Financial Terms Glossary

Cash advance
A high-interest loan taken by withdrawing cash from your credit card account. Unlike credit card purchases, these short-term loans do not have “grace periods,” meaning interest charges begin accruing immediately.

Certificate of Deposit (CD)
An investment account that pays a fixed interest rate on money that you deposit for a pre-set period of time. These low-risk accounts are usually FDIC or NCUA-insured, they typically pay higher APY than savings accounts and they’re available at most banks and credit unions.

Charge-off
When a creditor gives up on collecting your debt and writes it off as a loss. Debt is usually charged off and sold to a collection agency once you’re 90 to 180 days behind on payments. If the charge-off is reported to the credit bureaus, it will appear on your credit reports for seven years from the date of the most recent missed payment.

Chapter 7 bankruptcy
A legal process that helps struggling debtors by discharging (eliminating) some or all of their debt. During this process, you may be required to sell or liquidate some of your assets in order to pay your creditors.

Chapter 13 bankruptcy
A legal process that helps people with regular income repay their debt. This process involves going on a three-to-five year payment plan, after which your remaining debt will be discharged (eliminated).

Checking account
A bank account built for everyday use. You can deposit money and make withdrawals from these accounts, usually without any penalties. Bank accounts usually come with debit cards and checks and you can make transactions online, at ATMs, through your mobile banking app or in-person at a bank branch.

Closing costs
The up-front fees associated with purchasing a home, usually equivalent to 3%-5% of the loan amount. Closing costs are paid to the lender at closing and often cover the origination fee, title fees, property taxes, appraisal fee and other expenses.

Collateral
An asset provided to a lender in order to guarantee you’ll repay a loan. If you fail to cover the payments, the lender can take your asset.

Collection debt
Debt that’s owed to a collection agency.

Consumer
Someone who buys or consumes goods and services for their personal use. In financial and economic contexts, this word is often used to refer to the general public. It’s also used to differentiate between products intended for personal use (consumer products) and those intended for business use.

Consumer Financial Protection Bureau (CFPB)
A U.S. government agency that enforces federal laws to protect consumers against unfair treatment from banks, lenders and other financial institutions. The CFPB also provides free educational resources and responds to consumer complaints regarding financial products and services.

Cosigner
Someone who helps a loan applicant qualify for a loan by agreeing to take full responsibility for the debt if the payments are not made.

Credit
An agreement between an individual and a creditor that lets the individual borrow money and then pay it back. This word is also used informally to describe a variety of financial products, including credit scores and credit cards.

Creditor
An individual or institution that lends money or issues credit cards.

Credit-utilization ratio
The percentage of your total available credit you’re using. This ratio is calculated by dividing your total credit card debt on all of your accounts by the combined credit card limit for all accounts.

Credit counseling
A service designed to help people manage their money and credit. Nonprofit credit counseling is free or low-cost and is delivered through confidential, one-on-one appointments with certified credit counselors who can assist you with reading credit reports and scores, budgeting, managing debt and more. You can schedule an appointment to meet with an NFCC-certified credit counselor online, by phone or in person.

Credit bureau
An agency that collects information on your debt-related activities from creditors and compiles it into a report. The three major credit bureaus in the U.S. are Equifax, Experian and TransUnion.

Credit limit
The maximum amount of money you can owe on a credit card or line of credit at any given time. If you exceed the limit, you can incur fees and other penalties. Your credit limit is determined when you first open an account, but it can potentially be increased if your credit scores improve.

Credit report
A report that shows your history with managing debt over the last seven to 10 years. These reports are compiled by credit bureaus using the information provided to them by your creditors. The information in your credit reports is used to calculate your credit scores.

Credit report review
An appointment where a credit counselor meets with you to review your credit reports and offer personalized advice on how to make improvements. NFCC-certified credit counselors offer credit report review appointments in-person, by phone or online.

Credit score
A numeric representation of the information in your credit reports. Most credit scores range from 300 to 850, with higher scores reflecting a more positive history of managing debt as agreed. Higher credit scores also help you qualify for more credit cards and loans with better terms.

Credit union
A nonprofit financial institution that offers similar services to a bank. However, unlike banks, which are for-profit organizations owned by shareholders, credit unions are member-owned and can pass their profits back to customers in the form of lower banking and lending fees, higher deposit rates and other services and benefits.CTerm – Definition

Dealer financing
An auto loan either offered to you directly by a car dealership or arranged for you by the dealership. Car dealerships usually mark-up interest rates and fees on these loans, so they’re typically more expensive than auto loans from banks and credit unions.

