Glossary of Common Credit Terms You May Come Across
A
Activate - When you communicate with your credit provider either online or via telephone verifying that you received a credit card. After proper ownership is confirmed, the card is "activated."
Activity - Activity is any transaction that appears on your bill, including purchases, cash advances, finance charges and payments made.
Amount due - The minimum monthly payment you must make, not the total amount you owe.
Annual Fees - A yearly fee charged by creditors for the privilege of using a credit card. Depending on how you use it, a card with no annual fee but a high interest rate could cost you significantly more than one with a higher annual fee and a low, or no, interest rate.
Annual Percentage Rate - Or APR, is the interest rate charged on credit card balances expressed in an annualized way. It describe the interest rate for a whole year rather than just a monthly fee/rate. Note: the nominal APR is the simple-interest rate (for a year) while the effective APR is the fee+compound interest rate (for a year). Effective is usually what you want to know.
Applicant - A person or firm applying for credit
Asset - Any thing you own that has value or use. Can potentially be used as collateral (see collateral).
ATM card - A payment card issued by a bank. Also known as a bank card.
Available credit - The unused portion of credit that falls within the consumer's applicable credit limit, if any.
Average daily balance - The most common method of calculating interest. To figure out your average daily balance, the bank will add up the amount you owe for each day of your billing cycle and divide that number by the number of days in the billing cycle (see billing cycle). New purchases may or may not be added to the balance, depending on the individual card's terms. The best is if the calculation excludes new purchases.
B
Bankcard - A payment card issued by a bank. Also known as an ATM card.
Bad Credit - A credit bureau term used to describe a poor credit rating. Things that can damage your credit rating include making late payments, skipping payments, not making payments and exceeding card limits or declaring bankruptcy, among others. “Bad Credit” can result in being denied future credit.
Balance-to-limit ratio - 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 credit utilization ratio.
Balance Transfer - When the outstanding balance of one credit card (or several credit cards) is moved to another credit card account. Usually done to lower interest rates.
Balance Transfer Fee - The fee charged by a credit card company to transfer a balance from one account to another. This fee can be anywhere from 1%-5% of the balance amount. Contact the credit card issuer for their specific fees.
Balloon Payment - The payment at the end of the loan that is much larger than the regular scheduled payments. Mostly used for mortgages and other loans, not for credit cards.
Bank identification number (BIN) - The first six digits of a Visa or MasterCard account number. This number is used to identify the card-issuing institution.
Bankruptcy - A legal proceeding in U.S. Federal Court that may legally release a person from repaying debts owed. The law contains several chapters which relate to different methods of relief:
Basis point - A basis point is one-hundredth of 1 percentage point. If your credit card rate goes from 14.49 to 14.99 percent, it has risen 50 basis points.
Billing cycle - The time between billing statements, usually 28-31 days. Paying off all charges during this initial period avoids the carrying of a balance (see carrying a balance).
Billing statement - Also simply called a statement or monthly statement. It is written record prepared by a credit card company or other financial institution, usually once a month, listing all transactions (see activity) for an account, including deposits, withdrawals, checks, electronic transfers, fees and other charges, and interest credited or earned.
C
Chargeback - A chargeback is when the credit card company withdraws the money for a transaction from a merchant's account and deposited in a consumer's following a dispute. Basically, you do a chargeback when you feel like you're not getting what you paid for, in terms of the quality or type of good or service.
Charge card - A short term (usually around 1 month) credit card. There is no "minimum payment" other than the full balance. Since there is no loan, there is no official interest.
Charge Off - Accounting term to indicate that the creditor does not expect to collect a balance owed on an account.
Closing date - The last day that transactions are posted on your account for that month.
Collateral - Physical property, savings, bonds, insurance policies and items that are pledged to pay off a loan or other debt if payments are not made according to the agreement.
Collection agency - Also known as simply “collections.” If you fail to pay a credit or charge card bill, the card issuer may send your overdue bill to a collection agency, a company that specializes in obtaining debts owed.. If this happens, your account may be listed as a "collection account" on your credit report, which is not good and will lower your score. Remember, a collector cannot lawfully use or threaten to use violence or other criminal means to harm you, your property or your reputation; use obscene or profane language; publish your name; list your debt for sale to the public; or place telephone calls to you or any other person without identifying himself or herself as a bill collector. If a collection agency goes beyond these boundaries, you have legal rights protecting you. Importantly, collection agencies can eventually sue you if you don’t pay, and they may be able to get a judgment against you and your assets.
Copy charge (document fee/charge) - Card issuers are required to provide you with copies of documents relating to your account. They may, however, charge a fee for the copying and handling. See your cardholder agreement for your issuer's copy charges.
