.
High-LTVEquity Loan: A specific kind of home loan that causes your loan-to-value ratioto be 125% or more. When the total principal of a loan leaves the borrower withdebt that exceeds the fair market value of the home, the interest paid on theportion of the loan above that value may not be tax deductible.
HomeEquity Line of Credit: Often called a HELOC, is an open-ended loan that isbacked by the part of a home's value that the borrower owns outright. This typeof loan is used much like a credit card. This type of loan is used much like acredit card. Home equity lines of credit can be effective ways to borrow largesums of money with a relatively low interest rate. Apply for a home equity loanonline. These types of loans should be used with caution. If a borrower isunable to pay back the loan for some reason (loss of job, illness, etc.) theyrisk loosing the home they used as collateral.
HomeEquity: 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 theprincipal balances of all mortgage loans.
HomeOwnership and Equity Protection Act: A law designed to discourage predatorylending in mortgages and home equity loans.
HousingExpense Ratio: The percentage of your monthly pre-tax income that goes towardyour house payment. The general rule is that this ratio shouldn’t exceed 28%.This is also known as the “front ratio.”
IndividualTaxpayer Identification Number (ITIN): This nine digit identification number isissued by the Internal Revenue Service to taxpayers who don’t have a SocialSecurity number, such as people who are not US citizens. This number can be usedto apply for credit and loans or to access credit reports.
IncomeVerification: Loan applications may require fully documented proof of anapplicant’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 SoftInquiry, Promotional Inquiry and Hard Inquiry).
InstallmentAccount: A type of loan where the borrower makes the same payment each month.This includes personal loans and automotive loans. Mortgage loans are alsoinstallment accounts but are usually classified by the credit reporting systemas real-estate accounts instead.
InterestRate Cap: A limit on how much a borrower’s percentage rate can increase ordecrease at rate adjustment periods and over the life of the loan. Interest ratecaps are used for Adjustable Rate Mortgage ARM loans where the rates can vary atcertain points.
InterestRate: A measure of the cost of credit, expressed as a percent. For variable-ratecredit card plans, the interest rate is explicitly tied to another interestrate. The interest rate on fixed-rate credit card plans, though not explicitlytied 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 aspecified time.
Interest-OnlyLoan: A type of loan where the repayment only covers the interest thataccumulates on the loan balance and not the actual price of the property. Theprincipal does not decrease with the payments. Interest-only loans usually havea term of 1-5 years.
IntroductoryRate: A temporary, low interest rate offered on a credit card in order toattract customers. Under the CARD Act, an introductory rate must remain ineffect for a minimum of 6 months before converting to a normal or variable rate.Shop for a credit card with a low introductory rate online.
JointAccount: An account shared by two or more people. Each person on the account islegally responsible for the debt and the account will be reported to each person’scredit report.
Judgment:A decision from a judge on a civil action or lawsuit; usually an amount of moneya person is required to pay to satisfy a debt or as a penalty. Judgment recordsremain on your credit report for 7 years and harm your credit scoresignificantly.
JumboMortgage: 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 anon-conventional or non-conforming loan, these mortgages usually have higherinterest rates than standard loans.
LatePayment: A delinquent payment or failure to deliver a loan or debt payment on orbefore the time agreed. Late payments harm your credit score for up to 7 yearsand are usually penalized with late payment charges.
LatePayment Charge: A fee charged by your creditor or lender when your payment ismade 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, assecurity for a debt. A lien (pronounced “lean”) may be placed by acontractor who did work on your house or a mechanic who repaired your car anddidn’t get paid. The property cannot be sold without paying the lien. Taxliens can remain on your credit report indefinitely if left unpaid or for 15years from the date paid.
LoanOrigination Fee: A fee charged by a lender for underwriting a loan. The feeoften is expressed in “points;” a point is 1% of the loan amount.
LoanProcessing Fee: A fee charged by a lender for accepting a loan application andgathering the supporting paperwork.
Loan-to-ValueRatio (LTV): The percentage of a home’s price that is financed with a loan. Ona $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 iscalculated using the appraised value of the home, not the sale price. You willusually get the best deal if your LTV ratio is below 80%.
Low-DocumentationLoan: A mortgage that requires less income and/or assets verification than aconventional loan. Low-documentation loans are designed for entrepreneurs orself-employed borrowers - or for borrowers who cannot or choose not to revealinformation about their incomes.
Low-DownMortgages: Secured loans that require a small down payment, usually less than10%. Often, low-down mortgages are offered to special kinds of borrowers such asfirst-time buyers, police officers, veterans, etc. These kinds of loanssometimes require that private mortgage insurance (PMI) is purchased by theborrower.
