Glossary of Debt Relief Terms
The Most Important Financial Terms Everyone Need To Know
There are so many terms used when it comes to credit counseling, debt relief, debt reduction, and finances. Knowing what the various terms mean can aide when you’re getting your finances back on track. After all, getting out of debt isn’t a subject you are taught in school. So, as you start to have problems, it becomes difficult to make the correct choices because you may not even fully understand the terminology that is being used regarding your debt and the various available solutions.
Capital Gains, Expense Ratio, Prime Rate, LIBOR, Amortization can sound like a foreign language. As with most industries, the finance world is filled with terms and acronyms that do sound alien to many people. So we’ve compiled a financial glossary of debt relief terminology, that explains important yet often confusing money concepts. These are phrases and jargon that will come in handy when investing, managing your money, or simply having a conversation about finance. Use this as a guide to basic finance concepts.
If you have questions or need help finding the right debt reduction solution, call us or complete the form to get the help you need now.
An amount of money borrowed against the accumulated cash value of a 401(k) retirement plan upon approval of the employer. The borrower will repay the loan within five years through payroll deductions. The loan carries a low-interest rate, and the interest payments go back into the retirement account. Borrowers often use 401(k) loans to pay off credit card debt.
A retirement savings plan which is sponsored by an employer and allows the employee to set aside money for retirement. Funds toward the plan are deducted from the employee’s before-tax pay, with matching contributions from the employer. The accrued funds are not taxed until the money is withdrawn.
Abstract of Judgment
This is a summary of the important requirements of a court judgment, which when recorded in the county recorders office, creates a lien upon the property of the defendant in that county. In most states, for an abstract of judgment to be obtained, you will need to wait at least ten business days after the judgment has been granted and fill out a form that has been issued by the clerk of court. You will then be required to take the form to court in the county where the defendant’s real estate is located. You are also be required to pay a filing fee before a lien is placed on the property. The lien will remain against the defendant’s property until the judgment is paid or expires. During this time the debtor or defendant cannot sell or borrow against the property until the lien is resolved.
A stipulation in a contract used in an installment note or mortgage that allows the lender to demand payment in full of the remaining balance or they may require that additional collateral be secured if a particular event occurs. Such events include failure to make payments, bankruptcy, nonpayment of property taxes, destruction of property, change of ownership without the lender’s consent, or any event that may endanger the security of the loan.
An acceleration clause is most often found in the purchase of real property and mandates if the property is sold then the entire balance of the note is due immediately, also known as a ‘due on sale’ clause. Some states prohibit “due on sale” and always allow the new property owner to assume the debt.
Add on Interest
This is a procedure where the borrower enters into an installment loan and promises to repay the principal plus interest, even though only the principal is initially disbursed to the borrower. The add-on interest is then calculated on the full amount of the loan for the entire loan period as if the borrower has made no payments. This particular amount of interest is then added to the amount that was borrowed. The lender then divides the total by the number of payments to calculate the size of each payment. Because the borrower pays interest on the full amount but has use of the total amount for only a portion of the loan period, the actual interest rate is higher than the rate that is itemized on the loan documents. This loan is also known as a flat-rate loan.
Adjusted Gross Income
This is a Federal tax term that is based upon the difference between a taxpayer’s gross income and adjustments made to that income such as deductions for an IRA account, pension plan, or alimony. These are made before standardized and itemized deductions and personal exemptions. The income used includes salary and other employment income, interest and dividends as well as long and short-term capital gains and losses and the adjusted gross income is essentially a calculation of an individual’s income tax liability.
The variable percentage a borrower pays for the use of money that may increase or decrease throughout the life of the loan. Here are some common forms of consumer loans and credit extensions that carry an adjustable interest rate:
- Home Equity Lines of Credit
- Student Loans
- Adjustable-Rate Mortgage (ARM)
- Credit Cards
The repayment of debt with prioritized installments. An amortization schedule is often used to illustrate the interest and principal payments on a home equity loan for debt consolidation. Next is an example of an amortization schedule:
Debt = $1,200; Interest rate = 15.00%; Term = 6 months
Annual Percentage Rate (APR)
The cost of carrying the balance on a loan expressed as an annual percentage. To calculate the amount owed in interest each month divide the APR by 12. For example, if the APR is 18%, the monthly rate is 1.5%. In comparing types of loans, whether it’s a fixed rate loan to a fixed rate loan, adjustable rate loan to adjustable rate loan or fixed rate loan to adjustable rate loan, there is one standard way to compare them, APRs. APRs are a way to calculate the annual cost of loans, taking into consideration loan origination fees, points, and the other associated costs.
Annual Percentage Yield (APY)
Similar to APR, but it takes into account the compound interest you would earn or pay over that year. APY includes interest you’ve already accumulated in its calculations, so it is higher than the APR. This is why banks advertise the APY for savings accounts but the APR for loans and credit cards.
