It is critical to understand debt. To do that, you should navigate the numerous terms related to it. Here are some of the most important to know.
APR (Annual Percentage Rate)
The Annual Percentage Rate (APR) represents the yearly cost of borrowing money. It's not just the interest rate on a loan or credit account but a comprehensive figure that includes the interest rate and any additional fees or charges associated with the loan.
An authorized user is someone other than the primary borrower allowed to use a line of credit. Adding an authorized user to a credit card, for example, means that person can use the credit card, but that does not mean they are responsible for repaying the debt.
Available credit refers to the amount of unused credit limit on an account. That is the amount you can borrow without going over the limit. If you have a credit limit of $500 and owe $200, your available credit is $300.
The balance on your loan is the amount you owe at that given point in time. Balances are updated regularly to reflect payments, fees, and interest charged.
A balance transfer refers to moving an outstanding debt balance from one account to another. It is most typical with credit cards, where the goal of a balance transfer is typically to save money on interest charges and to consolidate debt under one card, making it easier to manage.
Bankruptcy is a legal proceeding in U.S. federal court in which a person's debt is reorganized or discharged. The goal of bankruptcy is to liquidate all the assets a person owes to pay off their lenders.
CFPB (Consumer Finance Protection Bureau)
The CFPB is a U.S. government agency responsible for providing guidelines to protect consumers from financial overreach and abuse.
An account may be charged-off if the lender elects to write off the account as a loss. That typically means the account is permanently closed, often about six months after nonpayment. Charge-offs negatively impact a person's credit score.
A collection agency is an organization a lender uses to collect an outstanding debt. The agency is responsible for seeking out payment from the borrower and may pursue that debt through statements, calls, emails, and letters. They may take legal action to collect the debt as well.
An account enters collections when the borrower does not make timely payments on a loan. Collections typically mean the account has been late for several months and could lead to more aggressive action against the borrower to collect on the debt owed.
A co-signer is a person that agrees to take responsibility for the repayment of the debt if the initial borrower fails to make payment. A lender may allow a person with bad or no credit to add a co-signer to their application to increase their approval odds.
Credit counseling is a service that helps consumer restructure their debt to make paying it back easier to do. They may provide financial education as well.
A credit bureau is an organization that collects information about a consumer's credit use over time and then provides a record of that data to lenders who request access for loan consideration.
Credit Limit and Credit Limit Increase
A credit limit is the most a borrower can access from a loan or credit card. A credit limit increase occurs when the lender agrees to raise that amount to a higher level, allowing the consumer to borrow more.
A credit report is a record that contains general information about a consumer's credit use as collected by a credit bureau. Credit reports help lenders make borrowing decisions based on past credit use.
A credit score ranges from 350 to 850, which reflects a person's credit usage. The higher the score, the more reliable a person's credit history is.
Custom Payment Plan
Payment plans help consumers catch up on their debt payments after missing a payment.
Debt refers to the money a person borrows and must repay to a lender.
A person may wish to consolidate their debt by obtaining a larger loan and using the proceeds to pay off numerous smaller loans to make repayment easier.
This term refers to any method to reduce debt pressure, like credit counseling or debt management plans.
Debt settlement refers to a lender agreeing to an amount less than payment in full.
Debt Settlement Company
This company works between lenders and consumers to work out settlement agreements.
Defaulting on a loan means a person has not made payment according to the terms and conditions initially set.
Delinquency refers to being behind or late on the debt owed.
The due date is the day of the month the lender must receive the minimum payment on that debt.
Fees or Late Fees
Fees are any charges in addition to interest applied to an account. Late fees, for example, are those added to the account if the consumer pays late.
A FICO Score is one type of credit score lenders use to determine risks. It uses its algorithm to calculate a person's creditworthiness.
When a debt is nonpaid, a court can order a debit against a person's paycheck, called a garnishment, to be paid to the creditor.
The term hardship refers to situations that make it difficult or impossible for a consumer to continue making payments as agreed, such as loss of employment or disability.
Interest is the cost associated with borrowing money, typically charged as a fee by lenders. It gets expressed as a percentage of the principal loan amount. This percentage, known as the interest rate, represents the amount a borrower must pay in addition to the original amount borrowed.
A court may rule in favor of a creditor, acknowledging that a debt is owed to them, and subsequently issue a judgment or a formal mandate to repay the loan.
A lien is a legal claim granted to a creditor over a debtor's property or assets. This claim serves as a security for the repayment of a debt. If the debt repayment is not as agreed, the creditor can seize the property or assets to settle the debt.
Line of Credit
A line of credit is a loan a consumer can borrow from, pay back, and borrow from again up to the stated credit.
The minimum payment is the lowest required payment the borrower must pay to keep the account current. It is less than the outstanding balance.
An account is past due if you don't make payment by the due date.
The principal refers to the original borrowed amount or debt without adding interest.
A lender may take ownership of collateral if debt repayment is not as agreed, such as taking a car from a consumer who fails to pay.
Interest is residual if it accrues on a credit card balance between the statement closing date and the payment due date.
Recoveries refer to the collection of a debt that was behind or late for some time.
Debt backed by collateral. A home loan is a secured debt.
Debt with no asset backing up the value is unsecured. Credit cards exemplify unsecured debt.
Variable Interest Rate
The interest rate on a loan that changes over time rather than remains the same throughout the loan's lifetime. Typically the rate will adjust over time based on changes in key lending rates.