Co-signer - Usually a family member or a friend over 18 years old who agrees to share the debt with a person or assume the debt if the other person defaults, that is, doesn't pay.
Credit bureau - A data-gathering company keeps a record of your credit history for any card or loan issuer to review when considering your application for credit. The three major credit reporting agencies in the United States are Equifax, Experian and Trans Union.
Credit card - A credit card is a payment card that is accepted by merchants, and which can be read at the point of sale. Credit cards offer revolving lines of credit to cardholders, which means they have the ability to pay balances over time.
Credit limit - A credit limit is the amount of money that can be charged to a credit card account. The size of a credit limit, and how much of it has been borrowed, have a large influence on consumer credit scores. Low credit utilization -- that is, a credit limit on which little has been borrowed -- leads to a higher credit score. Credit limit is also known as a credit line.
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. You should request a copy of your credit report periodically to check it for accuracy. You cannot have correct information removed from your records for seven years, or 10 years in the case of bankruptcy.
Credit union - A member (customer)-owned and controlled nonprofit financial cooperative that offers a variety of savings and lending services to members. They usually offer better service, and at times, better rates than banks.
Creditworthiness - Judged to be qualified to have a certain level of credit.
D
Deadbeat - A credit card industry term for consumers who pay off their balances every month, using the lenders money but paying no interest on it, i.e., no carrying a balance.
Debit - A charge to a customer’s bankcard account. A transaction, such as a check, automated teller machine (ATM) withdrawal or point-of-sale (POS) debit purchase that debits a demand deposit account.
Debit card - This card allows you to deduct the amount of your purchase directly from your checking account for payment to the merchant.
Debt consolidation - The combination of multiple loans with a new, single loan offering a lower monthly interest rate and payment, or a longer repayment period. Also called a balance transfer when several high-interest cards are consolidated into a single lower interest card.
Debt-to-income ratio - this is a value that compares your total debt payments to the money you earn. This value can help you determine if you have too much debt.
Debtor - An individual, a firm, government, a company that owes a debt to someone else.
Default - Failure to pay a debt as outlined in the cardholder agreement, bankruptcy, or an inability or unwillingness to pay your debt. If you default on your credit card account, the issuer will cancel your account and demand full payment of the outstanding balance.
Delinquent account - An account for which the minimum payment hasn’t been made more than 30 days past due.
Discount rate - The fee paid by merchants to credit card processors (those who supply the credit card terminals and who process the transfer) as a fee associated with accepting general-use credit cards (such as Visa, MasterCard, American Express and Discover).
Due date - The day a payment is due to a creditor. After that date, a late fee can be charged and the payment can be recorded as late, or the account can be considered delinquent.
E
Effective date - The first day your card is activated and ready for use or when new terms take effect.
Equal Credit Opportunity Act - (ECOA) A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
Equifax - One of the three major credit reporting agencies (credit bureaus)
Emancipated minor - One who has not yet reached the age of majority -- usually 18 -- but has by court order or actions become independent of his parents or other adult supervisors. An ordinary minor may not enter into binding financial contracts, such as credit card agreements. An emancipated minor can.
Experian - Another one of the three major credit reporting agencies, formerly known as TRW.
F
Federal Reserve - A central bank in the U.S. that monitors and influences the total supply of money and credit through its 12 regional offices. The Federal Reserve Board sets interest rates, maintains the flow of cash to local and regional banks, clears checks, provides deposit insurance, and helps guarantee the stability and security of the U.S. banking system.
FICO score - FICO stands for “Fair, Isaac & Company”, the company that has been the most trusted source in calculating credit scores for over 50 years. Anything over 720 is probably considered a “good” score.
Finance Charge - Fees and other costs billed to you on your statement for using credit (balance transfer fees, cash advance fees, late fees, overlimit fees, etc.).
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.
Float - The difference in time between when a transaction occurs and the time it is posted to a credit card account, often one to two days. This is the delay you see when you go online to view your statement and your recent activity is not displayed yet.
Floor Limit - An amount that Visa and MasterCard have established for single transactions at specific types of merchant outlets and branches, above which authorization is required. The limit can vary based on account and merchant.
G
Garnishment (e.g., wage garnishment) - Legal process whereas a creditor has obtained judgment on a debt may obtain full or partial payment by seizure of a portion of a debtor's assets (wages, bank account, etc...). Not a good thing. Usually done by collections agencies.
Grace Period - The period allowed to avoid any finance charges (i.e., not carrying a balance) by paying off the balance in full before the due date. Usually around one month.
