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Undertanding Credit

Understanding Financial Terms

Glossary of Terms

In this section, you'll find definitions for commonly used terms related to credit and debt. Understanding these terms will help you to make more informed decisions.

Accrued Interest: Interest that accumulates over time on a debt that you owe.

Annual Percentage Rate (APR): The cost of credit, expressed as yearly rate. The Federal Truth in Lending Act requires that all offers for credit  indicate the credit's APR so that consumers can understand the cost of credit they are applying for and so they can compare credit offers.

Bankruptcy: A legal procedure governed by federal law that helps consumers who have too much debt. There are two bankruptcy options for consumers -Chapter 13 reorganization and Chapter 11 liquidation. Click here to learn more about bankruptcy.

Collection Agency: A business that collects past due debts for other businesses, as well as individuals. Most collection agencies get paid for their services by taking a percentage of what they collect for their clients.

Collateral: Assets pledge as security for a secured debt. If you do not pay a debt that you have collateralized, the creditor can take the collateral.

Credit Agreement: A contract between a borrower and a creditor that details the amount borrowed, the applicable interest rate and all other terms of the credit.

Credit History: A record of how you have managed your credit over time that is maintained by a credit bureau. Creditors, insurers, employers and landlords use consumer credit record information as well as credit scores based on that information to make decisions about consumers. Also called a credit report, credit record or credit file.

Credit Score: A number that is delivered from the information in your credit history and that is an indicator how well you are likely to manage credit in the future.

Creditor: A person or business to whom you owe money.

Debt Consolidation: The process of taking out a larger loan to pay off one or more smaller loans.

Fair Debt Collection Practices Act: A federal law that regulates the activities of debt collectors and establishes your rights when you are contacted by a debt collector. Click here to learn more about the fair debt collection practices act.

Finance Charge: Another term for the amount of interest you pay a credit card company when you do not your card balance in full each month as well as the amount of interest you pay on your outstanding loan balance. The finance charge is expressed as percentage. 

Foreclosure: The process whereby a mortgage lender or another creditor with a lien on your home or on some other piece of real estate that you own takes that asset because you did not live up to the terms of your agreement with your creditor.

Grace Period: The time during which you can pay your account balance in full without incurring finance charges.

Open-End Credit Agreement: A credit agreement with no specific date by which you must pay the account balance in full although you must make monthly minimum payments an the balance. Credit cards are a common example of open-ended credit. 

Periodic Rate: An interest rate that charges periodically. The terms of the change are spelled out in your credit agreement. 

Principal: The amount of money you borrow. Principal does not include interest.

Unsecured Debt: A debt for which no assets are pledged to guarantee payment.  The most common type of unsecured debt is credit card debt.