MaxedOut: A slang term for using up the entire credit limit on a credit card or aline of credit. Borrowing the maximum limit on credit cards hurts your creditscore.
MergedCredit Report: Also called a 3-in-1 Credit Report, this type of report showsyour credit data from TransUnion, Equifax and Experian in a side-by-side formatfor easy comparison. Order a merged credit report.
MinimumPayment: The minimum amount that a credit card company requires you to paytoward your debt each month.
MortgageBanker: A person or company that originates home loans, sells them to investors(such as Fannie Mae) and processes monthly payments.
MortgageBroker: A person or company that matches lenders with borrowers who meet theircriteria. A mortgage broker does not make the loan directly like a mortgagebanker, but receives payment for their services. (See Broker Premium)
MortgageInterest Expense: A tax term for the interest paid on a loan that is fullydeductible, up to certain limits, when you itemize income taxes.
MortgageRefinance: The process of paying off and replacing an old loan with a newmortgage. Borrowers usually choose to refinance a mortgage to get a lowerinterest rate, lower their monthly payments, avoid a balloon payment or to takecash out of their equity. Compare refinance loan options online.
NegativeAmortization: When your minimum payment toward a debt is not enough to cover theinterest charges. When this occurs, your debt balance continues to increasedespite your payments.
Opt-Out:You can opt-out from pre-approved credit card offers, insurance offers and otherthird 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 allthree credit bureaus. You can also call this number to ask to opt-in again.
Over-LimitFee: A fee charged by a creditor when your spending exceeds the credit limit seton your card, usually $10-50. Under the CARD Act, credit card issuers must firstget your consent before charging over-limit fees and they are only allowed tocharge one over-limit fee per billing cycle. Shop for credit cards with low orno over-limit fees online.
PeriodicRate: The interest rate you are charged each billing period. For most creditcards, the periodic rate is a monthly rate. You can calculate your card’speriodic rate by dividing the APR by 12. A credit card with an 18% APR has amonthly periodic rate of 1.5%. Compare credit card rates online.
PermissiblePurpose: Specific guidelines regulating when your credit data can be reviewedand by what type of business. These guidelines are part of the FCRA laws underSection 604. Permissible purposes of consumer reports.
Personto Person Loan: Usually applied to auto loans; this loan is a request for directfinancing for a vehicle rather than a loan through a dealership.
PITI:Acronym for the four elements of a mortgage payment: principal, interest, taxesand insurance.
Point:A unit for measuring fees related to a loan; a point equals 1% of a mortgageloan. Some lenders charge “origination points” to cover the expense ofmaking a loan. Some borrowers pay “discount points” to reduce the loan’sinterest rate. Shop and compare mortgage offers online.
Pre-ApprovalLetter: A document from a lender or broker that estimates how much a potentialhomebuyer could borrow based on current interest rates and a preliminary look atcredit history. The letter is a not a binding agreement with a lender. Having apre-approval letter can make it easier to shop for home and negotiate withsellers. It is better to have a pre-approval letter than an informalpre-qualification letter.
PrepaymentPenalty: A fee that a lender charges a borrower who pays off their loan beforethe end of its scheduled term. Prepayment penalties are not charged by moststandard lenders. Subprime borrowers should review the terms of their loanoffers carefully to see if this fee is included.
Pre-QualificationLetter: A non-binding evaluation of a prospective borrower’s finances todetermine how much he or she can borrow and on what terms. A pre-qualificationletter 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, excludinginterest.
PrivateMortgage Insurance (PMI): A form of insurance that protects the lender by payingthe 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 than20% of the sale price.
PromotionalInquiry: A type of soft inquiry made by a creditor, lender or insurer in orderto send you a pre-approved offer. Only limited credit data is made available forthis type of inquiry and it does not harm your credit score. Check your creditreport and score online.
PublicRecords: Information that is available to any member of the public. Publicrecords like a bankruptcy, tax lien, foreclosure, court judgment or overduechild support harm your credit report and credit score significantly. Click hereto check your credit report for public records.
QualifyingRatios: As calculated by lenders, the percentage of income that is spent onhousing debt and combined household debt.
RateShopping: Applying for credit with several lenders to find the best interestrate, usually for a mortgage or a car loan. If done within a short period oftime, such as two weeks, it should have little impact on a person’s creditscore.
ReaffirmationAgreement: An agreement by a bankrupt debtor to continue paying a dischargeabledebt after the bankruptcy, usually to keep collateral or a mortgaged propertythat would otherwise be repossessed.
