Credit and Banking Glossary

A

Amortization The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.

Appraisal Fee The charge for estimating the value of property offered as security.

Annual Fee A yearly fee charged to the card for keeping the account open. Some cards have this fee and some do not.

Annual Percentage Rate (APR) The cost of carrying a balance on a loan expressed as an annual percentage. To calculate the amount owed in interest each month divide the APR by 12. For example, if the APR is 18% the monthly rate is 1.5%.

Asset Anything owned by an individual that has a cash value. This includes property, goods, savings or investments.

Average Daily Balance The average daily balance is a method used to calculate finance charges. It is calculated by adding the outstanding balance on each day in the billing period, and dividing that total by the number of days in the billing period. The calculation includes new purchases and payments.

B

Bad Credit A term used to describe a poor credit rating. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy.

Balance The total amount of money owed. It includes any unpaid balance from the previous month, new purchases, cash advances, and any charges such as an annual fee, late fee or interest (Finance Charges). The balance should not be confused with the monthly payment (the minimum payment allowed each month), which is generally 2% - 5% for revolving credit cards.

Balance Transfer Moving a balance (debt) from one credit card to another. This is often done with special checks or forms, or may be offered as an option on some credit card applications. The usual reason is to shift an ongoing debt to an account with a lower interest rate.

Balloon Payment A large extra payment that may be charged at the end of a loan or lease.

Bankruptcy Bankruptcy is a legal declaration of the inability to repay debts. Bankruptcy should be viewed as a last resort. It will have a severe impact on a credit rating and will remain on a credit report for ten years. Furthermore, bankruptcy is not a solution in all cases. Federal student loans, Federal tax debt and child support are all exempt from bankruptcy protection. Bankruptcy agreements vary but there are two types of agreements that most people choose: Chapter 7 and Chapter 13.

Chapter 7
In a Chapter 7 agreement, the court resolves most debts by selling assets and property so that the filer is given a fresh financial start. The court takes all assets including cars, homes, furnishings, jewelry or anything else of value. The assets are sold to pay off the debt. There are some debts that a person may wish to repay on their own instead of having the court resolve it. This is called reaffirmation. Reaffirmation is a special payment plan with the court. For example, if a car loan is reaffirmed, the person keeps the car and makes payments under new terms. Chapter 7 bankruptcy will not eliminate debts due to taxes, child support, alimony, student loans, court fines or personal injury caused by driving drunk or under the influence of drugs. A Chapter 7 filing remains on a credit report for 10 years.

Chapter 13
In a Chapter 13 agreement, the court creates a debt repayment plan that allows the filer to keep their property. In order to file Chapter 13, a person must have a source of income and promise to pay part of their income to creditors. The court allows the filer to keep any assets that have debts against them if they pay them off under terms determined by the court. Chapter 13 filings remain on a credit report for 10 years. With Chapter 13, there is a better chance of obtaining future loans and credit.

Billing Cycle The number of days between statement dates. This is generally about 25 days.

Buydown A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness.

C

Closed-end Credit Generally, any loan or credit sale agreement in which the amounts advanced, plus any finance charges, are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed- end agreements.

Collateral Property that is offered to secure a loan or other credit and that becomes subject to seizure on default.

Community Reinvestment Act (CRA) Encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations.

Cosigner Another person who signs for a loan and assumes equal liability for it.

Credit The promise to pay in the future in order to buy or borrow in the present.

Creditworthiness A creditor's measure of a consumer's past and future ability and willingness to repay debts.

Credit Card Any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.

Credit History A record of how a person has borrowed and repaid debts.

Credit Scoring System A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.

D

Default Failure to meet the terms of a credit agreement.

Discount An amount deducted from the regular price for those who purchase with cash instead of credit.

F

Finance Charge The total dollar amount paid to get credit.

Fixed Rate A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.

G

Graduated Payment Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.

L

Liability on an Account Legal responsibility to repay debt.

N

Negative Amortization Repayment schedule calling for periodic payments that are insufficient to fully amortize the loan. Earned but unpaid interest is added to the principal, increasing the debt. Eventually, payments must be rescheduled to fully pay off the debt.

O

Open-end Credit A line of credit that may be used repeatedly up to a certain limit, also called a charge account or revolving credit.

Open-end Lease A lease that may involve a balloon payment based on the value of the property when it is returned. (Also called finance lease.)

Overdraft Checking Account A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.

P

Points Finance charges paid by the borrower at the beginning of a loan in addition to monthly interest; each point equals one percent of the loan amount.

R

Renegotiable Rate A type of variable rate involving a renewable short- term "balloon" note. The interest rate on the loan is generally fixed during the term of the note, but when the balloon comes due, the lender may refinance it at a higher rate. In order for the loan to be fully amortized, periodic refinancing may be necessary.

S

Security Interest The creditor's right to take property or a portion of property offered as security.

Seller's Points A lump sum paid by the seller to the buyer's creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount.

Service Charge A component of some finance charges, such as the fee for triggering an overdraft checking account into use.

Statement The monthly bill from a credit card issuer that describes and summarizes the activity on an account. A statement includes the outstanding balance, purchases, payments, credits, finance charges and other transactions for the month.

Statement Date The date on which a statement is generated, and the month's finance charges (interest) are added to the balance.

Surcharge An extra charge imposed on those who purchase with a credit card instead of cash. (Currently, surcharges for credit card purchases are prohibited.)

V

Variable Rate A variable rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.