Credit Terminology Explained
Below is a MRR and PLR article in category Finance -> subcategory Credit.
Understanding Credit Terminology
When navigating the world of credit, it's crucial to familiarize yourself with key terms. This guide will help you understand important credit concepts.
Key Credit Terms
Adjusted Balance
This calculation method considers payments and credits made during the billing cycle, subtracting them from the previous cycle's balance. Unlike the Average Daily Balance method, new purchases aren't included, which benefits borrowers by applying interest only to the remaining balance.Amortization
A payment plan allowing borrowers to reduce debts through consistent monthly payments of the principal amount.Annual Percentage Rate (APR)
The yearly interest rate charged by lenders, representing the cost of credit. Lenders must disclose the APR before finalizing any agreement. However, some credit agreements allow adjustments in APR if interest rates or indexes change.Average Daily Balance
This method tracks your daily balance, applying interest based on a calculated average. The lender sums beginning daily balances and subtracts payments/credits for the period. New purchases aren't immediately factored into this balance.Bankruptcy
A legal protection for borrowers unable to fulfill financial obligations. There are two main types:- Chapter 7: Eliminates most debts by liquidating non-exempt assets.
- Chapter 13: Allows debt repayment over 36 to 60 months for those with a steady income.
Credit Score
A numerical representation of a consumer's creditworthiness based on their credit report. Common scores include FICO, Beacon, and Empirica, predicting the likelihood of loan repayment.FICO
A widely used scoring model developed by the Fair Isaac Corporation, assessing lending risk.Liquidation
The process of converting assets to cash to pay off debts, often used in bankruptcy scenarios.Repossession
Occurs when a lender reclaims merchandise due to non-payment by the borrower.Revolving Account
An account requiring a minimum monthly payment and applicable service charges. As the balance decreases, so do the charges.Conclusion
Credit terminology can seem complex, but understanding these terms can empower you to make informed decisions. Use this guide to become familiar with the essentials of credit.
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