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Credit Terminology Explained

When dealing with credit, there are afinancial protection where the borrower
multitude of terms that you shouldis unable to pay rent or mortgage
understand. These terms are usedpayments, has no credit or means of
frequently when dealing with credit andpaying for it, and is unable to
will help you better comprehend exactlyreconcile with collection agencies.
what is involved in your credit. ReadThere are two methods of filing for
through this credit terminology guidepersonal bankruptcy: Chapter 7 and
and educate yourself on the world ofChapter 13. A Chapter 7 bankruptcy
credit.eliminates all debts (minus taxes and
Adjusted Balance - Adjusted Balance is apossibly alimony payments) by taking all
method of calculating your creditnon-exempt property (as set forth in
balance and Annual Percentage Rate (APR)Chapter 7 filing) and converting it to
where payments and/or credits madecash to pay off debts. A Chapter 13
during the billing cycle are subtractedbankruptcy allows a borrower with a
from your balance at the end of thesteady income to pay off bills over a 36
previous billing cycle. This method isto 60-month period. Chapter 13 filing is
more advantageous to borrowers andonly available to those who have
credit card holders. Unlike Averagepredictable income and a means of paying
Daily Balance calculations, newoff their debt over the established
purchases during that billing cycle areperiod of time.
not included in Adjusted BalanceCredit Score - A credit score is a
calculations, and interest is onlystatistical calculation of the credit
applied to the balance remaining afterinformation obtained in a consumer's
payments are credited to your account.credit report. A common credit score
Amortization - Amortization is a paymenttype is the FICO score, others include
plan that allows the borrower to reduceBeacon and Empirica. They are all used
his/her debt through monthly payments ofto calculate the future probability of
principal.you repaying any loans, based on your
Annual Percentage Rate (APR) - APR ishistorical credit history.
the yearly rate lenders charge borrowersFICO - FICO is a mathematical equation
to borrow money (also called the cost ofcalculation lenders use to evaluate the
credit). Lenders must divulge the APRrisk associated with lending you money.
they are charging prior to finalizingFICO stands for Fair Isaac Company, the
the deal. Lenders can not reveal or makecompany that originally created the
changes to the APR after the lenderformula.
borrower contract has been signed.Liquidation - Liquidation is the process
However, some credit card companies andof converting assets into cash to pay
loan companies state in their agreementoff creditors. This process is used in
that they can change your APR whenpersonal and corporate bankruptcy as a
interest rates or indexes change.solution to getting out of debt with
Average Daily Balance - The Averagelenders.
Daily Balance is a method of calculationRepossession - Repossession is the
of your credit balance and interest.forced or voluntary surrender of
It's the practice of crediting yourmerchandise as a result of the
account from the day your payment iscustomer's failure to pay what is owed.
received. In other words, it's a dailyIf you purchase an item on credit and
tracking of what you owe. Whenfail to pay for it, the entity that sold
calculating the Average Daily Balance,it to you reclaims it.
the lender adds the beginning balanceRevolving Account - A Revolving Account
for each day in the billing period andis an account that requires a minimum
then subtracts any payments and/orpayment each month in addition to a
credits made to your account that day.service charge. When the balance
The end result is your Average Dailydecreases, the service charge/interest
Balance. New purchases aren'talso declines.
necessarily added to your account theCredit terminology can be confusing. If
day of the purchase, and won't show inyou're investigating credit options and
your daily balance. When the purchase iswant to know what's involved, use this
charged to your account, it affects yourguide to get you up to speed on some of
balance.the more common credit terms.
Bankruptcy - Bankruptcy is a form of



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