This term is generally used in combination with mortgages, installment payments and other payment obligations that are due and payable on certain dates. Arrears is when a debt remains unpaid following the date of maturity. When this money is past due and unpaid, you are considered to be in arrears on that account. Once you are in arrears, you may start to be billed for late charges or finance charges. Also, you could be sent to collections or begin to see negative effects on your credit report.
A diversification strategy used in which you spread money across different types of investments called asset classes. How much you put in each class depends on your goals, risk tolerance, and timeline. Cash, Bonds, and Stocks are the three basic asset classes.
The process of selling a debtor’s assets or property to pay off creditors. This process is associated with Chapter 7 bankruptcy. At filing, the debtor provides a list of assets to a bankruptcy trustee who determines which items to sell and compensate creditors. The long-term effect of Chapter 7 liquidation is a negative mark on the filer’s credit record that exists for a minimum of 10 years.
A person’s owned possessions that carry value. Assets are often characterized by liquidity, the ability to convert to cash in a short time without loss. Here are some specific types of personal assets:
- 401(k) Account
An agreement between seller and buyer where the buyer takes over (assumes) the payments on an existing mortgage from the seller. Because this is existing mortgage debt, assuming a loan can usually save the buyer money. The word means The act of taking to or upon oneself, in other words, the assumption of an obligation, in this case, their mortgage obligation.
Average Daily Balance
The method by which most credit card providers calculate your payment owed. Your average daily balance is determined by totaling each day’s balance then dividing that total by the total of days in your billing cycle.
A term identifying a person with below-average credit resulting from default or late payments on previous debts. Bad credit can influence many aspects of a person’s life, and an increasing number of businesses are screening customers based on their credit history.
Bad Credit Debt Consolidation
A person with a low credit score obtains a loan or line of credit to replace multiple debts at a low-interest rate and monthly payment. Few financial options exist for a borrower with bad credit, so this method of debt relief can be risky and often result in additional debts incurred by the borrower.
Bad Debt Consolidation Loan
An advancement of money for someone with damaged credit to finance multiple debts. A loan issued to a borrower with poor credit will usually carry unfavorable terms and conditions, such as a high-interest rate, extended repayment term, and predefined rate adjustments.
The term used to describe items purchased on high-interest credit cards that quickly depreciate. The buyer continues to make partial payments on the credit card with interest each month, while the item loses value. The amount paid for the item continues to increase with each payment.
The total amount of money owed. Debt. It may include all unpaid balances from the prior month, new purchases, cash advances, and any charges such as interest, an annual fee, or late fee. The balance should not be confused with the monthly payment (the minimum payment allowed each month), which is generally 2% to 5% for revolving credit cards. In accounting, balance refers to the equality of totals in the debit and credit sides of an account or the difference between such totals, either on the credit or the debit side.
The process of moving a high-interest credit card balance onto another card with a lower interest rate. Consumers often use a balance transfer to consolidate multiple high-interest debts onto one card, but the low-interest rate usually lasts for a brief period.
Balance Transfer Fee
The amount charged by a credit card company to transfer your balance from one account to another. This can be anywhere from 1%-5% of the balance amount. Contact the credit card issuer for their specific fees.
A loan payment made at the end of the term to pay off the remaining balance. The payment amount is larger than other payments. During the life of the loan, the borrower makes small prioritized payments, usually monthly, until the end of the term when the balloon payment is made to eliminate the remaining sum.
A financial institution offering loans and credit to customers while holding money deposits and other valued items. Banks offer a variety of products to help consumers manage debt, such as personal loans and debt consolidation loans.
A person legally appointed by a federal court to serve the interests of creditors involved in Chapter 7 or Chapter 13 bankruptcy case. The bankruptcy court executes its mandate through the trustee, who’s responsible for ensuring the creditors receive the maximum amount of restitution.
An action pursued by debtors in federal court to relieve debts and gain protection from creditors seeking legal action. Personal or consumer bankruptcy occurs in one of two forms: Chapter 7 ( asset liquidation) and Chapter 13 (debt adjustment).
- For people with large debts and no to low income
- Remains on credit record for ten years
- For people with regular income
- Filer enters a debt repayment plan
- The plan lasts three to five years
Chapter 11 Bankruptcy
Chapter 11 Bankruptcy, used in business, is also known as business reorganization. A Chapter 11 bankruptcy is a tool used by commercial enterprises allowing them to continue doing business while repaying creditors through a court-approved payment plan. Individual consumers do not commonly use chapter 11 bankruptcy because it is far more complex and expensive to achieve. However, an individual consumer may file for Chapter 11 bankruptcy if their debt exceeds the legal limitations placed upon a Chapter 13.
A term describing the person entitled to receive assets and proceeds from a life insurance policy, retirement plan, will or trust. The amount beneficiaries receive from a whole life insurance policy can be negatively affected by debt consolidation when the policyholder taps into the funds to pay off debt.
The time between billing statements, usually 28-31 days.
