If you’re on this page, chances are high that you want to brush up on credit vocabulary terms. I bet you were the kid that read the dictionary for fun. Me too. I like you.
The best defense is a good offense, and we’re going to offense the heck out of your credit game by teaching you credit vocabulary terms. Increasing your knowledge of credit terms means defending yourself from being taken advantage of when doing things like applying for a loan or rebuilding your credit profile. Unscrupulous lenders and also fraudsters look for any hole in your defense that can be penetrated, and lack of credit expertise can make you an easy target for both. It could cost you thousands of dollars in loan interest, months disputing information, and even lead to legal headaches from fraud.
You shouldn’t need a degree in finance to understand your credit or what you’re signing for when you take out a loan. We’ll break down some of the most commonly used credit and lending terms over three different lessons. Read over the first set of financial vocabulary terms, A through G, and follow our stories on Instagram or Facebook to test your knowledge with pop quizzes.
A:
ANNUAL PERCENTAGE RATE
Complicated Definition: This represents the total yearly amount of interest that a borrower is to be charged on their loan expressed as a percentage against the total balance of a loan.
Simple Definition: The percentage you pay your lender each year for your loan.
Scenario: You get a 3-year personal loan at SunWest for $10,000 with an annual percentage rate of 7.90%. Your APR tells you how much you’ll pay SunWest yearly to have that loan. In this case, you would pay $681 within the first year if you make all of your payments for the exact payment amount on the due date each month. Question: Why isn’t it $790 if 10,000 x 7.90% = $790? Answer: Interest is calculated a little bit each day using the total balance you owe. As you make payments, your balance goes down which makes the amount of interest you pay also go down. This is very helpful because if you pay more than your regular payment each month, you’ll save money on interest since your balance is going down faster.
AMORTIZATION
Complicated Definition: The process of debt repayment through regularly scheduled payments for an allotted period of time agreed upon by the borrower and coborrower.
Simple Definition: Routine payments to pay off a debt.
Scenario: Using the same scenario from APR, you have a loan for $10k over a 36-month term with a rate of 7.90%. The amortization would be 36 payments of $312.90 which is credited among your principal balance and interest due. An amortization schedule shows you how much of your monthly payment will be credited to the principal and interest each month. Example: Payment #1 - $247 Principal, $66 Interest; Payment #2 - $249 Principal, $64 Interest.
ASSET
Complicated Definition: Property owned by a person or entity that is viewed as valuable and often used as collateral to secure a commitment or debt.
Simple Definition: Something you own and can use to get a loan such as cars or houses.
Scenario: You own one of those asset things that goes vroom vroom.
AUTHORIZED USER
Complicated Definition: An individual that has been granted access or permission to use another individual’s account, typically in reference to a credit card or line of credit.
Simple Definition: Someone that can use someone else’s card (without stealing it).
Scenario: You are 15 and going on your first trip without a parent. They want to make sure you can use their credit card in case of an emergency, so they add you as an authorized user. You fall asleep in the airport and miss your flight, and now you have to pay for a replacement flight. You don’t have enough money for the ticket on your debit card, so you have to use your parent’s credit card. It goes through with no trouble because you are an authorized user.
B:
BALANCE TRANSFER
Complicated Definition: The shifting of a balance of debt from one credit account to another, most commonly seen with credit cards and utilized as a way to take advantage of a promotional rate to pay down a balance faster or reduce overall interest accrual.
Simple Definition: Paying off debt on one account with debt from another account. A switcheroo of debt.
Scenario: You have a balance on a credit card that has an APR of 20.50%, and it’s taking forever to pay it off because so much of the monthly payment just goes to interest instead of the principal balance. You also have a credit card with SunWest that only charges you 12.50% APR, so you use the funds from your SunWest credit card to pay off the other one. This transaction is a balance transfer.
BILLING CYCLE
Complicated Definition: Typically, a monthly period of 28 to 31 days in which time has elapsed between your previous statement closing date and your successive statement closing date.
Simple Definition: The time between your last statement and the following statement.
Scenario: You get an online statement for your credit card on January 10th and the next one on February 7th. Your billing cycle would be 28 days – not to be confused with the popular zombie movie, 28 Days Later.
BORROWER
Complicated Definition: An individual or entity that takes a sum of money from a secondary party or lender upon a mutually agreed contract of repayment.
Simple Definition: Someone who’s given money by a lender and pays it back.
