Glossary of Terms
401(k) Plan: A savings account established by your employer that is specifically for retirement savings. The money you put into your 401(k) is not taxed until you use it. Some employers will “match” some of the money you put into the 401(k), which means for every dollar you contribute to your account, your employer will also contribute a dollar. This is a great benefit to look for when choosing whom to work for.
Account Agreement: The paperwork your financial institution gives you when you open an account. All the legal information about the account is listed in this agreement. By signing these forms, you are stating you understand how the account works.
Accounts Payable: The term used to refer to money a business owes to a person or company. For example, if you own a lawn mowing business and you owe money to the person who repaired your lawn mower, this payment falls under this account.
Accounts Receivable: Refers to money owed to a business, such as clients who owe you money for mowing their lawns.
Adjustable Rate Mortgage: A loan to buy a home that does not have a set interest rate. The interest rate can go up or down, depending on what the interest rate is based on. This type of mortgage is commonly referred to as an ARM loan.
Adjusted Balance: One of the methods used by creditors when determining the balance owed by borrowers. With this method, interest is charged on the principal balance after the credits and payments from the previous statement balance have been added to the account. Any new charges to the account will not begin to be charged interest until after the statement cycle ends.
Adverse Action: An action taken, usually not in your favor, as a result of negative aspects on your credit report. For example, if you are turned down for a car loan because of late credit card payments listed on your credit report, the denial of the car loan application is referred to as an adverse action.
Amortization: The amortization of a loan refers to a payment plan set up to allow the borrower to pay off the total amount owed, including interest charges, through regular payments. For example, car loans are commonly amortized for five years and mortgages are commonly amortized for 30 years.
Annual Percentage Rate (APR): The cost of the credit in percentage terms. The total APR cost includes interest and recurring fees on an annual basis. Although many people use the terms “interest rate” and APR interchangeably, these two figures can be different based on the type of credit product. In general, it is best to look for the lowest APR when getting a credit account to save money.
Appraisal: Determines what something is worth, usually real estate or personal property. An appraisal is contacted by a professional appraiser. Appraisals are usually used for real estate, cars, and other valuable items.
Asset: Something you own, including money you have in the bank or your car minus how much you owe currently to the bank.
Assumed Interest Rate (AIR): An insurance term referring to the interest rate an insurance company will pay out for insurance products that are designed to build wealth.
Automatic Deferral Default Percentage: The percent of your pay that an employer assumes you will contribute to an offered program. For example, when you enroll in your employer’s 401(k) program, you will probably be enrolled using whatever the automatic deferral default percentage is unless you specify a different amount.
Automatic Rollover: When retirement savings are transferred into an individual retirement account (IRA) automatically.
Average Daily Balance: The average balance of your account, usually based on a month’s worth of transactions. You will see the average daily balance listed on bank account statements as well as on credit card statements.
Balloon Loan: A loan that is amortized over a certain period of time, but come due in full earlier than the fully amortized terms. For example, a balloon mortgage might be amortized for 30 years, but at 10 years it must either be paid in full or refinanced. These types of loans are common for investors who want the advantage of a low monthly payment, but who also know they will not need the loan for the full term because they will sell the property.
Bankruptcy: Legal action filed by borrowers when they cannot handle their credit bills any longer. It is not an easy or simple process and can involve the total liquidation of debt and some assets (referred to as a Chapter 7 Bankruptcy) or a reorganization of debts where a new payment plan is created to give the borrower the chance to get a handle on debt (referred to as a Chapter 13 Bankruptcy). There are other types of bankruptcies offered for businesses. Bankruptcy severely damages the borrower’s credit score and should be a last resort.
Beneficiary: The person who will inherit money or property when a person dies. This can apply to life insurance policies or financial accounts, or to property left in a will. For example, if your uncle states in his will that he wants everything he owns to go to you upon his death, you are his beneficiary.
