Credit 101: All the Terms You Need to Know

Credit 101: All the Terms You Need to Know

Credit can be confusing. We have heard some people from the credit industry and financial institutions boast that the reason they are still in business is because of how hard it is for people to understand the whole process of credit. As a starting place, we put together a Glossary of terms, a Credit 101 of all the terms that relate to your credit or could appear on your report. (Related posts: What is Credit? and Understanding Your Credit Reports)

Credit Glossary

Active Account: Activity on an active account has been reported to a credit reporting agency in the last 90 days.

Active Duty Alert: A consumer called to military duty may request this fraud alert be placed on credit reports while he or she is deployed. It helps minimize the risk of identity theft and fraud.

Annual percentage rate (APR): The yearly interest rate that your creditors and lenders charge you for borrowing money from them. Credit cards may have a different APR for making purchases, for balance transferring, and for cash advances.

Authorized User: An individual who is granted permission to make transactions on a cardholder’s account but who is not held responsible for payment.

Asset: Assets are items owned by a borrower that have cash value, like a home, car, or savings account. If used to secure credit, these may be repossessed by a lender if the borrower stops making payments on his or her debt.

Balance Transfer: The act of transferring debt from one credit card to another. Credit card users do this to take advantage of lower APRs.

Bankruptcy: A proceeding in federal court that legally releases a person from debt repayment. A bankruptcy typically remains on a credit report for seven to 10 years.

Borrower: A person who owes money to another person, financial institution, lender, or credit card company.

Charge-Off: The balance on a delinquent debt written off by a creditor or lender as bad debt. This record remains on a credit report for seven years.

Closed Account: A credit account that is inactive and can no longer be used. Either a cardholder or a creditor may close an account.

Collection Account: Accounts sent to an agency for recovery of all or a portion of debts that have been charged off.

Consumer Statement: A statement on a credit report made by a consumer that explains certain credit activity, such as a why a balance was not paid on time.

Co-signer: An individual who contractually agrees to repay a debt if the borrower does not. The account appears on the credit reports of both parties.

Creditor: A financial institution, government, company, organization or person to whom money is owed.

Credit Bureaus: Also known as reporting agencies, these institutions collect information about credit users from banks and other lenders. Credit reporting agencies compile this information into credit reports, which financial institutions use to evaluate borrowers’ creditworthiness. There are three major credit reporting agencies in the United States: Equifax, Experian, and TransUnion.

Credit Inquiry: A record of someone requesting to view your credit report. There are two types of inquiries. Hard inquiries are made when you put in an application for credit. Soft inquiries are those made by businesses you already have a relationship with, and businesses looking to send promotional offers to you. Checking your own credit is known as a soft inquiry, and does not affect your credit score.

Credit Monitoring: A service that alerts you to changes in your credit report including new accounts, new inquiries, new public records, address changes, and other important updates. Credit monitoring is often used to aid in the early detection of identity theft.

Credit Report: A compilation of your credit history. It lists your credit and loan accounts along with your payment history, credit limit, and balance information for each. Bankruptcies, debt collections, tax liens, and lawsuit judgments also appear on your credit report.

Credit Score: Typically ranging from 300 to 850, this number is determined by a borrower’s credit history. It allows lenders to assess the risk of granting credit to a borrower.

Date of Last Activity: The definition varies. On a current credit account with a zero balance, it can mean the date of the last billing statement or the date the borrower last made a payment. For current accounts with a balance greater than zero, it is the date of the last action made on the account. For an account that is in collections, it is the date of the first delinquency that led to the collection.

Debt: Money that’s owed to someone else.

Default: Nonpayment on a debt.

Delinquency: A failure to make payment by the time it’s due.

Discharge: When a court releases a borrower from debt, usually as a result of bankruptcy.

Dispute: When a consumer challenges what he or she believes is inaccurate information on a credit report.

Fair Credit Reporting Act (FCRA): A federal law that regulates the credit reporting industry. The FCRA protects consumers by requiring accurate, confidential use of credit reports. The FCRA specifies the length of time negative information can remain on credit reports, who can review credit reports, and also gives consumers the right to dispute inaccurate information on their reports. Consumers may have more rights under consumer reporting laws depending on their state.