A monthly, itemized, printed record prepared by financial institutions which list all transactions for a specific account. The record will include deposits, withdrawals, checks, electronic transfers, fees and other charges, and interest credited or earned. The statement is usually mailed or emailed to the customer.
The person who obtains a loan or is granted a line of credit from a lender or creditor while accepting the liability of repaying the debt in full. The goal of the borrower, whether seeking a loan to buy a car or relieve debt, is to receive the best possible repayment term and the lowest interest rate.
A person who acts as an intermediary between a buyer and seller of securities. Also, a person who accepts a fee to help a buyer obtain sufficient insurance coverage. An investment broker can also be a lender for borrowers who hold securities in a margin account, lending a margin loan.
The process of paying off indebtedness in full by installments of principal and earned interest over a definite time. In other words, a buydown is a cash payment made by any party to reduce a borrower’s monthly loan payment. You can buydown credit card debt, a mortgage, car payments, or student loans.
An option that allows the issuer to reclaim securities before maturity. This option often repels investors from taking out a margin loan to finance debt consolidation. The investor may need to deposit more money into the margin account to make up for the reduced value if the market value of the securities declines or the broker will demand a margin call and take control of the funds.
Cancellation of Debt (COD) Income
When debt is canceled, you may have tax consequences. This is known as COD (Cancellation of Debt) Income. The discharge of indebtedness must be included in a taxpayer’s gross income. There are exceptions, so a thorough examination of the COD income is important to determine any potential tax consequences. Note that not all COD income is considered gross income. There are several exceptions if the discharge of indebtedness occurs when the taxpayer is insolvent.
Capital Gains and Losses
Sold an asset for more than the original purchase price? It’s called a ‘capital gain.’ When you sell it for less than the original purchase price, it’s a ‘capital loss.’ The IRS taxes capital gains but lets you deduct capital losses on your tax returns.
Car Title Loan
An advancement of money that uses the borrower’s automobile as collateral against repayment. These loans often carry unfavorable repayment terms and expensive interest rates. Car title loans can be a form of secured debt consolidation, although the interest rate, near 25 percent, is often higher than the rates charged on credit cards.
A cash loan from a credit card using an ATM or bank withdrawal.
Cash Advance Fee
The amount the card issuer charges the customer for accessing cash on their credit line in lieu of credit, either through an ATM, convenience check or at a bank’s teller window. The fee is typically 3% of the amount withdrawn, with a minimum dollar amount charged for smaller transactions. Finance charges typically accrue from the date of the advance, typically at a higher rate and without a normal grace period as with purchases.
The restructuring of a mortgage loan for a larger amount than the remaining sum. The difference is cashed out by the borrower. A popular method of paying off multiple debts, a cash-out refinance converts unsecured credit card debt into a secured loan using the debtor’s real estate property as collateral.
Certificate of Deposit (CD)
A certificate issued by a bank on a time deposit of a certain amount of money. A CD accrues interest over a specified term, and fixed maturity date, similar to a savings account but with higher interest and penalties for early withdraw.
The chapter of the bankruptcy code involving the adjustment of debts to allow the debtor to repay creditors over a three- to five-year period. Debtors who don’t qualify for Chapter 7 are transferred to Chapter 13 bankruptcy.
- Remains on credit record for seven years
- Filer enters a debt repayment plan
- Must direct all disposable income toward creditors
- Filer’s income determines the amount paid on debt
The chapter of the bankruptcy code that liquidates assets of a debtor to pay off creditors and discharge debts. Below lists some of the key points involved in a Chapter 7 bankruptcy case:
- Remains on credit record for ten years
- Proceeds from liquidation given to creditors
- Allowed to file once every six years
- Strict rules to qualify must pass the “means “
A charge off is an uncollectible credit card debt or loan that the lender removes from their active receivable accounts. A charge off may also be known as a bad debt. However, the consumer will still be responsible for paying the charge off, and they may have to deal with collection efforts from third-party agencies. Charge-offs will appear as an expense on the lender’s income statement, thus reducing their net income. However, most companies will generally make a charge off allowance in their prospective financial analysis due to constant law changes and the fact that any of their borrowers may experience unforeseen circumstances that may keep them from making payments. This way if the lender does not receive payment in full, they have at least already included an estimate of those charge off expenses that may be incurred in their estimated earnings. If one of your debts are charged off, it will negatively affect your credit report.
An advancement of money at a fixed amount in which the borrower agrees to repay the entire principal and interest over a predetermined period. Payments are made in fixed installments, and the credit may be secured or unsecured.
A valuable asset or property pledged by a borrower as security against repayment of a debt. If the borrower falls behind on the payments or does not repay the debt, the lender receives ownership of the asset. Secured loans use collateral as insurance against repayment.
A financial institution that provides services to the general public, both consumer and business, such as loans, credit cards, and various deposit accounts. Commercial banks offer their services to all people, unlike other financial institutions, such as credit unions which require membership before eligibility.
