August 20th, 2009
Personal Finance Terms from The Intern
Lesson 1: As a personal finance writer, I have to learn and fine-tune my financial services lexicon if I am going to write a financial services blog. Lesson 2: There is A LOT to learn.
This is a simple glossary of the terms and definitions I’ve learned so far working in an office where the 5 key components of a credit score should be second nature (credit history, on-time payment history, credit utilization, total accounts, and credit inquiries—just in case you were wondering). While there are entire websites and Wikipedia entries dedicated to defining all the need-to-know words when it comes to credit cards, home mortgage, auto loans, banks, and more, this glossary is for consumers out there, like me, who are just getting their feet wet in the financial world. Whether you are tired of Wiki-ing unfamiliar credit terms or you just want to brush up on your credit know-how, use this short and sweet guide to help you talk the personal finance talk.
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BASIC CREDIT TERMS
Bankruptcy
The B word is one of the worst negative records you can have on your credit report, and means that you request legal assistance to pay off your debt. Filing for bankruptcy is often the last resort for financial protection when you are in serious debt or the toughest of financial straits. Bankruptcy will heavily impact your credit score and remain on your credit report for seven to ten years. Additionally, bankruptcy will severely limit future chances for credit and loan approval in the near term, but it’s not uncommon for consumers to get a home loan 2-3 years after filing for bankruptcy
Charge – off
A charge-off happens when you are unable to pay off your credit card and a creditor effectively writes off your debt in their books and closes your account. This does not mean you are off the hook; you can’t make anymore purchases on your credit card and creditors will continue to attempt to collect on your account until paid in full. Creditors will generally charge-off your debt after 180 days of less-than-minimum or no payments, and the charge-off will remain on your credit report for up to seven years.
Co-Signer
A co-signer is an individual who signs off on a contract agreeing to pay off loan or credit card payments in case the primary accountholder defaults. Having a co-signer on a loan application is advantageous for people with poor credit who are seen as high-risk borrowers and need a person of good credit standing to vouch for them. The downside for the co-signer is that both the accountholder and the co-signer’s credit reports and scores is impacted by the account, so bad credit behavior or defaulting payments by the accountholder means bad news for the co-signer.
Credit
Credit is the money a lender, such as a bank or credit card company, loans to a borrower under the condition that it will be repaid over a certain period of time according to certain APR terms.
Credit bureaus
Also called a credit reporting agency, credit bureaus issue consumers their credit reports and credit scores, usually as a paid service. The three major national credit bureaus are TransUnion, Experian, and Equifax.
Credit check
A credit check is any instance when a lender, company, bureau, or even yourself looks into your credit report and credit history. Credit checks happen when you take out a home mortgage, open a new credit card, apply for any loan, buy a car, get insurance, and you apply for a job. A credit check is done by lenders to gauge your propensity to pay back a loan.
Credit history
Your credit history begins when you open up your first credit product such as a credit card, pre-paid card, auto loan, or a personal loan, and entails all of your credit payment history, credit lines, and good and bad credit actions taken throughout the course of your financial life. Everything from a late payment to requests for loans will be captured as your credit history in your credit report and may impact your credit score negatively or positively.
Creditor
A creditor is any person or company that extends credit and to whom money is owed. This includes credit card issuers, banks, loan services, bill agencies, and pretty much any financial service company that lends you money which you are obligated to pay back.
Credit report
A credit report is full of complex information about your credit history and credit use, but here at Credit Karma, we boil down it down to a snapshot of important components: credit card utilization, on-time payment history, age of credit history, total accounts, and credit inquiries. The credit report is the foundation for your credit score.
Credit reporting agency
See credit bureaus
Credit score
Your credit score may seem like an arbitrary 3 digit number, but think of it as a grade that sums up your credit report for lenders to see. Credit scores generally range from 300-850, with higher scores being indicative of less credit risk and better creditworthiness. Different scoring models, algorithms, and score ranges are used across different credit bureaus, so oftentimes the credit score you receive from one provider will not match exactly with the score from another provider. But all in all, all credit scores are correlative to a consumer’s creditworthiness and propensity to repay a loan.
Credit utilization ratio
Your credit utilization ratio is the amount of debt you have compared to your total available credit, and determines about 30% of your credit score.
Debt Settlement
Debt settlement is a service provided by a third-party agency that works with a consumer’s creditors on behalf of the consumer to negotiate a reduced amount of total debt. Debt settlement in your credit history can damage your credit score.
Fair Credit Reporting Act
The Fair Credit Reporting Act is a big victory for consumers because it regulates how credit bureaus maintain, share, and correct information on credit reports. Consumers’ rights achieved by the Act include the right to see your credit report for free at AnnualCreditReport.com, limited disclosure of credit reports to creditors, and fair, timely, and accurate reporting of your credit information.
FICO Score
The FICO score, developed by Fair Isaac Corp, is the standard credit score used in the mortgage industry by lenders to determine approval of a loan as well as the mortgage terms a lender will offer. The FICO score has become a stalwart for mortgage loans mainly due to FICO requirements on loans that are securitized and sold to the government-sponsored enterprises, Fannie Mae and Freddie Mac.
Hard inquiry
A hard inquiry is a credit check done by a lender anytime you apply for a loan. Also known as a hard pull, every hard inquiry on your credit report makes a small negative impact on your credit score; so take care not to apply for multiple loans at the same time.
Soft Inquiry
A soft inquiry is a credit check that does not impact your credit score. Also known as a soft pull, examples of soft inquiries to see your credit report include requests for background checks by employers, verification of your identity, and requests to see one’s own credit report.
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