An Overview of Common Credit Terminology

By Tiffany Sorensen

Experts in the credit industry use technical terms that are often puzzling to outsiders. Below you’ll find straightforward explanations, as well as sample sentences, for terms regarding credit cards, credit reporting, and loans.

  1. Amortization

The process of paying back money in installments and according to a fixed payment schedule.

Amortization affords Tom the comfort of a predictable monthly payment.

  1. APR (Annual Percentage Rate)

The yearly total cost for borrowing money, including all fees, finance charges, and other costs involved with a loan.

One of the incentives the car salesman mentioned was low APR financing on select Ford models. 

  1. Bankruptcy

A legal state in which a person or business is excused from outstanding debts due to a proven inability to pay.

The restaurant owners filed for bankruptcy on account of financial hardship.

  1. Collateral

Assets that can be seized by lenders in the event a borrower defaults on payments.

Tom’s Corvette and beach house in the Hamptons act as collateral.

  1. Collection

A state describing a delinquent account that has been turned over to a professional agency for payment acquisition purposes.

Because Tom was quite behind on his payments, his account is now in collection.

  1. Cosigner

One who signs for another person’s debt and is responsible for that debt should the principal signer default.

As a result of his son’s poor credit score, Mr. Callahan decided to be the cosigner of Tom’s lease. 

  1. Credit Bureau

A for-profit company that issues credit scores to represent consumers’ creditworthiness. Other responsibilities of credit bureaus include maintaining financial records and controlling identity theft.

Experian, Equifax, and Transunion are the three largest credit bureaus in the U.S.

  1. Credit Inquiry

A request, usually made by creditors, employers, and landlords, to view an individual’s history.

Most landlords make a credit inquiry on perspective tenants before they rent out homes or apartments.

  1. Credit Limit

The maximum dollar amount that can be charged to a credit card.

Tom’s Chase Sapphire credit card has a credit limit of $4,000.

  1. Credit Score

A number between 300 (minimum) and 850 (maximum) that represents a consumer’s creditworthiness. Credit score is based on payment history, amount of debt, length of credit history, and other related factors.

In the United States, the average credit score is 687.

  1. Creditor

The person, company, or institution from which one borrows money.

Japan has surpassed China as the world’s largest creditor nation.

  1. Creditworthiness

The theoretical probability that a person will pay back borrowed money.

A high credit score reflects a high level of creditworthiness.

  1. Default

To fail to make required loan payments.

Defaulting on loan payments adversely affects one’s credit score.

  1. Delinquent

Being behind on one’s payment schedule.

Make your payments on time to avoid a delinquent account.  

  1. Grace Period

A period of time after a payment’s due date, during which no late fees are charged. Interest may or may not accrue during the grace period.

Many student loans have a six-month grace period.

  1. Interest

The cost of borrowing money, usually expressed as a percentage.

Student loans for graduate school can have interest rates of up to 8%.

  1. Lien

A claim that a creditor makes on one’s property (collateral) when a debtor cannot pay back a loan.

A tax lien will stay on one’s credit report for seven years.

 

Readers should note that this is a non-exhaustive list of credit terms. However, we hope to have clarified some of your confusion about the jargon of the industry!