Scenario: You want to buy a car from a dealership but spent your cash on a trip to Ibiza last month, so you need a loan. As the borrower, you are responsible for making payments.
BRANDED TITLE
Complicated Definition: An official designation from the state in which the title is currently held which indicates a vehicle has sustained damage or might be potentially unsafe to drive, leading most lenders to reject financing as there is a greater risk of financial loss for the lender should the borrower default on payments.
Simple Definition: The car has had issues severe enough for the state to mark it, and most lenders won’t finance it because it’s risky.
Scenario: You owned a car, and a javelina rammed into it, causing you to tailspin into a pole. Your insurance company said it would cost significantly more to repair it than it was currently worth and considered it a total loss. Your insurance company gave you a check, took ownership of the vehicle, placing the title in their name and sold it. The new buyer decided to fix the car up and resell it, however, the state now labels this car “salvaged” on the title because of the its history.
C:
CASH ADVANCE
Complicated Definition: The act of taking out a lump sum of funds against a credit line as a type of short-term loan for immediate cash availability.
Simple Definition: Withdrawing cash from your credit card. It’s often charged at a higher interest rate than a normal credit card purchase and/or there could be fees associated, so make sure you know the terms before taking one out.
Scenario: You and your girlfriend decided not to move in until you get married. She says she’ll only propose if you go on a one-week vacation together to make sure you can stand spending that much constant time together. While on the trip, you see a beautiful ring at a local shop, and you decide to buy it and propose to her! The shop only takes cash, and you only have a credit card. Luckily, there’s an ATM there, and your credit card allows you to take a cash advance out for a low fee. Best of luck, future newlyweds!
CASH-OUT REFINANCE
Complicated Definition: The process of replacing your current loan with a new one and taking advantage of the equity in your the collateral being pledged, typically a home or vehicle, in order to borrow an amount in addition to the remaining balance of your current loan.
Simple Definition: When the collateral you’re refinancing is higher in value than what you owe, so you increase the total loan amount and use the extra money for whatever you want.
Scenario: You bought a car when you were 18 and had no credit, so your interest was really high at 15%. When you go to refinance it for a lower rate of 5%, your lender tells you that your car is worth $5,000 more than your current payoff balance. You decide to use $3,000 of that equity by adding it to your auto loan balance, and you use that money to buy a new dryer that doesn’t set your clothes on fire.
CHARGE-OFF
Complicated Definition: A debt in which the original lender or creditor does not believe will be repaid or that the borrower no longer intends to pay or is unable to pay and is seen as having an inability to be collected on so is written off by the lender as a loss or expense and adversely affects the borrower’s ability to receive credit in the future.
Simple Definition: Debt that goes unpaid and the issuing company writes off as a loss. Having charge-offs on your credit hurts your credit, so always try to make payment arrangements if you can.
Scenario: You used a credit card for one purchase, and forgot to pay it back. The credit card company couldn’t get ahold of you for 4 months, so they considered it a charge-off. You didn’t know until you tried to get a new credit card and the company said your credit score was too low because of your previous charge-off.
COLLATERAL
Complicated Definition: Property that is pledged by a borrower in order to secure a loan and would be forfeited by the borrower if they fail to meet the agreed upon requirements set forth in the lending agreement.
Simple Definition: Something of value that you give your lender rights to take if you don’t pay the loan back.
Scenario: You buy a house, but because you’re not a millionaire, you have to finance it. Your bank gives you the money to buy the house, but it’s basically their house until you pay the loan back. You do have some rights though, like being allowed to put up floral, yellow wallpaper or floating shelves. So it’s kind of yours…as long as you make your payments.
COLLECTION
Complicated Definition: A process in which a creditor or lender attempts to recover a debt on a loan that has become past due in the hopes of preventing the debt from becoming a charge-off or loss to the lender.
Simple Definition: A late payment that your lender is trying to get you to pay back before taking a loss on it.
Scenario: You lost your job and are 60 days late on your car payment. Your payment is considered in a collection status, and your credit union calls you to set you up on payment arrangements so the car won’t be repossessed.
CO-SIGNER
Complicated Definition: An individual that signs a loan agreement with another and accepts responsibility for the fulfillment of the obligation in the case that the primary borrower does not make the agreed upon payments.
Simple Definition: A person that agrees to pay back a loan if the original borrower doesn’t. Co-signers are typically used when the person applying for the loan doesn’t have enough credit experience.