Foreclosure: Is the legal process by which a lender seeks to reclaim property to in an attempt to recover the balance of an outstanding loan from a borrower who has stopped making payments.

Fraud Alert: An alert placed on a credit report at the request of the consumer if fraud has occurred or is suspected. If a credit grantor receives a new application for credit on a file with a fraud alert, the creditor must contact the consumer to ensure the legitimacy of the request.

Inquiries: Indications of access to a borrower’s credit report. A hard inquiry is triggered when a lender requests to see a credit report because of a loan or credit application, and it can affect the borrower’s credit score. A soft inquiry occurs when a third party requests to see a credit report for reasons other than a loan or credit application, and it does not affect the consumer’s credit score.

Installment Loan: A loan given extended to a borrower who must then repay it in equal amounts—usually on a monthly basis—over a specific period of time until both the loan and interest have been paid off.

Interest rate: When you borrow money, you will be required to pay back the amount borrowed (called principal) plus interest. The interest rate determines the cost of borrowing money and is usually indicated by a percentage. Knowing the interest rate for each of your credit cards and other loans will tell you how much those debts are truly costing you. Fixed interest rates stay the same over time; variable interest rates can change according to the terms of your loan agreement.

Judgment: A decision by a court of law that requires a person to fulfill an obligation, usually to pay a debt. Judgments are listed in the public records section of credit reports and can harm credit scores.

Lender: An institution or person who makes money available for others to borrow.

Loan: Money that must be repaid. A loan is a type of debt.

Major Delinquency: Items on a credit report, such as an account in collections or a foreclosure, which could significantly harm a credit score.

Open credit: Open credit is a type of credit that must be paid in full at the end of the billing period, and neither a finance charge nor interest is charged on the account.

Payment History: Reflects how monthly payments are made on credit accounts. Will show if payments are on-time, 30, 60, 90, 120 or 150 or more days late.

Payment Plan: A timeframe agreed upon by the consumer and creditor to repay a debt that has fallen in arrears.

Pay Status: The current status of your credit account.

Personal Information: Name, aliases, date of birth, addresses and employers listed on a credit report.

Public Records: Public records are credit report entries that are also on file with government bodies on the local, county, state or federal level. These can include tax liens, court judgments, foreclosures, repossessions and bankruptcies.

Repossession: The process by which a vehicle is returned to the lender because of the debtor’s failure to comply with the terms of the loan. There is voluntary repossession and involuntary repossession. Voluntary repossession is when the debtor agrees to return the vehicle. Involuntary repossession is when the lender takes the vehicle without permission.

Retail Account: An account which allows payments to a retail business for the purchase of goods or services on credit.

Revolving Account: A type of credit account in which credit is available up to a predetermined limit as long as a specified minimum payment is made each month. Most credit cards fall under this category.

Security Freeze: Also known as a credit freeze, this action allows consumers to restrict access to their credit file, and it’s often used as a defense against identity theft.

Settlement: An agreement between a creditor and a consumer to settle a debt for less than the amount owed. The creditor agrees to accept less than the amount owed and the consumer avoids a collection, but the settlement can remain on a credit report for up to seven years.

Skip Tracing: Skip tracing, which typically involves collecting and analyzing a large amount of a consumer’s data, may be used by debt collectors who are trying to locate a borrower in order to collect the delinquent debt.

Tax Lien: A lien filed against a consumer after he or she fails to pay taxes. A paid tax lien will generally remain on a consumer’s credit report for seven years, while an unpaid tax lien can remain on a credit report for 15 years.

Tradeline: A credit reporting agency term for credit accounts.

Truth in Lending Act (TILA): A federal law that protects consumers from unscrupulous credit billing and credit card practices. It requires creditors to disclose annual percentage rates (APRs), loan terms and costs to borrowers before extending credit.

Utilization rate: The portion of your credit limit being used (also called your credit-to-debt ratio). Your utilization rate is calculated by dividing your credit card balances by your credit limits. A high utilization means you’re using a large amount of your available credit and may result in a lower credit score.