One of the most prevailing forces in the financial universe, interest on interest. Compound interest is the addition of interest to the principal sum of a loan or deposit which can cause you to quickly become buried under debt, or make you richer while you sleep.
An advancement of money to pay off a combined debt amount, replacing multiple debts with one large loan. Lenders offer specialized consolidation loans to help borrowers pay off debts. However, these loans often carry high-interest rates and extended repayment terms.
Consumer Credit Counseling Service
An agency that offers debt management services to help people repay debts while working on behalf of creditors. The service aims at getting the debtor to repay all debts in full. The service also provides educational tools to assist people with debt.
A loan or line of credit granted to a consumer to purchase goods and services. Consumer credit can occur in several different forms including open-end credit, installment loans, closed-end credit and single-payment loans.
Financial obligations or liabilities for personal, not business, needs, including credit cards, personal loans, and real estate mortgages. The consumer signs a written agreement upon receiving the loan to repay the amount with interest.
Another person or individual other than the borrower who signs for a loan or promissory note and assumes equal liability for it. This is also referred to as a co-maker. In many cases, the cosigner signs for a borrower who does not have collateral or good credit history. The cosigner guarantees via their own credit and or income, that the loan will be repaid if the borrower fails to make payments. They are required to go through the same approval process as the original signer of the loan.
An agency that compiles credit history data on consumers to provide creditors with risk information on potential borrowers. Bureaus are responsible for creating credit reports on individual consumers that interpret spending habits, credit availability and various financial inquiries. Below is a list of the three major credit bureaus where you may obtain your credit report and score:
A plastic card carrying a revolving balance that allows cardholders to use the money for goods and services. A credit card carries a credit limit, the maximum amount of money extended to the cardholder. The interest rate on a credit card is based on the cardholder’s credit record and the prime rate.
Credit CARD (Card Accountability, Responsibility, and Disclosure) Act of 2009
Includes several consumer protections such as credit card issuers must notify cardholders of rate increases at least 45 days in advance; banned the act of double-cycle billing (charging interest on both the current balance and the prior month’s balance); and limited or banned various consumer fees, including unwarranted penalty charges and over-the-limit fees.
Credit Card Debt Consolidation
A debt-relief method that combines multiple credit card debts into one debt with a lower interest rate. The new debt often carries small monthly payments for an extended term, and the consumer benefits by dealing with one debt instead of multiple debts.
A debt-relief service provided by an agency who works to lower the interest rate and fees on credit cards. These credit counseling agencies are compensated by creditors to get consumers to repay their debts in full, and the program does not offer any reduction in the principal debt amount, only in fees and interest.
Credit Debt Consolidation
A debt-relief process that combines different credit debts into one manageable solution to help pay off debt faster and easier. When consolidating credit debt, the debtor obtains a loan and directs the proceeds to pay off all debts, transforming numerous creditors into one lender.
Refers to placing a security alert on credit accounts or directly at the credit bureaus to prevent any additional charges or new accounts to be set up without the customers consent.
A detailed record of a person’s ability to repay debts, along with data on borrowing tendencies. A person’s credit history illustrates his or her past performance on financial obligations, such as credit cards, loans and utility bills. Here is some information that might appear on someone’s credit history for a specific account:
- Origination date
- Type of account
- Unpaid amount
- Payments made
- Credit limit
- Account status
Credit Life Insurance
A version of insurance sold by affiliates of credit card issuers that can repay the outstanding card balance in the event of the death of the primary card member.
How much total money can be charged to a credit card account, for example $5,000 (also known as a credit line).
The limit or maximum amount of available funds on a credit card. The limit is set based on the cardholder’s credit score. Some credit card companies will increase a cardholder’s line as a reward for good payment performance.
A record of financial obligations about a person, including payment histories, outstanding debts and available credit. Every consumer is entitled to a free copy of his or her credit report. The three major credit bureaus – Equifax, Experian and TransUnion – offer personal credit reports.
A number that reflects a person’s credit history used by lenders to assess risk and creditworthiness. One’s credit score is affected by spending and repayment habits.
A nonprofit financial institution offering similar services as a commercial bank and operated as a cooperative, owned and controlled by the people who use its services. Credit unions are known for offering low interest rates on loans and high rates on savings accounts.
Credit Utilization Rate
It is the amount of outstanding balances on all credit cards divided by the sum of each card’s limit, and it’s expressed as a percentage. It has the second biggest factor influencing your FICO score.
The promise by a borrower to repay a lender in the future in order to buy or borrow in the present. The right to defer payment of debt. When the item of value is money, the agreement is often called a loan . When the item of value is a product, the purchaser will buy it “on credit.” The repayment usually has interest attached. Credit can also be slang term used to describe one’s FICO score or credit worthiness. If someone has “poor” credit, they may not qualify for a loan. Conversely, if you have “very good” credit, or A Credit, you may qualify for a loan and have very low interest rates to repay. The worse one’s credit, the higher the likelihood that they will be turned down for a loan or be forced to pay a higher interest rate. Credit may involve a closed-end loan extension or an open-end revolving balance. Below lists several examples of the two types of credit:
- Credit Card
- Retail Store Card
- Personal Loan
The risk level of a borrower, as viewed by a lender. Borrowers likely to make timely payments on debt are considered a better risk by lenders.
