When dealing with credit, there are a multitude of terms that you should understand. These terms are used frequently when dealing with credit and will help you better comprehend exactly what is involved in your credit. Read through this credit terminology guide and educate yourself on the world of credit.
Adjusted Balance is a method of calculating your credit balance and Annual Percentage Rate (APR) where payments and/or credits made during the billing cycle are subtracted from your balance at the end of the previous billing cycle. This method is more advantageous to borrowers and credit card holders. Unlike Average Daily Balance calculations, new purchases during that billing cycle are not included in Adjusted Balance calculations, and interest is only applied to the balance remaining after payments are credited to your account.
Amortization is a payment plan that allows the borrower to reduce his/her debt through monthly payments of principal.
Annual Percentage Rate (APR)
APR is the yearly rate lenders charge borrowers to borrow money (also called the cost of credit). Lenders must divulge the APR they are charging prior to finalizing the deal. Lenders can not reveal or make changes to the APR after the lender/borrower contract has been signed. However, some credit card companies and loan companies state in their agreement that they can change your APR when interest rates or indexes change.
Average Daily Balance
The Average Daily Balance is a method of calculation of your credit balance and interest. Its the practice of crediting your account from the day your payment is received. In other words, its a daily tracking of what you owe. When calculating the Average Daily Balance, the lender adds the beginning balance for each day in the billing period and then subtracts any payments and/or credits made to your account that day. The end result is your Average Daily Balance. New purchases aren’t necessarily added to your account the day of the purchase, and wont show in your daily balance. When the purchase is charged to your account, it affects your balance.
Bankruptcy is a form of financial protection where the borrower is unable to pay rent or mortgage payments, has no credit or means of paying for it, and is unable to reconcile with collection agencies. There are two methods of filing for personal bankruptcy: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy eliminates all debts (minus taxes and possibly alimony payments) by taking all non-exempt property (as set forth in Chapter 7 filing) and converting it to cash to pay off debts. A Chapter 13 bankruptcy allows a borrower with a steady income to pay off bills over a 36 to 60-month period. Chapter 13 filing is only available to those who have predictable income and a means of paying off their debt over the established period of time.
A credit score is a statistical calculation of the credit information obtained in a consumer’s credit report. A common credit score type is the FICO score, others include Beacon and Empirica. They are all used to calculate the future probability of you repaying any loans, based on your historical credit history.
FICO is a mathematical equation/calculation lenders use to evaluate the risk associated with lending you money. FICO stands for Fair Isaac Company, the company that originally created the formula.
Liquidation is the process of converting assets into cash to pay off creditors. This process is used in personal and corporate bankruptcy as a solution to getting out of debt with lenders.
Repossession is the forced or voluntary surrender of merchandise as a result of the customer’s failure to pay what is owed. If you purchase an item on credit and fail to pay for it, the entity that sold it to you reclaims it.
A Revolving Account is an account that requires a minimum payment each month in addition to a service charge. When the balance decreases, the service charge/interest also declines.
Credit terminology can be confusing. If you’re investigating credit options and want to know whats involved, use this guide to get you up to speed on some of the more common credit terms.