Glossary of Debt Terms
Amortization-
The process of fully paying off indebtedness by installments of principal and
earned interest over a definite time.
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.
Assumption-
The agreement between buyer and seller where the buyer takes over the payments
on an existing mortgage from the seller. Assuming a loan can usually save the
buyer money since this is an existing mortgage debt.
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.
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. "Bad Credit" can result in being
denied credit.
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. 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.
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 will remain 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. A Chapter 13 filing will
remain on a credit report for 10 years. With Chapter 13, there is a better chance
of obtaining future loans and credit.
Beacon
Score- This is your credit score that creditors look at when determining if
you are credit worthy. Your Beacon Score is determined by negative entries such
as late payments which would decrease your score or a positive, timely payment
history on your accounts which would increase your score.
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.
Cash
advance loan- a loan where a borrower gets cash advanced based on his
paycheck. These loans generally up are up $500 and must be repaid on the next
payday.
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. (Also called security.)
Conditionalities-
Extra requirements other than repayment (such as ‘structural adjustment’
policies) demanded by the lender before new loans are granted.
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. The
right to defer payment of debt.
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.
Debt
service- Total payments due on loans (repayments plus interest).
Default-
Failure to meet the terms of a credit agreement.
Discharge-
A legal terms meaning a court has erased your debt(s) not to be confused with
a "charge off" or "write off" which is an accounting term
which does not erase debts.
Discount-
An amount deducted from the regular price for those who purchase with cash
instead of credit.
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.
Graduated
Payment- Repayment terms calling for gradual increases in the payments on
a closed-end obligation. A graduated payment loan usually involves negative amortization.
Liability-
Legal responsibility to repay debt.
Lien-
a notice a creditor attaches to your property that tells the world that you owe
the creditor money. You cannot sell the property without paying off the creditor
because the lien makes the "title" (history of ownership) cloudy and
a new owner won't buy under those conditions.
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
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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.
Payday
Loan - a loan where a borrower gets cash advanced based on his paycheck.
These loans generally up are up $500 and must be repaid on the next payday.
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.
Principal-
Amount of the loan.
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.
Reschedule-
Revised timetable for loan repayments, usually granting longer repayment periods
and often involving new loans to pay old ones
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,
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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. also
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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.)
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.