A type of payment card used for transactions carrying one of the major association brands that is linked directly to a customer’s bank demand deposit account. ATM and some point of sale transactions require input of a four digit personal identification number, while other transaction may require a customer’s signature. Debit card transactions don’t involve credit, but rather transfer money directly from the customer’s checking account to pay for the product or service involved.
Debt Arbitration is the process of hiring a third party or an arbitrator to take old bills, invoices, lawsuits, liens, medical bills, utility bills, and judgments, and then negotiate an out-of-court settlement. A successful Arbitrator will reduce the debt by 40% to 60%. Unlike an attorney, the debt arbitrator does not charge an hourly rate that could be as high as $200 to $300 an hour to work your case, and sometimes more if there are court appearances. And unlike a credit counselor, a Debt Arbitrator works for you and is independent. A counselor is supported mainly by the credit card companies.
Debt Consolidation Loan
An advancement of money to pay off financial liabilities and transform multiple debts into one loan at a reduced interest rate and monthly payment.
The process of combining multiple debts into one large debt to lower interest charges and create a more manageable budget by dealing with only one lender. This process usually extends the repayment length to reduce monthly payments.
A plan created to help a consumer pay off debts and sustain financial responsibility. Debt management programs may, but do not always, include debt negotiation, budgeting and financial counseling.
The process that takes place between a creditor and debtor, or an agency representing the debtor, to settle on a repayment amount less than the initial balance.
Debt reduction is the process of reducing the face value of your outstanding debt. There are several different means of debt reduction. There are many available options for debt reduction. The most common debt reduction options are: Continue to make minimum payments, credit counseling, home equity loans, debt arbitration (also known as debt settlement), and bankruptcy. Each debt reduction option has its strengths and weaknesses, and its effectiveness depends on your individual financial situation.
A solution to handle multiple debt obligations. This solution occurs with three basic kinds of debt relief: debt consolidation, debt settlement and credit counseling.
A firm that specializes in resolving debt problems on behalf of its customers. These companies may be called debt consolidation firms, debt settlement firms or debt management firms.
Total cash payments due on outstanding loans covering interest charges and principal due. Your debt service is the amount of money you have to pay each period (month/year) to make your loan payments. Debt Service is usually comprised of the total amount of credit card, auto, mortgage or other debt upon which you must pay. When a company or individual is “overextended”, it often means they cannot afford to service their debt.
A debt-relief method provided by a third-party firm who acts on behalf of debtors to help resolve debts by working with the creditor and client to settle the debt. Creditors agree to waive part of the debt and accept the remaining sum as full repayment.
The amount of available credit a person has on all credit lines compared to the amount of outstanding debt. High ratios indicate more risk to lenders.
The portion of one’s debt as compared to the amount of one’s income.
Money a borrower owes to a lender. Every card that has a balance (meaning you got a bill this month.) A person can incur debt from many different sources, such as credit cards, department store cards and loans. Debt is typically classified into two categories: secured and unsecured. A debt is secured when the debtor’s asset may be controlled by the creditor if the debtor fails to make payments. An unsecured debt does not use collateral and carries a higher interest rate than secured debt because the creditor takes on more risk. Some examples of secured and unsecured debts:
- Credit cards
- Personal loans
- Medical bills
- Student loans
- Overdue utility bills
- Car loans
- Retirement funds
- Title loans
- Margin loans
A person who owes money. Debtor’s include those who borrow money for home mortgages and car loans, as well as those who’ve accumulated credit card debt.
A “deficiency balance” is the difference between what the creditor lent you and what you owe on the loan. An example of a deficiency balance is: if you were to have an automobile repossessed, you will still owe the difference between what the car was worth and the amount of the loan. However if they auction your car you will be responsible for the difference between the loan and the amount they were able to collect on the car. Even though you do not have the car, you will have to pay the balance or risk legal action.
The failure to fulfill financial obligations on a loan, credit card or any debt security. A mark on a person’s credit report as an indication of bad credit.
An overdue payment, or failure to repay a financial liability. The delinquency appears as a negative item on a credit report.
Discharge of Debts
The cancellation of a consumer’s financial liabilities that occurs through bankruptcy.
The portion of personal income that can be spent at the person’s discretion. In general, the greater one’s income, the greater their availability of disposable income. Disposable income is not necessarily spent frivolously.
A method used by creditors, usually credit card companies, to calculate the amount of interest charged for a given billing period. Double-cycle billing takes into account not only the average daily balance of the current billing cycle, but also the average daily balance of the previous period. Double-cycle billing can add a significant amount of interest charges to customers whose average balance varies greatly from month to month.