Debt
Money owed to a person or business. Examples of debt include car loans, student loans, mortgages and balances owed on credit cards. When debt is owed to a business, it is usually accompanied by a legal contract that details when and how the money will be paid back and the associated interest charges and fees.

Debt collector
A person or company that collects past-due debt. This includes debt collection agencies, lawyers and debt buyers who collect debt as part of their business.

Debt consolidation
he act of combining multiple debt accounts into one account with a single monthly payment. This is usually done by using a new credit card or loan to pay off your pre-existing debt accounts.

Debt management plan (DMP)
A structured debt payment program that involves paying off multiple debts over the course of three to five years by making a single, recurring monthly payment. A debt management plan can also involve having your total monthly debt payments and/or interest rates reduced, as well as having certain finance charges dismissed. DMPs are often facilitated by NFCC-certified, nonprofit credit counseling agencies.

Debt settlement services
Companies that offer to negotiate or settle debt on your behalf, also known as debt relief services. For-profit debt settlement services often require you to make monthly payments for up to four years, but they cannot legally guarantee any of your debt will be reduced. Nonprofit debt settlement programs, also known as Less Than Full Balance programs (LTFBs), are a less common alternative that offer guaranteed forgiveness on 40% to 50% of your debt after you complete a 36-month, 0% APR payment plan.

Debt-to-credit ratio
The percentage of your available credit you’re using, also known as your credit utilization rate. This ratio is calculated by dividing the current balance on a credit card by the limit on the account, and then multiplying the result by 100 to convert it to a percentage. The lower your debt-to-credit ratio (DTC), the better your credit scores will be and the more likely you are to qualify for new loans and credit cards. Debt-to-income ratio The percentage of your monthly income needed to cover your minimum monthly debt payments. This ratio is calculated by dividing your monthly gross (pre-tax) income by the total of your minimum debt payments that are due each month, and then multiplying the result by 100 to convert it to a percentage.

The lower your debt-to-income ratio (DTC), the more likely you are to qualify for mortgages and other loans.

Default
Failure to pay a loan as agreed. Depending on the lender and the type of loan, you may enter default when your payment is anywhere from one day to several months late.

Deferment
A temporary pause or reduction in your loan payments. Depending on the lender and the type of loan, deferment may or may not include a pause in your interest charges.

Deficiency balance
The amount you owe to your auto lender after a vehicle repossession if their sale of the vehicle did not cover the full balance you owed on the auto loan.

Delinquent
A debt payment that’s overdue. Your payment is considered delinquent if you fail to pay by the due date or if you pay less than the minimum amount due.

Depreciation
Loss of value. An asset such as a home or car can lose value, or depreciate, for several reasons. Most commonly this is due to aging, wear-and-tear or reduced market demand.

Down payment
The money you contribute to a purchase while borrowing to cover the rest of the cost. Many lenders require you to make a down payment in order to qualify for a car loan or mortgage.Term – Definition

Emergency savings fund
Money specifically saved to pay for unpredictable expenses that could occur in the future, including medical bills, car repairs or a loss of income. It’s generally recommended that you save three to six months worth of your regular living expenses in this fund.

Escrow
Money held by a mortgage lender in order to cover upcoming expenses, including costs related to closing the mortgage, annual property taxes and mortgage insurance.

Equity
The difference between the market value of your asset, such as a home or a car, and the amount of money you owe against that asset. For example, if your home has a market value of $200,000 and you owe $150,000 on your mortgage, you have $50,000 in home equity.

Eviction
The legal process in which a landlord removes a tenant from a rental property.

FHA loan
A mortgage that’s insured by the Federal Housing Administration (FHA). These mortgages are available through FHA-approved lenders. Because they’re insured by a government agency, the lender is able to be more flexible in terms of eligibility requirements. You may be able to qualify for an FHA-backed loan with credit scores as low as 500 or a down payment as low as 3.5%.

FICO
An acronym for Fair Isaac Corporation, the company that created the credit score.

FICO Scores
Credit scores calculated using scoring technology from Fair Isaac Corporation (FICO). A FICO credit score is a three-digit number based on the information in your credit reports. Most FICO scores range from 300 to 850, with higher scores reflecting a more positive history of managing debt as agreed.

