April 7, 2011
Here’s a basic glossary of credit terms, helpful as a reference tool, for those new or knowledgeable on credit.
Bankruptcy: Filing for bankruptcy means that you have requested legal assistance to pay off your debt. Because it is one of the worst negative records you can have you your credit report, it is usually the last resort for financial protection. A bankruptcy will remain on your credit report for seven to ten years.
Credit bureau (or credit reporting agency): Credit bureaus provide lenders with consumer credit reports and credit scores. Consumers can also request this information from the bureaus, often as a paid service. The three major national credit bureaus are Equifax, Experian, and TransUnion.
Credit Card Accountability, Responsibility And Disclosure Act of 2009 (CARD Act): Enacted to limit the ways in which credit card companies can charge card users, the CARD Act prohibits such actions as arbitrary interest rates increases and peddling credit cards on college campuses. It also requires issuers to consider an applicant’s income before credit card approval, among other things.
Credit check (or credit inquiry): A credit check happens when a lender, a company, or a bureau looks into your credit report and credit history. It occurs when you apply for a mortgage, open a new credit card, apply for a loan, buy a car, apply for insurance, or apply for a job. Lenders conduct a credit check to determine the likelihood that you’ll pay back a loan.
Credit report: Your credit report includes the details of your credit history, such as amounts owed on each account and any past or current derogatory marks on all accounts. Your credit report lists all of the financial information that is used to calculate your credit score. You can get your TransUnion credit report from Credit Karma.
Credit score: A three-digit numerical representation of your credit health. The key factors that influence your credit score are open credit utilization, payment history, derogatory marks, average age of open credit lines, total accounts, and hard credit inquiries. Credit scores can help a lender assess your creditworthiness and ability to pay back a loan.
Credit score algorithm: The formula credit bureaus use to calculate your credit score. Each bureau has its own, proprietary credit score algorithm and it differs slightly from bureau to bureau. However, common significant factors remain the same and all algorithms take into account details from a consumer’s credit report.
Credit utilization rate: Your total credit balance divided by credit availability. In other words, your credit utilization rate is percentage that represents how much your use your credit. For optimum credit health, this percentage should remain under 30% of your total credit limits at all times.
Creditor: A person or company that extends credit. Creditors include credit card issuers, banks, loan services, bill agencies, and any other financial service company that lends you money that you are obligated to pay back.
Debt collector: An employee of an original creditor or collection agency who tracks down debtors to get them to pay what they owe. Many debt collectors are hired by companies that are owed money. The debtors job is to track down the invidivuals who owe money, charging a fee or a percentage of the total amount of debt collected. Some are actually debt buyers, which means they purchase the debt at a fraction of what it’s worth in order to attempt to collect the full amount.
Derogatory marks: These include long-lasting negative records on your credit report, such as a bankruptcy, foreclosure, accounts in collections, and liens. They can typically take seven to ten years to clear from your credit history.
Fair Credit Reporting Act: An Act enacted in 1970 that regulates how credit bureaus maintain, share, and correct information on credit reports.
Fair Debt Collection Practices Act: Added in 1978 to the Consumer Credit Protection Act, the Fair Debt Collection Practices Act was created to help keep third party debt collectors from engaging in abusive, misleading, false, or deceptive debt collections practices.
Foreclosure: Another highly negative record to have on your credit report, a foreclosure typically happens if you’ve defaulted on mortgage payments, and other reasons you can find?. A bank or other investor in the property in question will take over the property as a result of the foreclosure. A foreclosure typically can remain on a credit report for seven years.
Hard inquiry (or hard pull): A credit check done by a lender when you apply for a loan such as a credit card, a mortgage, or an auto loan. Each hard inquiry causes a small negative impact on your credit score, so be careful not to apply for multiple loans at once.
Soft inquiry (or soft pull): A credit check that does not impact your credit score. Soft inquiries include background checks by employers, verifications of identity, and your own requests to see your credit report.