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Important Credit Terms You Must Know

Understanding these important credit terms is essential for effectively managing your credit and making better financial decisions.

Understanding credit can be daunting because of all the jargon used. To help you on your wellness journey, you must know these key credit terms for better credit health.

1. Credit Score

Your credit score is a numerical representation of your creditworthiness, typically 300 to 850. It’s based on information from your credit report and helps lenders assess the risk of lending to you.

2. Credit Report

A credit report is a detailed record of your credit history, including information about your credit accounts, payment history, outstanding balances, and public records like bankruptcies or liens.

3. Credit Bureau

Credit bureaus are agencies that collect and maintain credit information on individuals. The three major credit bureaus in the United States are Experian, Equifax, and TransUnion.

4. Credit Utilization Ratio

Your credit utilization ratio is the percentage of your available credit that you’re currently using. It’s calculated by dividing your total credit card balances by your total credit card limits and is an important factor in determining your credit score.

5. Annual Percentage Rate (APR)

The APR is the annualized interest rate charged on credit card balances or loans. It includes both interest and fees, allowing consumers to compare the cost of borrowing across different lenders.

6. Minimum Payment

The minimum payment is the lowest amount you’re required to pay on your credit card statement each month to keep the account current. Paying only the minimum can result in accruing interest and prolonging debt repayment.

7. Grace Period

The grace period is the time between the end of a billing cycle and the due date for payment, during which no interest is charged on new purchases if the balance is paid in full.

8. Secured Credit Card

A secured credit card requires a cash deposit as collateral, which serves as the credit limit. It’s often used by individuals with limited credit history or poor credit to build or rebuild credit.

9. Unsecured Credit Card

An unsecured credit card doesn’t require collateral and is based solely on the cardholder’s creditworthiness. It’s the most common type of credit card and typically offers higher credit limits and rewards.

10. Revolving Credit

Revolving credit is a type of credit that allows you to borrow up to a certain limit and repay the borrowed amount over time, with interest. Credit cards are the most common form of revolving credit, offering flexibility in borrowing and repayment.

11. Installment Credit

Installment credit involves borrowing a fixed amount of money and repaying it in equal installments over a specified period, typically with interest. Examples include auto loans, mortgages, and personal loans.

12. Credit Builder Loan

A credit builder loan is an installment loan designed to help individuals establish or improve their credit history. The lender holds the loan funds in a savings account or certificate of deposit (CD), and the borrower makes regular payments, building a positive payment history.

13. Credit Limit

The credit limit is the maximum amount of credit extended to you by a lender. Exceeding the credit limit may result in fees and penalties, as well as damage to your credit score.

14. Credit Inquiry

A credit inquiry occurs when a lender or creditor checks your credit report in response to a credit application. There are two types of inquiries: hard inquiries, which can impact your credit score, and soft inquiries, which don’t affect your score.

15. Co-signer

A co-signer is someone who agrees to take responsibility for a loan or credit card if the primary borrower defaults. Co-signing can help individuals with limited credit history qualify for credit, but it carries risks for both parties.

16. Authorized User

An authorized user is someone who is allowed to make purchases with a credit card account but is not legally responsible for repaying the debt. Being added as an authorized user to an established credit account can help individuals build a credit history or improve their credit score.

17. Default

Default occurs when a borrower fails to repay a loan or credit obligation according to the terms of the agreement. Defaulting can lead to negative consequences, including damage to credit scores, collection actions, and legal repercussions.

18. Prequalification

Prequalification is a preliminary assessment of your eligibility for a loan or credit card based on basic information such as income, assets, and credit score. It’s a useful tool for gauging your borrowing options without impacting your credit score with a hard inquiry.

19. Debt-to-Income Ratio (DTI)

Your DTI ratio is the percentage of your gross monthly income that goes toward paying debts. It’s calculated by dividing your total monthly debt payments by your gross monthly income and is used by lenders to assess your ability to manage additional debt.

20. Credit Limit Increase

A credit limit increase is a rise in the maximum amount of credit available to you on a credit card or line of credit. It can improve your credit utilization ratio and potentially boost your credit score, but it may also increase the risk of overspending if not managed responsibly.

21. Bankruptcy

Bankruptcy is a legal process that allows individuals or businesses to eliminate or restructure their debts under the protection of the court. It’s considered a last resort for resolving financial difficulties and has significant long-term implications for credit.

Additional Credit Related Terms to Know

22. Credit Freeze

A credit freeze, also known as a security freeze, restricts access to your credit report, making it more difficult for identity thieves to open new accounts in your name. It’s a proactive measure to protect against fraud and can be temporarily lifted when you need to apply for credit.

23. Credit Monitoring

Credit monitoring is a service that tracks activity on your credit report and alerts you to any significant changes or suspicious activity, such as new accounts opened in your name or late payments reported. It provides added security and helps detect potential fraud early.

24. Credit Score Simulator

A credit score simulator is a tool that allows you to estimate how certain financial actions or events may impact your credit score. It can help you make informed decisions about managing your credit and achieving your financial goals.

25. Credit Counseling

Credit counseling is a service provided by nonprofit organizations to help individuals manage debt and improve their financial literacy. Certified credit counselors offer personalized advice and assistance with budgeting, debt repayment plans, and credit improvement strategies.

26. Hardship Program

A hardship program offered by some lenders and credit card issuers provides temporary relief for borrowers experiencing financial difficulties. It may involve reduced payments, waived fees, or other accommodations to help individuals avoid defaulting on their obligations.

Understanding these important credit terms is essential for effectively managing your credit and making better financial decisions.

Remember to regularly monitor your credit report, practice responsible borrowing habits, and seek professional guidance when needed.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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