Finance
A broad term that refers to the various aspects of managing money, including budgeting, saving, borrowing and investing. This word can also be used to describe the act of borrowing money in order to make a purchase. For example, you might “finance” your car purchase by taking out an auto loan from the bank.

First-time homebuyer program
A program that helps make homebuying affordable for people who are buying their first homes, and for people who have not owned a home in the past three years. These government and nonprofit programs provide assistance in a variety of ways, ranging from offering loans with reduced interest rates and flexible eligibility requirements, to selling homes priced at below-market rates, to offering fully or partially forgivable down-payment loans.

Fixed interest rate
An interest rate that does not change at any point during your debt repayment.

Federal Trade Commission (FTC)
A federal agency that protects consumers against unfair and deceptive business practices by enforcing consumer protection laws, recommending legislation and providing free educational resources.

Federal student loan
A loan issued by the government for the purpose of paying for education. These loans must be paid back, with interest, but they’re generally more flexible when it comes to income-based payment options and debt forgiveness than any other type of student loans and other types of financing.

Forbearance
A temporary pause or reduction in loan payments, usually allowed by the lender as a result of a financial hardship you’re facing. Interest will likely accrue even while payments are paused.

Foreclosure
The legal process in which lenders sell your property to pay your overdue mortgage debt. This process usually begins once you’re roughly 120 days late on your mortgage payment.

Gift fund
Money given to a homebuyer, usually from a family member, in order to help them cover homebuying costs.

Gross income
The total amount of money you earn before anything is withheld for taxes, benefits or other deductions.

Hard inquiry
When a creditor reviews your credit report(s) in order to approve or deny your application for a new credit card or loan. Also known as a hard pull, these inquiries appear on your credit reports for two years but only impact your credit scores for one. They initially cost you between one and five points from your credit scores.

Hardship program
A program that lets you temporarily adjust your credit card or loan payment based on a financial hardship. Hardship programs vary by creditor, but they’re most often available if you’re experiencing a specific, provable challenge such as job loss, a medical emergency, national disaster, divorce or loss of an immediate family member.

High-yield savings account (HYSA)
A bank account that functions just like a normal savings account but pays a much higher interest rate, and may have a higher minimum deposit requirement.

Home equity line of credit (HELOC)
A complex credit account that’s backed by your home as collateral. With a home equity line of credit (HELOC), you can withdraw money up to a set limit during the account’s initial “draw period” of 10 years or more, while making interest-only payments, with a variable interest rate that can occasionally change. Then you enter the “repayment period,” which is usually 20 years, during which your monthly payment increases as you pay back the remaining balance and interest.

Home equity loan (HEL)
A loan that gives you a portion of your home’s equity as a lump-sum, and is paid back in monthly installments. Also known as a second mortgage, these loans are secured against your property, meaning you can face foreclosure if you miss payments.

Homeowner’s association (HOA) dues
Payments that cover the cost of the shared amenities you use when you own a condominium or a home in a planned community. These dues usually cover expenses like landscaping, trash removal, electrical repairs and more. If you fail to pay HOA dues, you could face foreclosure on your home.

Identity theft
A crime that happens when someone steals your personal information or financial information and uses it without your permission to do things like spend money from your accounts or open credit cards.

Income-driven repayment plans
Payment plans available through the Department of Education that can reduce your federal student loan payments to as low as $0 a month based on your income and family size.

Inflation
The rate at which prices increase for a variety of goods and services, or the rate of increase for a specific product or service.

Installment loan
A loan where you receive a lump-sum of money up front and pay it back in “installments,” or equal monthly payments. Common types of installment loans include car loans, mortgages, personal loans and student loans.

Interest
This term can refer to the price you pay to borrow money or the money you earn on your bank deposits or investments.

Joint account
Bank account owned by two or more people who have equal access to the funds in the account.

Loan-to-value (LTV) ratio
A ratio that compares your mortgage amount to the value of the home you’re purchasing. The loan-to-value (LTV) ratio can be calculated by dividing the loan amount by the appraised value of the home, and then multiplying the result by 100 to convert the figure to a percentage.

M

Minimum payment
The smallest amount you can pay on a debt each month in order to stay in good standing with the creditor and avoid incurring penalties. Note that paying the minimum does not stop the creditor from charging you interest. For most loans and credit cards, you’re charged interest until the full balance is paid off.

Mobile banking
Using a mobile device, such as your cell phone or tablet, to conduct banking activities through your bank’s mobile app.