Go-to rate - The real interest rate charged on a credit card after the introductory, or "teaser," period ends.
H
Hold - With credit and debit cards, a "hold" may be placed on a portion of a consumer's credit limit or available debit balance if the final amount of a transaction is unknown. That can happen at gas stations and hotels for example, because the merchant can't know at the time the card is presented how much you'll pump, or if there will be any extra charges for room service or damage to the room.
Home Equity Loan - A home equity loan or line of credit allows you to borrow money, using your home's equity as collateral. Sometimes used in consolidating high interest credit card debt. A risky proposition, considering that “you’re betting the house that you can pay off your credit cards.”
I
Inquiry - When a lender looks at your credit report to see whether to loan you money. An inquiry can be "soft," as when a credit card issuer prospecting for new customers looks at your report to see whether to mail you an offer. Or an inquiry can be "hard" -- that is, initiated because you yourself have applied for a loan. Hard inquiries have a slight, negative impact on your credit scores. Soft inquiries have no effect on credit scores.
Introductory Rate (aka teaser rate) - A temporary, lower annual percentage rate, after which the APR is raised to the fixed rate.
Issuer - A financial institution, bank, credit union or company that issues, or causes to be issued, credit cards to cardholders.
J
Joint account - Two people can share a card (usually spouses), each individually responsible for the outstanding balance on the card account. (This is different from having one person apply as a cardholder, with additional cards on that account issued to family members or others.
Judgment - The official court decision of an action or suit.
L
Late Payment - a payment made toward a credit account that is past the scheduled date the payment is due. Can definitely affect your credit rating/score.
Liability - Liability refers to the responsibility for charges to an account. Generally, a cardholder agrees to be liable for any charges to his or her account, including purchases, fees and finance charges. If the cardholder allows someone else to make charges to his or her account (through, for example, an additional card), the cardholder is still responsible for paying the bill.
Lien - A legal claim or hold of a person’s property as security for a debt. A lien will affect a potential sale of the property, most notably, real estate property.
Line of Credit - A line of credit is usually an open-ended, revolving loan, in which the borrower may access money up to a certain limit, pay it back and borrow it again. Lines of credit may be secured (as with home equity line of credit) or unsecured (as with credit cards).
M
Magnetic strip - A stripe of magnetic information that is affixed to the back of a plastic credit or debit card. It contains encoded cardholder data including account details such as their credit card number, full name, the card's expiration date and the country code.
Minimum payment - The minimum amount you are required to pay the credit card issuer each month for your outstanding balance. You may, of course, choose to pay more. If you don’t, interest charges can really add up when you stretch out a loan with minimum payments. Making minimum payments only means you are definitely carrying a balance. It’s best to make most than the minimum payment
Monthly periodic rate - It’s simply the rate of interest per month, calculated by dividing the annual percentage rate (APR) by 12.
Mortgage - a conveyance of an interest in property (usually real estate) as security for the repayment of money borrowed, which is usually the property itself in first mortgages.
Mutual savings bank - One of many institutions that offer consumer credit. They are state chartered, so their primary regulator is their home state's banking agency.
N
New balance - The balance owed on a credit card after the unpaid balance from the previous billing cycle and new purchases, finance charges and other fees are added together.
O
Open loop cards - Open loop is a term used to describe general purpose cards that carry the American Express, Discover, MasterCard or Visa logo and can be used wherever those cards are accepted. Closed loop cards, by contrast, can be used only in a single store or group of stores.
Overdraft protection - A service that automatically transfers funds from one bank account to another in order to avoid overdraft fees when insufficient funds are available. It can carry hefty fees. Sometimes the service is automatically applied when an account is opened and the customer must opt out; other times consumers must sign up for the service. Debit accounts as well as credit accounts can have overdraft protection
Over-limit - This refers to a cardholder going over their credit limit with a transaction
Over-limit Fee - A fee charged when your balance goes over your credit limit.
P
Past Due - A payment that has not been paid at the scheduled time. After 30 days, the account becomes "delinquent."
Periodic rate - The interest rate described in relation to a specific amount of time. For example, the monthly periodic rate is the cost of credit per month; the daily periodic rate is the cost of credit per day. APR is a standardize, yearly periodic rate.
Phishing - A common scam to steal access to consumers’ credit accounts. Consumers often see phishing attempts in the form of fake e-mails that mimic those of banks. Consumers who click on such copycat e-mails will be transferred to a phony site that will try to dupe them into entering usernames and passwords, as well as Social Security or bank account numbers.