The dollar difference between the fair market value of an asset and debts claimed against it.
An account in which the assets are held by a third party until specific conditions or repayments are met.
Fair Credit Reporting Act (FCRA)
There are three major credit bureaus in the U.S.: Experian, Equifax, and TransUnion. The FCRS is a law enacted in 1970 to ensure “accuracy, fairness, and the privacy of personal information” by the credit bureaus. It regulates not only what can be reported but also how long negative information can remain in a consumer’s credit report.
Fair Debt Collection Practices Act (FDCPA)
This act was passed by Congress in March 1978 and designed to prohibit “abusive, deceptive, and unfair debt collection practices.” It is the law which protects consumers from excessive phone calls, abusive language, threats of violence, and contact at inconvenient times.
Federal Reserve System (The Fed)
The central bank of the United States, often referred to as the Fed, conducts monetary policy through regulation in the supply of money.
Your FICO Score is a three digit number ranging from 300 to 850 and is calculated by a mathematical equation that evaluates many different types of information on your credit report. This credit score was developed by Fair, Isaac and Company, Inc., and was designed to predict the possibility of a borrower becoming seriously delinquent on their credit obligations. Credit bureau scores, referred to as FICO scores, are based solely on information found in consumer credit reports. The credit bureaus use Fair, Isaac’s software to calculate a score from your credit bureau information. Once the score is calculated, it is returned to the person or entity who has requested the information. Higher FICO (740 and above) scores represent lower credit risks, which typically equate to better loan terms.
A person who filed for bankruptcy.
The total dollar amount paid to get credit. This is a total of all the costs imposed directly or indirectly by the creditor and payable either directly or indirectly by the customer, as defined by the federal Truth-In-Lending laws. A finance charge includes the following types of charges required by card issuers: interest, transaction fees and service fees.
A business that specializes in lending financial commodities to individuals, often with bad credit or no credit, and does not take deposits like a commercial bank.
A situation that has caused financial turmoil. For example, if a person goes through medical treatment has no insurance, and then has to take a 50% cut in pay, he or she has experienced a financial hardship. Underemployment, job loss, medical, divorce, death, increase in interest rates, fixed income; all qualify as hardship if expenses are more than current income. If you have become monetarily insolvent, then you have a legitimate financial hardship.
A company or enterprise that performs financial tasks, such as holding deposits, issuing loans or investing in securities, for consumers, businesses or the federal government.
A financial statement is a written record that is used by third parties to evaluate a consumer’s financial health. Included in the statement, you will find a record of all the monies received into your account as well as monies you have paid out. The document will outline your assets, income, expenses and debts to allow a third party to evaluate the information in order to determine your financial stability. A financial statement may also include a balance statement, income statement, tax return, or any other statement of finances.
The initial loan on a property that has precedence over all other debts on the property.
A predetermined percentage of interest applied to the principal on an extension of credit.
A debt-relief agency that does not receive subsidies or compensation from credit card companies to help customers relieve debt problems.
The procedure that occurs when a mortgage lender gains ownership of a property after the homeowner failed to make proper payments.
An investment that generates value, such as a mortgage or student loan.
Acronym for home equity line of credit.
Home Equity Debt
A loan or line of credit secured by the borrower’s home.
Home Equity Line of Credit
A revolving credit line offered by lenders allowing homeowners a second mortgage that uses the homeowner’s equity as collateral.
Home Equity Loan
An installment loan secured by the accumulated equity of the borrower’s home. A form of closed-end credit featuring a fixed interest rate, monthly payment and term.
The value of real estate calculate by the market value of the home minus the amount of unpaid mortgage.
A taxpayer is insolvent when their total liabilities exceed the fair market value of assets. For example, if a taxpayer has $100,000 in liabilities, but only $50,000 in assets, they are considered insolvent under the Internal Revenue Code. Therefore, a cancellation of a $20,000 debt will not need to be reported as gross income. However, if a debt of $60,000 was cancelled, the taxpayer will have $10,000 in gross income because their total liabilities no longer exceed their total assets (cancelling $60,000 in debt means the taxpayer now has only $40,000 in liabilities).
An extension of money arranged to allow borrowers to repay the principal and interest in equal payments over a fixed term.
A percentage charged by a lender for borrowing money.
The cost of borrowing money, usually expressed as a percentage rate.
A low interest rate carried by a credit card for an initial period, usually three months.
The excessive and unnecessary costs charged by credit card companies or personal loan lenders.
A retirement plan for a self-employed individual who can deduct contributions from taxable income.
A rental agreement.
A company that provides loans to customers.
A financial obligation.
LIBOR is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market).
A legal claim on a property that acts as a security for the payment of a debt. If the debt is not repaid as agreed, the lender or the lien holder can foreclose its claim on the property and force a public sale to pay the debt. You cannot sell the property without paying off the creditor. This is because the lien makes the “title” (history of ownership) cloudy and a new owner will not buy under those conditions.