Bonds: A form of saving where you provide money to the government or a corporation for a specified amount of time in return for interest paid by the organization issuing the bond. You will not have access to your money while it is in the bond, but this can be a good place to stash money you do not currently need.
Capital Growth Strategy: A plan you use to make the most out of the money you have invested or placed into savings products. Using a capital growth strategy, you will determine the best investment strategies to make the most profit.
Certificate of Deposit: A savings account that pays high interest at a set rate for a set period of time. You do not have access to the funds while they are in the CD, so this makes this form of saving a good idea for money you want to see grow within a certain amount of time.
Charge-off: This happens when a creditor decides to stop pursuing a borrower for a debt owed because the borrower is not likely to pay the debt. A charge-off usually happens after several months have passed without payment. A charge-off appears negatively on your credit report.
Closing Costs: The fees and taxes associated with the creation of a new loan. Closing costs are common with mortgage loans. While some closing costs are purely profit for the lender, some are necessary to pay real estate taxes or to file necessary documents associated with the loan.
Collection: Refers to the act of trying to get a borrower to pay a past due debt. Some lenders try to collect debt on their own while others use professional collection agencies for this task.
Compounding: When interest starts to get earned on interest. Suppose a savings account with a balance of $100 earns $0.25 in interest for the month. The next month, the interest earned will not be based on $100, but instead on $100.25. This is how money in savings accounts grows in addition to deposits made by the accountholder.
Consolidated Omnibus Budget Reconciliation Act (COBRA): Allows people who have health insurance through their employer to keep the health insurance even if they leave their jobs or are laid off. This is important because health insurance that is not provided through an employer plan can be incredibly expensive. COBRA health insurance may cost more than the health insurance cost while employed, but it will almost always be less expensive than buying health insurance without an employer-provided plan.
Consumer Credit File: The information assigned to you according to your social security number, listing everything related to your credit history, including current and past debts.
Consumer Finance: A term used in two different manners. It may refer to any type of credit product offered to borrowers, or to credit products specifically marketed toward people with bad credit.
Coverdell Education Savings Account (ESA): A type of college savings account that features tax advantages.
Credit Bureau: Equifax, Experian, and TransUnion are the three major credit bureaus, although there are other companies. These companies are not governmental agencies, but are instead businesses that record credit activity for individual consumers and report this information in the form of credit reports.
Credit Bureau Risk Score: A credit score based on information provided by the credit bureaus. The numerical score presented with a credit bureau risk score tells potential lenders whether a borrower is creditworthy.
Credit Opportunity Act (ECOA): Requires that all credit decisions from lenders be based solely on factors directly related to an applicant’s ability or likelihood to repay debt. In other words, a lender can look at your payment history but not your gender when deciding whether or not to approve your credit application.
Credit Score: A three-digit score that is based on the information listed on your credit report. The higher your score, the more likely you will be approved for credit and be approved at a low interest rate.
Credit Union: A financial institution that is not-for-profit and uses the funds of the members to provide credit products to other members. Credit unions usually offer attractive products and generally have more personalized customer service than larger banks, but membership to a credit union is limited to eligible people.
Custodial Account: The name for an account opened and managed by someone on behalf of someone else. For example, if you put money into a mutual fund account, the allocation of your funds may be managed by the mutual fund company instead of by you.
Debit: Money taken from your account. For example, if you withdraw $20 from your checking account, this is considered a $20 debit from the account.
Debit Card: A card connected to your checking account with a financial institution. You can use the debit card to withdraw money from an ATM or by swiping the card at a store to pay for purchases. Unless otherwise specified, debit cards do not usually have credit cards accounts attached to them, but they may be have a Visa or MasterCard that which enables you to use the card at retail locations.
Debt Load: The amount of money a borrower owes in total. If you owe $4,000 for your car and $280 for your credit card, your total debt load is $4,280.
