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Glossary of Credit Terms

ANNUAL PERCENTAGE RATE or APR
The yearly cost of using credit, including interest, mortgage insurance, and the origination fee, expressed as a percentage of the money owed.

AVAILABLE CREDIT
The amount of credit available before the credit limit is reached. Normally used with reference to revolving credit, it is the difference between the credit limit and the current balance.

BANKRUPTCY
The condition of being financially insolvent as defined by United States Code, Title 11. There are two common types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is a “liquidation of assets” and gets rid of all debts (except some taxes and alimony payments) at the price of a total liquidation of assets. Chapter 13 is a “wage earner repayment plan” and allows a borrower with a reliable income to pay off bills over a 36 to 60 month period. When a person files for bankruptcy, a record of the filing appears on the borrower’s credit report for up to 10 years. A bankruptcy record on a credit file severely damages the person’s credit rating—the more recent the filing, the worse the impact.

CHARGE-OFF
A debt that is declared by the creditor as being uncollectible, at least by the creditor’s internal collection procedures. However, a charged-off account is typically still “owned” by a creditor. The creditor may either continue the collection process using third party debt collectors, sell the account to a third party debt buyer, or (if the debt is greater than $600) file a Form 1099 with the IRS, reporting the debt as a “forgiven” debt (which is taxable as miscellaneous income to the debtor) and may even use a combination of these actions.

A bankruptcy filing often results in multiple accounts becoming charged-off. Charge-off s will lower credit ratings, depending upon how old it is. Also known as bad debt, charged-off account, charged-off balance, charged to loss, charged to profit and loss.

CREDIT BUREAU
A company that records a consumer’s credit history and sells it to prospective lenders to help them evaluate the consumer’s creditworthiness. Credit bureaus provide critical information used by lenders to review credit applications. Credit information is also sometimes used to make hiring and renting decisions. There are many credit reporting agencies, however the three major agencies in the United States are Equifax, Experian, and TransUnion.

CREDIT LIMIT
The maximum amount of credit issued to a consumer for a specific credit instrument. For example, a credit card may be issued with a limit of $5,000 which means that $5,000 is the maximum balance that can be obtained for that specific card.

CREDIT SCORE
A number used by lenders as an indication of how likely a consumer is to repay his/her loans. Credit scores are generated by a credit scoring model utilizing the data from a credit report.

CREDITWORTHINESS
A measure of a consumer’s past and future ability and willingness to repay his/her debt. It is usually determined by a credit scoring system based on credit history.

COLLECTION
Status that indicates that an account has been sent to a special department or an agency in order to try to collect some of the past-due money owed to a lender. Accounts are typically sent to collection when they become delinquent by 180 days (sometimes less) or more. Accounts in collection have a special mention on the borrower’s credit report (as a collection status, special comment, narrative, remarks, or collection segment ID). A collection record on a credit file typically lowers the person’s credit rating.

DELINQUENT
The payment status of accounts with a past due amount. An account becomes delinquent when a consumer either misses a payment or pays late. A payment status is assigned to the account indicating how many payments (measured 30, 60, 90 days late, etc.) The lender may increase the APR for delinquent accounts, particularly for serious delinquencies such as 90 days or more. Delinquent is the opposite of current.

DEROGATORY
A negative reference appearing on credit reports, such as public records and severe delinquencies. An account gets a derogatory status when the consumer repeatedly fails to make the required payments and the account is turned over for special handling, such as collections, charge-off, repossession, etc.

DISPUTE
 1. To question the accuracy of information on a credit profile. Disputes are allowed by federal law (The Fair Credit Reporting Act - FCRA) and are usually initiated by consumers in writing (although they may also be initiated via the credit reporting agency’s website). When the Credit Reporting agency receives a consumer dispute, the FCRA requires the dispute to be investigated with the lender.  2. To question the accuracy of a specific charge on a billing statement. Disputes are allowed by federal law (The Fair Credit Billing Act - FCBA) and have to be investigated jointly with the lender and the merchant associated with the charge. The account holder does not have to pay the disputed items until the dispute is resolved; however, he/she still has to pay the minimum payment on the rest of the bill.

