Getting out of debt isn’t something you typically learn about in school. As a result, when you start having trouble, it can be difficult to make decisive choices because you may not even fully understand terms that are being used. With that in mind, we’ve created this debt dictionary to help you understand words and phrases related to debt, so you can have informed discussions about getting out of it.
Annual fee: Every credit card has an annual fee that requires you to pay a certain amount per year to use that credit card. Make sure to pay attention to these fees when selecting a new credit card.
APR: The annual percentage rate (APR) is what you pay per year to maintain a loan or line of credit; it includes the basic interest rate as well as broker fees and other charges. Credit cards often have multiple interest rates that can be applied to your debt.
Balance transfer: This happens when you move debt from one or more high-interest credit cards by transferring it onto another credit card with a lower interest rate. There is typically a balance transfer fee attached, so make sure you know the fees before you make a transfer. Also make sure to transfer balances to a card with the lowest interest possible or get a new card with 0% APR on balance transfers.
Balance transfer APR: This is the interest rate that gets applied to debts after you transfer balances from one credit card to another. The lower the rate, the more beneficial your balance transfer will be.
Bankruptcy: A legal declaration that you are not able to repay your debts filed in court. A judge determines is your assets can be liquidated to repay at least a portion of what you owe or if you can be put on a limited payment plan administered by a trustee. In either case, (almost) all of your outstanding balances are discharged once your filing is complete. Causes and 7-10 year penalty on your credit report, depending on the type of filing you make.
Borrower: A person who has been approved to receive a loan or line of credit that they are obligated to repay; also known as a debtor.
Cash advance: This allows anyone with a credit card to take out cash from an ATM using their card. Cash advances always carry a higher interest rate than other charges on a credit card, and the interest begins to compound daily starting on the day the cash is withdrawn.
Cash advance APR: The specialized interest rate applied to cash advances taken out on a credit card. Cash advance APR is usually much higher than the rate applied to regular purchases, making cash advances on credit cards an expensive option.
Chapter 7 bankruptcy: There are two different types of bankruptcy. Declaring Chapter 7 bankruptcy, often called “straight bankruptcy,” or “liquidation” is usually the quickest and most simple type of filing to make. Most of your assets (some may be excluded) are liquidated (sold off) to repay at least a portion of what you owe; the remaining balances are discharged. Filing remains as a negative remark on your credit report for 10 years.
Chapter 13 bankruptcy: A different type of personal bankruptcy that allows you to keep your property and assets. Instead, you make court-assigned payments over time, usually 3 to 5 years, on a program administered by a trustee. At the end of your payment schedule, the remaining balances on your debts are discharged. Chapter 13 bankruptcy causes a 7-year credit penalty.
Charge-off status: This term sounds more positive than it actually is. If your credit card is charged-off, you will not be able to make purchases with it. In fact, it’s already been closed for several months for default due to lack of payment. When a credit card company declares you are charged-off, it’s because you haven’t made a payment in a while and your debt is considered a loss to the credit card company.
Consumer Financial Protection Bureau: The CFPB is an independent agency established by the U.S. government after the 2008 recession that is responsible for monitoring the financial sector. Their jurisdiction includes banks, credit unions, payday lenders and mortgage services, and the agency keeps a close eye on practices that are dangerous for consumers.
Credit Card Accountability, Responsibility, and Disclosure Act: The Credit CARD Act of 2009 included several protections for consumers: credit card issuers must notify you of a rate increase at least 45 days in advance; double-cycle billing (where interest is charged on both the current balance and the previous month’s balance) is banned; and various consumer fees, including over-the-limit fees and other penalty charges, are banned.
Credit Card Annual Percentage Rate (APR): This is the interest rate that gets charged to debts incurred on credit cards. Different cards have different rates – some lower, some higher. Rates also depend on your credit score. The higher the APR, the faster interest builds and the fast your debt grows.
Credit card statement: All of the monetary transactions you’ve made within the last billing cycle compiled onto one bill. A statement will also typically include important disclosures about your account.
Credit counseling: Credit counselors are trained professionals who look at your financial situation and advise you on a plan to reduce your debt. They can also provide a form of assisted debt consolidation known as a debt management program.
Credit history: Simply put, a record of all the money you have borrowed and repaid; a portion of your credit history is compiled into a profile known as your credit report.
Credit report: A snapshot of your credit history that creditors and lenders use to assess your ability to repay loans and lines of credit. It includes positive and neutral information from your entire time as a credit user, plus negative information that remains only for a certain period of time. It also includes personal information, such as employment history and court-ordered financial decisions.
Creditors: Anyone to whom you (the debtor) owe money; also known as a lender. For example, if you have credit card debt, your creditors might be Bank of America, Citibank, and so on.
Debtphobia: A generalized fear of taking on new debt, often brought on by an economic downturn. This term was first used by the New York Times during the global coronavirus pandemic.
Debt collector: An agent who attempts to collect the outstanding balance on a debt that has been written off (moved to charge-off status) by the original creditor. Collectors can be in-house working for the creditor’s collections department, or a third party. Any collector is legally required to adhere to the regulations set forth in the FDPCA.
Debt consolidation: The process of combining multiple debts into a single monthly payment at the lowest interest rate possible. The goals of credit card debt consolidation are to lower your monthly payments plus reduce your interest rates so you can get out of debt faster even though you’re paying less each month.