Life Insurance Loan
An amount of money borrowed against the accumulated cash value of a whole life insurance policy.
Line of Credit
A revolving money balance issued by creditors to borrowers up to a specific limit.
The selling of assets to use the proceeds to pay off debts.
A legal proceeding in a court or a judicial contest to determine and enforce legal rights. To contest in law; to prosecute or defend by pleadings, exhibition of evidence, and judicial debate in a court. Some creditors use litigation as a form of legal action to recover a debt. Litigation is most often used as the final remedy after all other collection efforts have failed. Litigation is an option but it may not be a cost-effective solution on low-balance accounts.
The process of combining multiple loans into one large loan to reduce interest and payments.
The repayment time a borrower has to repay a loan.
The ratio of money borrowed against a secured asset to the market value of the asset.
The borrowing of a sum of money for a temporary period.
Low-Interest Credit Card
A revolving line of credit that carries a lower interest rate than most credit cards either for an introductory period or throughout the life of the credit.
A large one-time payment or distribution of money.
An extension of money borrowed against the cash value of securities held in a margin account at a brokerage firm. The loan is often used for paying off debts.
An income-based test required for Chapter 7 bankruptcy filers.
An adjustment of the remaining amount on a loan to secure a low interest rate, extend the payment term or increase the amount borrowed.
A secured loan that uses real estate as collateral against repayment. The lender can seize possession of the property if the borrower defaults on the payments.
A mark on a credit report from default or delinquency that decreases the credit score.
A person who talks with a creditor on the debtor’s behalf in order to obtain a settlement. Negotiators have many different means of negotiation. You can hire a Negotiator for many different reasons. Generally a negotiator is hired anytime you are entering into or trying to get out of a contract.
A person’s income minus expenses.
Net worth is your most important measurement of wealth. It’s the difference between your assets (things that are worth money like savings, investments, paid off homes, etc.) and your liabilities (your debts like mortgage, auto payments, etc.). It’s a better guage of your financial status than your income.
Loans to people with No Income, No Job or Assets. These products contributed to the boom in the housing industry in 2005, as more consumers qualified for mortgages under poor lending standards. The loans also played a key role in the ensuing subprime mortgage slump.
A debt-relief agency funded through credit card companies and consumer fees that helps customers repay debts in full.
A revolving line of credit that borrowers may use repeatedly.
Anytime you are not paying the minimum balance on your credit cards you have an open delinquency. This open delinquency will appear on your credit report until the debts are satisfied either by payment in full or settlement. An open delinquency can also be satisfied by making the payments that have been missed to bring the account current.
The principal amount of a loan excluding interest and other charges.
Overdraft Checking Account
A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft. Example: If you were to write a check for a credit card payment of $500.00 and you only have $400.00 in your checking account the bank would “cover” the $100.00 you don’t have but you would then be charged an overdraft fee plus the $100.00.
Pawn shop loan
A small, short-term extension of money by a pawnbroker for a variety of merchandise, such as tools, electronics and jewelry.
An advancement of money in exchange for a personal check the lender holds until payday, when the borrower can redeem the check, allow the lender to deposit it or write another post-dated check to cover the original amount plus a new fee.
Personal Line of Credit
A revolving line of credit used for consumer services, as opposed to business expenses.
A small, closed-end loan issued to consumers that is not secured by collateral.
A person who pays a premium in exchange for coverage by an insurance policy.
Power of Attorney
A power of attorney is an authorization to act on someone else’s behalf in a legal or business matter. The person allowing the other party to act is the “principal” and the party authorized to act is referred to as the “agent”. The power of attorney allows the agent to act on the principal’s behalf as long as the principal is not disabled or incapacitated. In debt negotiation, the principal is the client and signs a “limited’ power of attorney that allows the debt arbitrator or agent, to negotiate on their behalf with their creditors.
The process used by creditors and lenders to qualify borrowers for an extension of credit or a loan without a credit check or any other screening method.
When lenders mislead borrowers to obtain expensive and abusive loans that carry high interest rates and excessive fees.
The standard interest rate on loans set by banks in relation to the Fed Funds rate, the rate at which banks lend money to each other.
The initial amount of a debt excluding interest and other fees.
An approval process for a debtor who is attempting to obtain an unsecured loan or file for Chapter 7 bankruptcy in which the debtor is subject to an income-based test called the means test.
Consumer debt that consistently occurs, such as credit card debt, and fails to be paid off.
The restructuring of a mortgage amount and term to seize a low interest rate or cash out equity.
Under Reg Z, credit card issuers are required to disclose the terms and conditions to potential and existing cardholders at the point of account opening and at regular intervals. Upon soliciting and opening new credit card accounts, credit card issuers must generally disclose key information relevant to the costs of using the card, including the applicable interest rate that will be assessed on any outstanding balances and several key fees or other charges that may apply, such as the fee for making a late payment. In addition, issuers must provide consumers with an initial disclosure statement, which is usually a component of the issuer’s card member agreement, before the first transaction is made with a card. The card member agreement is the governing document for the account and provides more comprehensive information about a card’s terms and conditions than would be provided as part of the application or a solicitation letter.