Debt-to-Income Ratio: A figure that reveals how much money you owe in debt in relation to how much money you receive from income. The lower your debt-to-income ratio, the better.
Defined-Benefit Plan: A retirement plan offered by employers that is based on factors such as how long the employee has worked for the company and how much money the employee makes.
Defined-Contribution Plan: A retirement plan through an employer where the employer contributes funds to the retirement fund on behalf of the employee.
Deflation: The opposite of inflation. This happens when the prices for goods and services declines.
Demand Loan: A loan that allows the lender to demand full payment of the loan regardless of the amortization.
Direct Deposit: Money that is deposited automatically into your bank account at a financial institution instead of being given to you in the form of a paper check.
Direct Rollover: When the balance from a retirement account is rolled into a different retirement account. A direct rollover avoids taxes and does not include the having access to the funds during the rollover.
Diversification: An investment strategy that involves dispersing money for savings or investments among different accounts or investment options. This is common with people who invest in the stock market because investors often do not want to lose all their money if the one company they invest in suddenly drops sharply in stock price.
Dividends: Money you will receive from a company if you invest in their stocks or mutual funds, and the company you invest in makes a profit.
Down Payment: The amount of money you pay toward a debt before the loan. For example, if you buy a car that costs $10,000 with a down payment of $1,000, the remaining $9,000 will be financed through a car loan. Having a large down payment can increase your odds of getting approved for a car loan or mortgage.
Early Withdrawal: Happens when you take money out of an account before the agreed-upon terms. For example, if you withdraw funds from a retirement account before you are of retirement age, this can be considered early withdrawal and will usually result in penalties.
Earned Income: The amount of money you make from an employer.
Employee Contribution Plan: A retirement account that is provided through an employer. Money deposited into the retirement account is withdrawn directly from your pay before you have access to the funds.
Endorse: The act of signing the back of a check in order to deposit or cash it.
Equity: The amount of money something is worth minus the amount that is owed on it. For example, a house worth $200,000 with a $150,000 mortgage balance has $50,000 worth of equity.
Escrow: Established to hold funds while a contract is being negotiated. Escrow is common with home purchases but is becoming more prevalent with online purchases. For example, a person purchasing a car online might put the money for the purchase into an escrow account until the car passes an inspection by the buyer.
Fair Credit Reporting Act (FCRA): States that consumers have the right to have accurate information listed on their credit reports and have a right to know what is listed within their credit reports.
Fair Debt Collection Practices Act (FDCPA): A federal law prohibiting abusive and unfair debt collection practices. This Act prohibits debt collection agents from using unreasonable or abusive actions in an attempt to collect debts from borrowers. The Act specifies how collectors can go about attempting to collect past-due debts.
FAFSA: An application that must be filled out by any college student looking to receive financial aid for school expenses.
FICO® Scores: This is the credit score assigned to every consumer by the Fair Isaac Corporation. How long a person has credit, as well as how they pay and maintain that credit, are factored into the scoring. The higher your FICO score, the better.
Fixed Rate: An interest rate that does not change. For example, if you receive a car loan at 6 percent interest, the rate of interest will always be 6 percent for the entire life of the loan.
Foreclosure: When a borrower stops making timely payments for a loan that has collateral, such as with a home loan, the lender can foreclose on the collateral. For example, if a homeowner stops making payments on a mortgage, the lender can foreclose on the home and take possession of the home.
Home Equity Line of Credit (HELOC): An account with a revolving line of credit, based on the equity within a home. The borrower’s home is offered to the bank as collateral. These usually feature low interest rates and may have tax advantages.
Individual Retirement Account (IRA): A retirement account. Money you put into this account may be tax-deductible, although it varies according to the type of IRA you open. There are annual limitations regarding how much money you can put into an IRA, and money cannot be accessed without penalty until retirement age, except in certain circumstances.
Inheritance Tax: Tax paid on money you receive as a beneficiary when someone dies. Not all states have inheritance taxes.
