Speaking the language of credit
A lot of jargon is tossed around by banks, credit card companies, financial advisors and debt collectors. When dealing with money issues, it’s good to be able to speak the language of professionals.
Here’s a condensed glossary to help you get a handle on some of the terminology you’re likely to encounter.
Common credit terms
- Amortization - This is the reduction of the value of an asset by prorating its cost over a period of time. A single lump-sum cash flow is divided into several smaller installments.
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- Annual Percentage Rate (APR) - The APR, interest stated as a yearly rate, is the credit card company’s way of informing you of the interest you must pay if you carry over a balance on your card, take a cash advance or transfer a balance.
- FICO credit score - You want to have a high one. Credit scores are developed from information on your credit report. FICO scores use the following factors:
- Payment history. A record of on-time payments helps.
- How much is owed. The more you owe compared to your credit limit, the lower your score.
- Length of credit history. A longer credit history will increase your score.
- New credit. Many recently opened accounts can be a red flag.
- Credit mix. Use of different types of credit can slightly raise a FICO score.
Video: Changing Credit Card Terms
Debt terms
- Consumer (or personal) debt - This is debt that you incur primarily by purchasing goods with money (from a credit card company, bank, automobile dealer, etc) that must be paid back. Payments, if not made in full all at once, go to reimbursing the lender for principal plus interest.
- Revolving debt - A debt that does not require a fixed payment is called a revolving debt. Money owed to a credit card issuer is an example.
- Unsecured debts - This is the form of debt that has no tangible property attached to it. Examples are credit card loans and medical bills.
- Secured debt - Tangible items are attached to this type of debt as collateral. It includes mortgages and car payments.
Video: Credit Card Basics
Debt management terms
- Credit counselor - These professionals offer advice on managing money through local offices, the Internet or on the telephone.
- Debt management plan - This is a program designed to provide help with your financial situation. Components can include assistance in creating a spending and savings plan, negotiating debt-repayment terms with creditors (such as lowered interest rates and waived late fees) and debt consolidation.
- Debt consolidation - Also called a consolidation loan, this is the replacement of multiple loans with a single loan, often leading to reduced monthly payments but an extended payback period.
- Debt negotiation - This process leads to convincing creditors to settle your debts at a lower amount than you actually owe.
Bankruptcy terms
- Liquidation - In the context of consumer debt, liquidation is the sale of some of a debtor's property and the distribution of the proceeds to creditors.
- Liquidation bankruptcy - usually referred to as chapter 7 bankruptcy, requires that some or most of the debtor’s assets be sold and that the money raised be used to pay off creditors. Only when there is not enough money left over to pay off everyone are unpaid debts erased.
- Chapter 13 bankruptcy - Designed for the adjustment of debts of an individual who has a regular income, Chapter 13 allows a debtor to keep some or all of his or her property and make payments over time.