Credit Terminology Explained

When dealing with credit, there are a multitude ofBankruptcy - Bankruptcy is a form of financial
terms that you should understand. These terms areprotection where the borrower is unable to pay rent or
used frequently when dealing with credit and will helpmortgage payments, has no credit or means of paying
you better comprehend exactly what is involved infor it, and is unable to reconcile with collection agencies.
your credit. Read through this credit terminology guideThere are two methods of filing for personal
and educate yourself on the world of credit.bankruptcy: Chapter 7 and Chapter 13. A Chapter 7
Adjusted Balance - Adjusted Balance is a method ofbankruptcy eliminates all debts (minus taxes and
calculating your credit balance and Annual Percentagepossibly alimony payments) by taking all non-exempt
Rate (APR) where payments and/or credits madeproperty (as set forth in Chapter 7 filing) and
during the billing cycle are subtracted from yourconverting it to cash to pay off debts. A Chapter 13
balance at the end of the previous billing cycle. Thisbankruptcy allows a borrower with a steady income
method is more advantageous to borrowers andto pay off bills over a 36 to 60-month period. Chapter
credit card holders. Unlike Average Daily Balance13 filing is only available to those who have predictable
calculations, new purchases during that billing cycle areincome and a means of paying off their debt over the
not included in Adjusted Balance calculations, andestablished period of time.
interest is only applied to the balance remaining afterCredit Score - A credit score is a statistical calculation
payments are credited to your account.of the credit information obtained in a consumer's
Amortization - Amortization is a payment plan thatcredit report. A common credit score type is the FICO
allows the borrower to reduce his/her debt throughscore, others include Beacon and Empirica. They are all
monthly payments of principal.used to calculate the future probability of you repaying
Annual Percentage Rate (APR) - APR is the yearlyany loans, based on your historical credit history.
rate lenders charge borrowers to borrow money (alsoFICO - FICO is a mathematical equation/calculation
called the cost of credit). Lenders must divulge thelenders use to evaluate the risk associated with lending
APR they are charging prior to finalizing the deal.you money. FICO stands for Fair Isaac Company, the
Lenders can not reveal or make changes to the APRcompany that originally created the formula.
after the lender/borrower contract has been signed.Liquidation - Liquidation is the process of converting
However, some credit card companies and loanassets into cash to pay off creditors. This process is
companies state in their agreement that they canused in personal and corporate bankruptcy as a
change your APR when interest rates or indexessolution to getting out of debt with lenders.
change.Repossession - Repossession is the forced or
Average Daily Balance - The Average Daily Balancevoluntary surrender of merchandise as a result of the
is a method of calculation of your credit balance andcustomer's failure to pay what is owed. If you
interest. It's the practice of crediting your account frompurchase an item on credit and fail to pay for it, the
the day your payment is received. In other words, it's aentity that sold it to you reclaims it.
daily tracking of what you owe. When calculating theRevolving Account - A Revolving Account is an
Average Daily Balance, the lender adds the beginningaccount that requires a minimum payment each month
balance for each day in the billing period and thenin addition to a service charge. When the balance
subtracts any payments and/or credits made to yourdecreases, the service charge/interest also declines.
account that day. The end result is your Average DailyCredit terminology can be confusing. If you're
Balance. New purchases aren't necessarily added toinvestigating credit options and want to know what's
your account the day of the purchase, and won'tinvolved, use this guide to get you up to speed on
show in your daily balance. When the purchase issome of the more common credit terms.
charged to your account, it affects your balance.