Money market account (MMA)
A bank or credit union account that offers higher interest rates than regular savings accounts, but may require larger minimum deposits. Like savings accounts, MMAs have a limit on the number of transactions allowed per month.

Mortgage
A legal contract outlining the details of your loan agreement with the mortgage lender, including the lender’s right to take possession of the property if you fail to pay as agreed.

Multi-factor authentication (MFA)
A security measure that requires you to verify your identity in more than one way before you can log into an account. Common methods of verification include passwords, PINs, facial recognition or temporary passcodes sent to you by text or email.

Net income
The amount of income you receive after taxes and all other deductions are withheld. This is also known as “take-home pay.”

Net worth
The difference between the value of your assets and your liabilities. To calculate your net worth, add up the market value of your possessions (such as your property, investments and bank account balances) and subtract the total debt you owe on loans, credit cards and any other accounts.

Nonsufficient funds (NSF)
A banking term that means there is not enough money in your bank account to cover a transaction. As a result of the nonsufficient funds (NSF), the transaction you’re attempting may be declined and you can be charged an NSF fee and other related fees.

Online bank
A bank that only offers its services online and not in-person at bank branches. These banks provide many of the same services as traditional banks, however you can only conduct transactions through your online account, a banking app, or in some cases at an ATM.

Since these banks don’t have the overhead costs associated with operating physical branches, they typically have higher deposit rates and lower fees than traditional banks.

Origination fee
A fee charged by lenders to cover the cost of processing loan applications.

Overdraft
An overdraft is what takes place when you don’t have enough money in your bank account to cover the cost of a transaction, but the bank still allows the transaction to go through. When you overdraft, the bank lends you the money to cover the shortage, but it must be paid back, usually with fees and interest.

Personal finance
A term that refers to all aspects of managing your money, including budgeting, saving, borrowing, banking and investing.

Personal loan
A loan you receive as an up-front lump sum, and then pay back (plus fees and interest) in set monthly installments.

Personal loans are usually unsecured, meaning they do not require you to have collateral in order to qualify.

Phishing
A cybercrime that involves attempting to trick you into sharing your sensitive personal information by sending you fraudulent emails, texts or other communications. Criminals often “phish” by impersonating legitimate business or government agencies.

Points
A fee you can pay at closing to reduce the interest rate on your mortgage. Also known as a mortgage point or discount point, each point is equal to 1% of the mortgage loan amount.

Preapproval
A conditional offer from a creditor that states the loan amount or credit limit you qualify for, usually based on a review of your financial and credit information.

Prepaid card
A card you can load money onto in order to make purchases, and set up to receive direct deposits of your paycheck or government benefits. These cards typically have many fees associated with them, including fees for activation, cancellation, monthly maintenance and for most transactions.

Prepayment penalty
A penalty fee charged by some lenders when you pay off your debt ahead of schedule.

Principal
The original amount of money you borrow from a lender. When you make monthly payments on a loan, part of your payment is used to pay off the principal balance you borrow, and part is applied to cover the interest charges on the loan.

PITIA
n acronym for the five costs that make up your monthly mortgage payment: principal, interest, taxes, insurance and if applicable, association (HOA) dues.

Private mortgage insurance (PMI)
An insurance policy that protects the lender if you fail to make your mortgage payments. If your down payment on a home is less than 20% of the sales price, the lender will likely require you to pay for private mortgage insurance (PMI) until you gain at least 20% equity in the home.

Private student loan
A loan for education that is offered by a private organization, such as a bank, credit union or other lender. These loans are typically more expensive than federal student loans and they do not give you access to the income-based payments and forgiveness benefits offered by the Department of Education. Additionally, the first payments are usually due before you graduate.

Prequalification
A creditor’s statement that you’re likely to be approved for a certain loan or credit card based on their limited or unverified review of your financial information and credit scores.

Q

Rate-shopping window
The time-frame in which you can “rate-shop,” or apply for and compare offers on a loan, while only incurring one hard inquiry on your credit reports.

Refinance
Using a new loan to pay off an older loan. This is usually done in order to access a lower interest rate, reduce your monthly payments or switch from a variable interest rate to a fixed interest rate.

Repossession
When a lender seizes your asset because you fell behind on the loan payments. Cars are the asset most commonly repossessed, and lenders typically initiate the repossession process once an auto loan payment is overdue by 90 days.

