Annual percentage rate (APR): The yearly interest rate that your creditors and lenders charge you for borrowing money from them. Credit cards may have a different APR for making purchases, for balance transferring, and for cash advances.
Asset: Assets are items owned by a borrower that have cash value, like a home, car, or savings account. If used to secure credit, these may be repossessed by a lender if the borrower stops making payments on his or her debt.
Balance transfer: The act of transferring debt from one credit card to another. Credit card users do this to take advantage of lower APRs.
Bankruptcy: Bankruptcy is a legal proceeding that releases a debtor from repaying some or all of his or her debts. Bankruptcy takes a toll on your credit score and should only be considered if the borrower has exhausted all other options.
Borrower: A person who owes money to another person, financial institution, lender, or credit card company.
Charge-off: An accounting term used to refer to debt that’s been written off as uncollectible by the creditor or lender. Debts are typically charged-off after six months of nonpayment. Though the creditor gets a tax break for charged-off debts, you still have a legal obligation to repay it.
Credit inquiry: A record of someone requesting to view your credit report. There are two types of inquiries. Hard inquiries are made when you put in an application for credit. Soft inquiries are those made by businesses you already have a relationship with, and businesses looking to send promotional offers to you. Checking your own credit is known as a soft inquiry, and does not affect your credit score.
Credit reporting agencies: Also known as credit bureaus, these institutions collect information about credit users from banks and other lenders. Credit reporting agencies compile this information into credit reports, which financial institutions use to evaluate borrowers’ creditworthiness. There are three major credit reporting agencies in the United States: Equifax, Experian, and TransUnion.
Credit report: A compilation of your credit history. It lists your credit and loan accounts along with your payment history, credit limit, and balance information for each. Bankruptcies, debt collections, tax liens, and lawsuit judgments also appear on your credit report.
Credit score: A numeric snapshot of your credit history at a point in time. Credit scores generally range from 300 to 850 with higher scores being better. Credit scores can vary based on which credit scoring formula is used and which credit report the score is based on.
Credit monitoring: A service that alerts you to changes in your credit report including new accounts, new inquiries, new public records, address changes, and other important updates. Credit monitoring is often used to aid in the early detection of identity theft.
Debt: Money that’s owed to someone else.
Default: Nonpayment on a debt.
Delinquency: A failure to make payment by the time it’s due.
Fair Credit Reporting Act (FCRA): A federal law that regulates the credit reporting industry. The FCRA protects consumers by requiring accurate, confidential use of credit reports. The FCRA specifies the length of time negative information can remain on credit reports, who can review credit reports, and also gives consumers the right to dispute inaccurate information on their reports.
Interest rate: When you borrow money, you will be required to pay back the amount borrowed (called principal) plus interest. The interest rate determines the cost of borrowing money and is usually indicated by a percentage. Knowing the interest rate for each of your credit cards and other loans will tell you how much those debts are truly costing you. Fixed interest rates stay the same over time; variable interest rates can change according to the terms of your loan agreement.
Loan: Money that must be repaid. A loan is a type of debt.
Public records: Public records can include bankruptcy, foreclosure, court judgment, tax lien, or overdue child support. These records can be accessed by anyone. These types of public records are listed on your credit report and will damage your credit score.
Utilization rate: The portion of your credit limit being used (also called your credit-to-debt ratio). Your utilization rate is calculated by dividing your credit card balances by your credit limits. A high utilization means you’re using a large amount of your available credit and may result in a lower credit score.