Terms You Should Know

Annual Percentage Rate – The interest rate which reflects all of the costs of financing. This rate will probably be higher than the original interest rate quote because it includes all of the other costs of getting credit, such as loan fees.

Bad Credit – A term used to describe a poor credit rating, usually a credit score below 650. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. “Bad Credit” can result in being denied credit.

Balance – The total amount of money owed. It includes any unpaid balance from the previous month, new purchases, cash advances, and any charges such as an annual fee, late fee or interest.

Collateral – Property that is offered to secure a loan or other credit and becomes subject to seizure on default. (Also called security.)

Credit History – A partial profile of your financial life, given within a particular time frame (usually measured in years). Your credit history shows the extent to which you pay your bills on time and how much you owe.

Credit Report – A report that displays a person’s credit history. A lender orders this report from a credit bureau when you apply for credit and often make their decision on issuing credit based on the credit score.

Credit Score – A score ranging from 300 to 900 which reflects the credit worthiness of a borrower. The score is determined by payment history, credit ratio, length of credit history, types of credit and credit inquires.

Debt to Income Ratio – A ratio that is computed by dividing the amount of total debt by the total income. Lenders use a debt to income ratio to help them determine an applicant’s capacity to repay a loan.

Finance Charge – Interest and fees billed to you on your statement for using the credit.

Minimum Payment – The lowest amount of money that you are required to pay on your credit card statement each month. Usually this payment is 3% – 5% of your current balance.

Secured Credit – This type of credit requires that you provide something of value to guarantee repayment (i.e car loan, boat loan, mortgage loan).

Unsecured Credit Cards – Credit cards that are not secured by collateral. Customers qualify for such cards based on their credit history, their financial strength and their earnings.