An arrangement set up for consumers to pay off debts over a specified period with fixed monthly payments.
The seizure of property after a borrower fails to make payments. Loans that are secured with collateral, such as car loans and home mortgages, include a risk of repossession.
Retirement Fund Loan
Money borrowed against the accumulated cash value of a retirement plan.
An available amount of money borrowers can pay off and use again that does not carry a fixed repayment schedule but only minimum payments.
Savings and Loan Association
A depository institution, also known as a thrift, that provides loans and mortgages, along with other similar services as commercial banks.
A home equity loan or home equity line of credit. An extension of money backed by a home’s equity that is second priority to the first mortgage.
Secured Credit Cards
A line of credit that equals an amount deposited by the cardholder as collateral.
Secured Debt Consolidation Loan
A loan backed by collateral that a borrower uses to pay off creditors by converting multiple debts into one secured debt.
An extension of money, or loan, a borrower obtains using collateral as security against repayment.
The creditor’s right to take property or a portion of property offered as security. A Security Interest is secured by either a security clause in a contract, or by a lien on property. If you have a JC Penny charge card, you are in a secured contract with the bank which issues the JC Penny charge card. If you have a title loan on your car, the creditor has a security interest in the car title until the bill is paid. This means that if you were to default on your car loan they would come and repossess your car.
An agreement between a creditor and debtor on a reduced amount of debt to be repaid.
A specific amount of money borrowed for a fixed period that entails one large payment at the end of the term instead of smaller monthly payments.
The date on which a statement is generated, and the month’s finance charges (interest) are added to the balance. This date is the end of the billing cycle. This is not the date the bill is due. You will receive your statement on or around the same date each month. If you need to make adjustments to your statement date all you need to do is contact your creditor and make arrangements.
A person with a low credit score resulting from late or default payments on previous debts. Lenders label these borrowers as risky business options and charge them higher interest rates. Borrowers are often considered subprime when their credit score is less than 620.
A mortgage loan issued to a homeowner with a damaged credit history and low credit score. The mortgage lender levies high interest rates that often adjust above the borrower’s ability to make payments, resulting in default and foreclosure.
A category used to identify financial operations involving borrowers with damaged credit histories and low credit scores.
An expense that a taxpayer may subtract from income tax payments. Charitable contributions are an example of a tax-deductible expense.
A low interest rate used by credit card companies to entice new customers, but the low rate exists for only a brief introductory period.
A loan the borrower repays in its entirety at the end of the term in one large payment, also known as a single-payment loan.
The life or time to maturity of a loan or deposit.
Third Party Firm
A company that acts as a middle man between a creditor and a debtor in a repayment plan.
A term referring to savings and loan associations and credit unions.
An extension of money against the ownership right of property, such as a car or boat title.
The procedure of moving a balance to another account. Many credit lenders will allow you transfer your credit card balance from one card to another.
The balance computation method used by some issuers that allows them to apply interest charges to two full cycles of card balances, rather than the most recent billing cycle’s balances.
A revolving line of credit not backed by collateral. Most credit cards are are a form of unsecured credit.
Unsecured Debt Consolidation Loan
An advance of money not backed by an asset for the purpose of replacing multiple debts with one loan at a lower interest rate.
A financial obligation that is not guaranteed by the pledge of any collateral. Most credit cards are a form of unsecured debt.
A lump-sum distribution of money that involves no collateral. Unsecured loans are usually personal loans, such as loans given by a bank or other lending institution.
The lending of money at exorbitant interest rates. Usury rates set by state law once capped credit card rates; fort the most part, they no longer do so. The concept of usury has largely been made irrelevant by federal law. Federal lawmakers decided to allow card issuers to “export” their rates. That means that the state law that applies to your credit card rate is exported from the home state of the card issuer, and major card issuers locate where usury laws have been repealed.
Variable Interest Rate
A fluctuating percentage rate a borrowers pays for the extension of money.
The process performed by a creditor in a debt settlement program to cancel a portion of the debt owed by a borrower.
Whole Life Insurance
A protective contract that issues funds to the beneficiary upon the death of the policyholder and accumulates cash value, allowing the policyholder to borrow against the amount to finance debt consolidation.
The percentage rate of return on an investment. The amount or quantity produced or returned.
The appearance on a consumer’s credit card bill when all debts have been paid off. Consumers begin their credit cards with zero balances.
Zero-Interest Credit Card
A revolving credit line that accrues no interest for a specified introductory period, usually three months.
A consumer liability in the form of an old debt that stays dormant for years only to revisit and haunt the consumer. The term “zombie” describes the debt as dead and forgotten until bill collectors start calling to collect it.