Re-agingAccounts: A process where a creditor can roll-back an account record with thecredit bureaus. This is commonly used when cardholders request that late paymentrecords are removed because they are incorrect or resulting from a specialcircumstance. However, re-aging can also be used illegally by collectionsagencies to make a debt account appear much younger than it actually is. Somecollections agencies use this tactic to keep an account from expiring from yourcredit report in order to try to get you to pay the debt.
RepaymentPeriod: 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, theborrower 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.
ReverseMortgage: A mortgage that allows elderly borrowers to access their equitywithout selling their home. The lender makes payments to the borrower with areverse mortgage. The loan is repaid from the proceeds of the estate when theborrower moves or passes away.
RevolvingAccount: An account where your balance and monthly payment can fluctuate. Mostcredit cards are revolving accounts.
RewardsCard: A credit card that rewards spending with points, cash back programs orairline miles. These types of cards usually require that borrowers have goodcredit and commonly involve an annual fee.
RiskScore: Another term for a credit score. (See Credit Score, FICO Score, BeaconScore and Empirica Score)
SchumerBox: An easy to use chart that explains the rates, fees, terms and conditions ofa credit account. Creditors are required to provide this on credit applicationsby the U.S. Truth in Lending Act and it usually appears on statements and otherdocuments.
ScoringModel: A complex mathematical formula that evaluates financial data to predict aborrower’s future behavior. Developed by the credit bureaus, banks and FICO,there are thousands of slightly different scoring models used to generate creditscores. Check your credit score.
SecondMortgage: A loan using a home’s equity as collateral. A first mortgage must berepaid before a second mortgage in a sale.
SecuredCredit Card: A consumer credit account that requires the borrower to producesome form of collateral—usually a cash deposit equal to the amount of thecredit limit on the card. Secured credit cards are easier to obtain thanstandard credit accounts and are helpful for borrowers with poor credit or nocredit. You can compare secured credit card options online.
SecuredDebt: A loan that requires a piece of property (such as a house or car) to beused as collateral. This collateral provides security for the lender, since theproperty 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 totalamount due. Settlements can be noted on your credit report and can negativelyimpact your credit score. The only time it is a good idea to settle a debt is ifthe debt has already gone to collections or is significantly past due. Settlinga debt that is current and in good standing can have a severe negative impact onyour credit score.
SocialSecurity Number: Also referred to as a SSN. This unique nine digit number ismeant to track your Social Security savings but is also used by creditors,lenders, banks, insurers, hospitals, employers and numerous other businesses toidentify your accounts. People who do not have a SSN, such as non-US citizens,use a nine digit Individual Taxpayer Identification Number (ITIN) instead.
SoftInquiry: A type of inquiry that does not harm your credit score. Soft inquiresare recorded when a business accesses your credit data for a purpose other thanan application for credit. Soft inquiries include your request to see your owncredit report and employment-related requests. This type of inquiry is recordedby the credit bureaus but does not usually appear on a credit report purchasedby you or a business.
SubprimeBorrower: A borrower who does not meet the qualifications for standard or"prime" credit and loan offers. Usually a subprime borrower has poorcredit (a score under 650) due to late payments, collection accounts or publicrecords. Lenders often grade them based on the severity of past credit problems,with categories ranging from “A-” to “D” or lower. Subprime borrowerscan qualify for loans and credit, but usually at a higher interest rate or withspecial terms.
Teletrack:A credit reporting system that specifically tracks subprime borrowers orborrowers with no official credit. Data about payday loan payments, rentpayments and non-standard lenders is collected to develop accurate riskpredictions for borrowers who may not be included in the standard creditreporting system.
Tradeline:The official term for an account listed on a credit report. Each account’sdetails (including payment history, balances, limits and dates) are recorded ina separate tradeline.
TransUnion:One of the three national credit bureaus that collects and provides consumerfinancial records. TransUnion operates the TrueCredit and FreeCreditProfilebrands.
TRW:A former credit reporting agency that is now part of Experian.
UniversalDefault Clause: A credit card policy that allows a creditor to increase yourinterest rates if you make a late payment on any account, not just on theiraccount. Universal default clauses were banned under the CARD Act - credit cardissuers are no longer allowed to use this practice to increase cardholderinterest rates.
UnsecuredDebt: A loan on which there is no collateral. Most credit card accounts areunsecured debt.
UtilizationRatio: The ratio between the credit limits on your accounts and the outstandingbalances. This ratio shows lenders how much of your available credit you areusing overall.
VariableRate: A type of adjustable rate loan tied directly to the movement of some othereconomic index. For example, a variable rate might be prime rate plus 3%; itwill adjust as the prime rate does.
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