Scenario: Your 45-year-old brother is a slight conspiracy theorist that never built credit because he didn’t want to be “in the system”. He was able to keep himself from needing to borrow money and getting into debt because of this, but his old truck just took a dirt nap, so he needs to buy a new one. He can’t qualify on his own, so he asks you to be a co-signer on the loan for him. He helped you install your hardwood floors, so you decide to return the favor.
CREDIT (FILE, HISTORY, REPORT, SCORE)
Complicated Definition: A tool that helps lenders or creditors gauge the likelihood of debt repayment based on the borrower’s previous experience of repaying debts allotted to them.
Simple Definition: Your ability to borrow money based on your previous experience borrowing money.
Scenario: You want a credit card that will give you points for all the world traveling you do as a photojournalist, and because you’ve always paid your loans and other credit cards responsibly the company you apply through can see that you have excellent credit and gives you a super elite matte black card with gold filigree on the edges. Spend on, big spender.
CROSS-COLLATERALIZATION
Complicated Definition: The act of securing additional loans or debts with property that is currently being pledged to your lender to secure a preexisting debt.
Simple Definition: Using the same property to secure more than one loan with your current lender.
Scenario: You got an auto loan through your bank a few months ago, and you currently have a credit card through them as well. You forget to make the last 4 payments to your credit card, but you’ve made your auto loan payments all on time. Your lender repossesses your car due to you defaulting on your credit card payments.
D:
DEBT CONSOLIDATION
Complicated Definition: The process of obtaining a loan to absorb multiple debts or loans into one in the interest of reducing the number of monthly obligations, interest or with the overall goal of making the repayment of existing financial obligation more manageable.
Simple Definition: Combining multiple debts into one loan, usually to make it easier to pay everything off sooner and pay less interest.
Scenario: You went to the mall during Christmas and signed up for roughly 50 different store credit cards in order to get discounts on prezzies. The problem is that they’re all due on different dates with high interest rates. Ha, rhyming! You bank with SunWest, and they’re running a personal loan promo at 7.90% APR, so you decide to apply for debt consolidation purposes to pay off all your credit cards and only have to worry about one monthly payment.
DTI (DEBT-TO-INCOME)
Complicated Definition: This ratio compares the total amount of your monthly debt obligations to your gross monthly income earnings and is used by lenders to assess your propensity to manage additional debt.
Simple Definition: What you owe to loans, rent or mortgage, and credit cards monthly versus what you make at work.
Scenario: You apply for a $100,000 car loan and are declined. When you ask why, the loan officer tells you it’s because your debt-to-income is too high. They explain that a healthy DTI is below 50%. You currently owe $2,000 per month between your current car, house, and credit card loans, but you only make $2,300 per month. That puts your DTI at 87%. If you got approved for this new loan payment of $1,542, your new DTI at 154%. Based on your current income, there’s literally no way you could make your payments.
DEFICIENCY
Complicated Definition: An amount that you owe in excess of the amount a lender sells a piece of collateral for after they have applied the proceeds to the original unpaid loan obligation.
Simple Definition: The remaining balance you owe after your lender sells the collateral you pledged and subtracts the funds they received from your total balance.
Scenario: You couldn’t pay your car anymore, and you had $10,000 left of a balance. Your lender considered the vehicle loan a charge-off and repossessed it, selling it for $8,000. The deficiency of your loan balance would be $2,000. This will show on your credit report, making it difficult to obtain credit later on unless you pay it off.
DELINQUENCY
Complicated Definition: An overdue payment.
Simple Definition: Okay, that one was already pretty simple.
Scenario: You were late on a payment, resulting in a delinquency. Honestly, I can’t make it easier, so let’s move on.
DEPRECIATION
Complicated Definition: The act of an asset being reduced in value over time in comparison to the current market and a previous assessment of value.
Simple Definition: When an asset, such as a car or home, decreases in value.
Scenario: You bought a top-of-the-line refrigerator in 1983, but that was a really long time ago. Many advanced models have come out since then, and the parts themselves have a lot of wear and tear, which all adds to the depreciation of your current refrigerator.
DISPUTE
Complicated Definition: The process of notifying the credit bureaus of an error on your credit report and requesting that the error be corrected which is then investigated by the bureaus, leading to either a correction or a rejection of the request, both of which resolutions are sent to the credit profile owner.