Reverse mortgage
A mortgage for a homeowner age 62 or older, that turns your home equity into a loan that you receive either as a lump sum or in monthly payments. The loan does not have to be paid back until you move, sell the home or pass away.

These loans are considered high-risk since they usually have adjustable interest rates, they’re more expensive than other home equity loans, they can impact your public assistance benefits and there are many reverse mortgage scams.

Revolving credit
A credit account that lets you spend up to a set limit and then pay off the balance (plus interest) an unlimited number of times. Revolving credit accounts include credit cards, home equity lines of credit (HELOCs) and personal lines of credit.

Rewards credit card
A credit card that gives you rewards in return for your spending. Rewards usually include cash back that can be credited to your account balance, or points or airline miles that can be redeemed for products or services. The value of the rewards depends on what you redeem them for. However, the high interest rates on these cards can offset the redemption value, particularly if you carry a balance from month-to-month.

Romance scams
A scam in which a criminal creates a fake online dating profile or social media profile and uses it to build trust with a victim in order to ask for money.

Savings account
A bank or credit union account designed to hold money that you don’t plan to spend right away. These accounts incentivize you to leave money on deposit by paying higher interest than checking accounts. Some do not come with debit cards or checks, and they penalize you for exceeding a set number of monthly withdrawals.

Secured credit card
A credit card that requires you to make a cash deposit in order to qualify. These products are meant to help people build credit history, and unlike regular credit cards you do not need good credit scores in order to qualify.

Secured loan
A loan that requires you to use your property as collateral. If you fail to make the payments on the loan, the lender can seize the property. Common types of secured loans include mortgages and auto loans.

Servicer
The company that manages your loan payments, including processing the payments and sending you statements. In some cases, the lender is also the servicer, but lenders usually hire third-parties for servicing. For example, if you have a federal student loan from the Department of Education, your loan servicer might be Nelnet, EdFinancial or MOHELA.

Soft inquiry
A credit check that does not impact your credit scores. Also known as soft pulls, these credit checks are not related to applications for new credit. They appear on your credit reports for one year. Soft inquiries are often performed when you check your own credit information, when you request an increase in your credit limit, when an employer conducts a background check or when a company reviews your credit report(s) in order to send you a promotional offer.

Statute of limitations
The period of time a creditor or debt collector has to file a lawsuit against you for unpaid debt. Each state has its own time limit and many fall within three to six years, but some are much longer. Store credit card A credit card that can only be used at a specific store or chain of stores. These cards, also known as retail cards, are usually easier to qualify for than regular credit cards but they have higher interest rates and lower spending limits.

Tax credit
An amount you can subtract from the taxes you owe. Most tax credits are “nonrefundable,” meaning they can only reduce your tax bill to zero, but they can’t be used to give you a refund.

Tax refund
refund due to you if you overpay your taxes and/or you qualify for a refundable tax credit.

Terms
A word used to refer to several financial concepts, including the set length of time you have to repay a debt. For example, most mortgages have a 30-year term. This word can also be used to refer collectively to the rates, fees and policies on a specific loan or credit card. For example, you might say that the terms on your mortgage include a $2,000 monthly payment, 7% fixed APR and no prepayment penalty.

Under water
When you owe more money on an asset than the asset is worth, also known as being upside-down or having negative equity. Going underwater can happen if your property loses value faster than you pay off the loan, or if your loan balance grows due to interest charges.

Underwriting
The process a lender uses to evaluate your finances and credit, and determine if you meet their requirements to qualify for a loan.

Unsecured loan
A loan that does not require you to use your property as collateral. Common types of unsecured loans include personal loans and student loans.

USDA loan
A mortgage that’s backed by the United States Department of Agriculture (USDA). These low-interest mortgages are designed to help people with low- to moderate-incomes buy homes in rural areas. Because these loans are insured by a government agency, lenders are able to be more flexible in terms of eligibility requirements. You may be able to qualify with no down payment and credit scores at 620 or lower.

Variable interest rate
An interest rate that can change when market conditions change or for other specific reasons such as a missed payment on the account.

VA loan
A mortgage that’s guaranteed by the Department of Veterans Affairs (VA). These loans are available to veterans and servicemembers with no down payment required.

Yield The return on an investment, usually expressed as a percentage.

Zelle
A payment service that allows you to send money between bank accounts.

Zero-based budget
A method of budgeting where every dollar of your income is assigned a specific role, whether its to cover expenses, pay off debt, add to your savings or otherwise.