Plastic (Card) - A generic, and somewhat slang term used to describe a (plastic) credit card. “Paper” means cash, usually.
Point Of Sale (POS) - Location at which the transaction, or payment, for goods or services received.
Pre-approved - A conditional offer of credit from a credit card issuer. Usually, after obtaining more detailed credit information, a potential lender will assign an actual APR based on the full credit profile of the customer. A pre-approval is not a guaranteed quote.
Prime rate - The interest rate banks charge for loans to their largest and highest-rated customers. The prime rate changes based on the demand for money and the rate the U.S. Federal Reserve Bank charges to its member banks. It is used as a major economic indicator.
Principle - The outstanding balance owned on a loan not including interest or other fees.
Processing Date - The date on which the transaction is processed by the acquiring bank. Receipt.
R
Recurring - A term for transactions for which a consumer grants permission for someone to periodically charge his account number for recurring goods or services, e.g., monthly subscriptions.
Reloadable card – Commonly called a prepaid credit card, these can be reloaded with money. It does not necessarily have to be associated with a bank account run by the owner of the card. They usually carry multiple fees, charged for purchase of the card, for use of the card and for reloading the card.
Repossession – The seizure of property that a person has stopped paying for. Autos and other big ticket items are the most common items to be repossessed.
Revolving Credit Account – Nearly all credit card accounts are revolving. That is, credit cards loan you money indefinitely (although you have to pay monthly) versus a personal loan or mortgage that has a set term agreed upon at the signing.
Reward card- A credit card carrying an incentive or "reward" for use, typically involving cash back, merchandise points or frequent flier points.
S
Secured Credit Card - A credit card that is issued to a consumer that is tied to their savings account, or a co-signer. The amount in the savings account is used to determine the amount of credit available for a person to use. These are often easier to obtain than a traditional credit card, but can carry a higher interest rate.
Service Charge - The name for a typical finance charge, such as the fee for triggering an overdraft checking account into use.
Setup fee - A one-time fee charged by a credit card company when a new credit card account is opened. Only high-interest accounts usually get charged this fee. If you have good credit, you shouldn’t ever pay "setup fees."
Soft inquiry – When a potential creditor runs a credit check on a consumer that does not impact the borrower's credit score.
Smart Card - An electronic prepaid cash card, usually sold at banks and are exchanged at face value.
T
Tax Lien - Not a good thing. It is a lien placed on a person that owes back taxes. It will affect the sale of property, most notably, real estate property.
Teaser rate - Also called the introductory rate, this is the low interest rate the credit card issuer charges during an initial period to entice customers, and it usually only lasts a few months up to a year. It is followed by a higher, "go-to" rate.
Terms and conditions -The fine print. The terms and conditions are what define a legal contract, so be sure to read them.
Transaction date - The date that account activity takes place on. Some companies assess interest on charges and cash advances from the transaction date, others from the processing date (see processing date).
Trans Union - One of the three major credit reporting agencies.
U
Universal default - A common practice among credit card issuers that allows them to increase cardholders' interest rates for any change in risk profile. In short, cardholders who fail to make timely payments to other creditors -- such as other credit card issuers, utilities, car lenders, landlords or mortgage lenders -- can see their rates raised by creditors, even if they were never late in paying those other creditors.
Unsecured credit/loan - A loan based on a consumer's promise to pay, without collateral as a guarantee. Most credit cards are unsecured, though nonpayment results in the account being handed over to a collections agency.
User Authentication - Process of validating that a user is who s/he represents her/himself to be. Usually in the form of requiring a pin number or password.
V
Validation code - A unique four-character value that VISA includes as part of the CPS/ATM program in each authorization response. This code ensures that key authorization fields are preserved in the clearing or settlement record.
VantageScore - A credit score product launched in March 2006 by the Big Three credit bureaus (Equifax, Experian and TransUnion) as a competitor product to Fair Isaac's FICO Score. Like FICO, VantageScore is a three digit numeric value that assesses a borrower's credit risk. VantageScores range from 501 to 990, with a higher score representing better credit and a lower risk to the creditor.
Variable interest rate - An interest rate based on fluctuating rates in the banking system, such as the prime rate.
Z
Zero balance - If you have no previous outstanding balances on your card account and no new activity that month, this means that you have a zero balance. You might not get a bill since you do not owe anything.
Zombie debt - Old credit card and other debts that are beyond the statute of limitations, so a debt collector cannot successfully use the courts to collect them. Although these debts no longer have the courts as an avenue of collection, there's nothing to prevent debt collectors from asking consumers to pay them. So from the consumer's perspective, debts don't die, they become undead and live on. Like zombies.