Simple Definition: When you request an error be removed from your credit report.
Scenario: You notice multiple credit cards showing up on your credit report that you don’t recognize, then begin getting itemized statements about hotel stays at tropical resorts and local restaurants. You’re mad because that definitely wasn’t you that opened and used all those cards, and now you have to dispute the accounts with the credit bureaus, but you’re also intrigued because the statement purchases paint a picture of a great time.
E:
EQUITY
Complicated Definition: The quantifiable portion you own of an asset which is the difference between the current market value of that asset and any loan amount for which the asset is currently being leveraged as collateral.
Simple Definition: The difference between what your property is worth and what you owe.
Scenario: You bought a house years ago when home prices still made some semblance of sense, and now it’s worth $200k more than what you owe. That $200k difference is the amount of equity you have in your home, which can be leveraged for low-rate HELOCs or 2nd Mortgages, or you could sell the home and that would be your profit (minus all the additional fees that come with selling a home, of course).
F:
FINANCE CHARGE
Complicated Definition: The cost a borrower will incur for obtaining credit and throughout the duration of the loan term expressed as a dollar amount.
Simple Definition: The total dollar amount you’ll end up paying in fees and interest for your loan.
Scenario: You got a loan for $10k with a 3-year term and a rate of 7.90%. If you make all your regular payments on the due date for the entire term of the loan, you will pay a total of $11,264.49. The difference between the original balance and the total amount you pay throughout the term of the loan is your finance charge. 11,264.49 – 10,000 = $1,264.49 of interest throughout the term of the loan. If there are any fees in addition to interest, they would be included in your finance charge.
FIXED RATE
Complicated Definition: This is an interest rate for credit obtained which does not fluctuate according to the market and will remain the same throughout the agreed upon terms of a loan.
Simple Definition: A loan interest rate that stays the same throughout the whole term.
Scenario: You got a vehicle loan when you had a score of over 800, but...pftt. Life happened as it sometimes does, and your score took a bit of a dive, hitting below 625. Since your auto loan is at a fixed rate, you don’t need to worry about an adjustment or paying any more for the current loan.
G:
GARNISHMENT
Complicated Definition: Legally-granted permission to a lender, creditor or company to seize certain assets of an individual or a discontinuation of wages within a specified amount in order to satisfy a debt or legal obligation.
Simple Definition: When a company is given access to certain assets or funds of yours to satisfy a debt or legal obligation.
Scenario: You went through a divorce, and your spouse was given custody of your child, to which you must pay child support. If you do not pay the required amount, you may receive a garnishment on your wages.
GAP or Guaranteed Asset (or Automobile) Protection
Complicated Definition: Coverage that reimburses a vehicle owner for the remaining balance of a loan in the case of a total loss situation where an insurance provider totals out the vehicle that has been in an accident, and the current value is less than the current loan balance.
Simple Definition: Covers the difference between what your insurance will pay and what you still owe on your car loan if your car is determined to be totaled after an accident.
Scenario: You were driving out to Payson when a landslide brought you down. You’re fine, but your car is down for the count. After determining the vehicle would cost way more to fix than it’s worth, your insurance calls it a total loss and pays out $15k which is applied directly to your loan balance. “Oh no!” You’re worried because your loan balance is $19k. Wipe the sweat off your brow, because you got GAP, and it’ll cover the remaining $4k!
GRACE PERIOD
Complicated Definition: A time between when a payment is due and when you are able to make a payment without incurring a late fee or finance charge. In the case of credit cards, this is the period of time between when you receive your bill and must make a payment in order to avoid paying interest – balances that have been carried over, as well as cash advances made, typically do not qualify for the grace period.
Simple Definition: The period of time when you can make a payment without being charged interest or late fees.
Scenario: You completely spaced the first payment on your new car. When you go to the credit union to make your payment, you expect to have to pay an additional fee, but instead, the teller tells you that you have a grace period of 10 days. Woohoo!
GROSS INCOME
Complicated Definition: An individual’s total income before any deductions (taxes, 401k, automatic payments, charitable contributions, etc.) have been taken out.
Simple Definition: The full dollar amount of what you made from work before anything comes out of it.
Scenario: You make $20 per hour and work 40 hours per week, paid out biweekly. $20 x (40 hours x 2 weeks) = $1,600
Check back soon for Part 2, and visit us on social media to get more tips and tricks.
February 20, 2023
Published by SunWest Credit Union