EQUIFAX
One of the three national credit bureaus. Equifax Credit Information Services Inc., commonly known as Equifax, is headquartered in Atlanta, Georgia.

EXPERIAN
One of the three national credit bureaus. Experian Information Solutions Inc., commonly known as Experian, is headquartered in Orange, California.

FORECLOSURE
A legal procedure, initiated by a creditor for the purpose of selling the property, to collect on a loan in serious delinquency. Foreclosure usually refers to actions taken by a mortgage holder when three or more payments have been missed. Foreclosure is one of the types of derogatory information that appears on credit files (and will lower credit ratings).

HARD INQUIRY
A request for a credit report that generates an inquiry in the person’s credit data. A hard inquiry must be authorized by the consumer and typically is the result of an application for credit. Hard inquiries typically are made by lenders for the purpose of making a credit decision, but insurance companies and rental agencies also may make a hard inquiry. Since hard inquiries result in a new inquiry being added to the credit report, they may lower credit ratings.

HIGH RISK
A person with a low credit rating, typically someone with either limited credit history or a troubled one. Many lenders will hesitate to lend to such people, and lenders who do typically charge a hefty price for it (through APR and fees).

INSTALLMENT LOAN
Installment loans have a fixed payment schedule that borrowers agree to when obtaining the loan. Most often, monthly payments (called “installments”) are constant for the whole duration (or “term”) of the loan. Examples of installment loans are car loans, mortgages, student loans, and personal loans. The opposite of an installment loan is a revolving loan.

LATE PAYMENT
A payment received by the lender after the due date. This violates the credit contract and may result in late fees and a higher APR.

PAYMENT HISTORY
A series of numbers displaying month-by-month information for the past 24 months for each account present in the credit report. This information includes payment status, and therefore any delinquencies (both past and present) within that timeframe.

PUBLIC RECORD
Information obtained by the credit bureaus from federal, state, and local court records, such as bankruptcies, foreclosures, judgments, and tax liens. Public records are included in a special section of a credit report, and they typically lower credit ratings. Public records stay on credit reports for seven years or longer (Chapter 7 bankruptcy remains for 10 years, while tax liens vary by state).

REVOLVING ACCOUNT
A credit account that allows the borrower to pay only a portion of the balance each month, while continuing to use the account for further purchases. The balance on the account will fluctuate depending on usage, and minimum monthly payments on the account will be calculated as a small percentage (usually two percent) of the balance. Revolving accounts typically have credit limits that may not be exceeded, and interest on the balance is charged if it is not paid in full every month. Examples of revolving accounts include credit cards and department store cards. Note: The balance on the account will be zero until a purchase or cash advance is made.

REPOSSESSION
A legal procedure by which the lender reclaims the collateral property on a loan in serious delinquency. It can be initiated by the creditor or the borrower. Other legal actions may follow repossession, and a balance (referred to as a “deficiency balance”) may be charged-off as uncollectible. This information is recorded on credit reports and typically lowers credit ratings.

SOFT INQUIRY
A request for a credit report that does not generate an inquiry in the person’s credit data. This is typical of consumers requesting their own report for information purposes. Such requests cannot be used by lenders for making credit decisions.

TAX LIENS
A lien imposed on property by law to secure payment of taxes. Tax liens may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.

TRADELINE
A record in a credit report that provides information on a credit account, a public record, or an inquiry. Each credit account has its own corresponding trade line in the report, and the information provided includes payment and credit usage.

TRANSUNION
One of the three national credit bureaus, Trans Union Credit Information Company (commonly known as TransUnion), is headquartered in Chicago, Illinois.

UNPAID DEROGATORY
A broad term for derogatory payment statuses other than bankruptcies, charge-offs, collections, foreclosures, payment plans, and repossessions. An unpaid derogatory may be an account settled for less than the full balance, a workout plan offered by a lender rather than arranged through a court, or an account holder who defaulted without giving the lender a new address.

UNSECURED LOAN
A loan solely based on a consumer’s promise to repay, without a cash deposit or other collateral as a guarantee. Most credit cards are unsecured debt, which explains why the APR on credit cards tends to be higher than the APR on secured loans such as auto loans and mortgages.