Debt consolidation loan: A personal loan that rolls multiple debts into a single, lower-interest monthly payment. You take out the loan and use the money to pay off your unsecured debts, leaving only the loan to pay off. These loans can be secured or unsecured; a secured consolidation loan may also be known as a home equity loan.
Debt counseling: This is another name for credit counseling. Services offered include: giving guidance on how to manage money and eliminate debt, how to create and follow a budget, and free educational materials and workshops.
Debt management program: A form of assisted debt consolidation administered through a credit counseling agency. Your debts are consolidated into one monthly payment that you make directly to the agency, who negotiates with your creditors for lower interest rates and distributes payments each month on your behalf.
Debt negotiation: Another name for debt settlement. You or an agent representing you offer a creditor a reduced amount of money (either paid in a lump sum or on a limited payment plan). In exchange, the creditor agrees to discharge the remaining balance on your debt.
Debtor: A person who borrows money. Sometimes used interchangeably with “borrower.”
Debt-to-income ratio: A useful ratio that compares your monthly debt payments versus your total monthly income. Mortgage lenders use DTI to qualify borrowers for new loans. You must have a DTI of 41% or less in order to qualify for a new mortgage. It can also be used to assess your own financial health.
Debt settlement: The debt relief option where you settle your outstanding unsecured debts for less than the full amount owed. Your creditor agrees to accept a sum of money (either in one lump sum or paid over a period of time) to discharge the remaining balances on your debt. Also known as debt negotiation.
Default: If you do not pay your credit card bills for 90 to 120 days or more, your loan or credit card account will go into default status. This means that you have not made your required payments, and the credit line will go into collections.
Deferment: In deferment, a lender agrees to temporarily suspend your monthly debt payments if you’re facing a brief period of financial hardship. You make no payments during deferment, but the lender does not report missed payments to the credit bureaus, so it does not damage your credit. Interest charges continue to accrue. However, if you defer subsidized federal student loans, the government pays those charges for you.
Fair Credit Reporting Act (FCRA): A law enacted in 1970 to promote “accuracy, fairness, and the privacy of personal information” by credit bureaus. There are three major credit bureaus in the U.S.: Experian, Equifax, and TransUnion. Regulates what can be reported and how long negative information can remain in a consumer’s credit report.
Fair Debt Collection Practices Act (FDCPA): Passed by Congress in March 1978, this act was designed to prohibit “abusive, deceptive, and unfair debt collection practices.” This law protects consumers from excessive phone calls, abusive language, threats of violence, and contact at inconvenient times.
FICO credit score: The original credit score calculation used to identify consumers as high or low risk on repaying loans and new lines of credit. The calculation is also used as a base by the credit bureaus and other agencies to develop their own proprietary score calculations. FICO scores can range from 300 to 850. A good FICO score is usually considered 650 and above.
Forbearance: In a forbearance, a lender agrees to temporarily reduce or suspend your monthly debt payments. The lender will typically set a time limit and you will usually be expected to make catch-up payments once the forbearance ends to bring your account current. Interest charges usually continue to accrue during forbearance.
Home equity loan: This is a type of loan where you use your house as collateral to secure the loan. It is a pledge that you will pay back the loan, or else you will lose your house if you don’t pay off the debt. May be used to consolidate debt if you cannot qualify for an unsecured debt consolidation loan, although this can be a risky option for repaying debt.
Interest rate (see also APR): The rate at which financing charges applied to an outstanding debt balance. The “periodic” interest rate is the rate applied to your debt each billing cycle. The annual percentage rate is the rate applied to your debt over the course of year.
Means Test: This test is required to determine whether or not a person is eligible for personal bankruptcy, and which type of filing they qualify to make. It is calculated by comparing your yearly income to the median income line in your state. Your financial history will also be reviewed to identify any potential issues of bankruptcy abuse – where you run up debt just prior to filing to “game” the system.
Payday loan: A short-term installment loan with high financing charges and extremely high APR. The money borrowed is usually due on your next payday. If the balance is not paid in-full, it is rolled over to your next pay cycle and interest is applied. Since it features fast approval with no credit check, this is often an option used by consumers who are short on cash, but it has a high potential of causing problems if you use them to overspending problems in your budget. The money is usually deposited directly into your account and payments are withdrawn automatically.
Penalty APR: This is a specialized type of interest that gets applied to a credit card debt if you are more than 30-60 days late with your credit card payment. Rates can be double your regular rate (or more) depending on the creditor and your account terms. Rate applies every month to your full balance until you are able to make six consecutive payments on time in a row.
Revolving debt: A type of debt with no fixed payment. This is most commonly seen on credit cards. With closed revolving credit lines, the full amount borrowed each month is due at the end of the payment cycle. With open revolving credit lines, payments are calculated as a percentage of the full amount owed.
Secured debt: A debt that uses a physical property, such as a house or a car, as collateral for a loan. This means that you pledge your house or car toward the repayment of your loan, and if you fail to make payments, your creditors may seize your property.
Unsecured debt: A debt that doesn’t have any physical property attached to it. Most credit cards are unsecured, as well as student loans and medical debt. It means that if you fail to make a payment on any one of these debts, the creditor cannot take any of your property without suing you (successfully) first.
VantageScore: A credit-rating method, similar to the FICO score, developed by the three major credit bureaus — TransUnion, Equifax, and Experian. It was created in 2006 by the bureaus working together in an attempt to compete directly with the FICO scoring system.
Article last modified on July 16, 2020. Published by Debt.com, LLC