Inquiry: When a current or potential lender looks at your credit report in order to make a credit decision. For example, if you apply for a credit card, the credit card company will make an inquiry, and it will be notated on your credit report. Having too many inquiries listed on your credit report can be negative.
Installment Credit: This is a form of credit where you pay the money owed back in installments. A car loan is an installment loan because you make payments each month.
Interest: With a credit account, this is the charge you pay for the use of the credit, not including additional fees. With savings, this is the money paid to you by the financial institution for depositing your money with their facility.
Intestacy: When someone dies without having specified a beneficiary in a legal will.
Investment Consultant: A professional who assists people in investing their money for the maximum return.
Lender: An individual or organization that lends money, usually with the intention of earning money from the transaction. A credit card company is a lender, but a friend who loans you money may also be considered a lender.
Line of Credit: A credit account that gives borrowers access to a certain amount of money. Payments are only required when there is a balance on the account. As payments are made, the money becomes available for purchases again.
Lump-Sum Distribution: Used to describe when one payment is made instead of several payments. For example, a person who wins the lottery may decide to take one lump-sum distribution instead of receiving annual payments.
Macroeconomics: The study of the economy as a whole.
Matching Contribution: Money that an employer adds to an employee’s retirement contribution. This is an attractive benefit offered by employers that can help retirement accounts grow quickly.
Matching Strategy: A strategy used by investment professionals that is designed to schedule investments in the best way to maximize growth.
Microeconomics: The study of portions of the economy instead of analyzing the economy as a whole.
Mortgage Brokers: These professionals act as liaisons between mortgage lenders and potential borrowers. Brokers try to find the best loan product for borrowers based on their eligibility.
Mutual Fund: Instead of investing as an individual, people use mutual funds, or groups of investors, to increase their buying power. These funds combine many people in order to invest.
National Foundation for Consumer Credit: A nonprofit organization that assists consumers who have credit problems. Consumers can get credit counseling as well as help with renegotiating debt through this organization (www.nfcc.org).
Non-Sufficient Funds (NSF): Occurs when a check is presented for payment, but there is not enough money in the account to cover the total cost of the check. There are usually costly fees associated with an NSF.
Nonelective Contribution: A contribution that an employer makes to an employee’s retirement account as a benefit to the employee.
Paid as Agreed: A positive notation your credit report. This means you are paying your account as you promised.
Passbook: Given to financial intuition customers to record their account transactions. This can be a great way to keep track of spending.
Pension Fund: A type of retirement account provided by an employer, used to build money for the pension plans of employees.
Pension Plan: A retirement account funded by employers.
Perkins Loan: Student loans that are subsidized by the government and are based on the financial needs of the student.
Personal Identification Number (PIN): A secret code to access money from an ATM or to make purchases using a debit card. Your PIN should be unique and should not be shared with other people.
PLUS Loan: A student loan that parents obtain to help fund a child’s college-related expenses.
Private Mortgage Insurance (PMI): An additional charge that mortgage companies charge to borrowers who do not make a substantial down payment, usually around 20 percent. This is also called “foreclosure insurance.”
Points: A fee that borrowers pay in order to buy the interest rate down on a mortgage loan.
Principal: The total amount you owe on a loan minus any interest and fees not yet charged.
Rate Cap: The preset maximum or minimum percentage that an adjustable rate loan can achieve. For example, an adjustable rate loan with an interest rate of a 6 percent and a cap of +/- 2 percent will never go higher than 8 percent or lower than 4 percent.
Re-age: When a credit account has not had any action for an extended period of time, but then something occurs to make the account active again. For example, if you call and speak to a collector to try to get a payment plan for a debt that you have not paid for several months, the account may be re-aged.
Real Estate Agent: A professional who can help people buy or sell real estate.
Reconciliation: Another word used for balancing a checkbook. Reconciling a bank statement means that you make sure your own records are accurate according to the records sent to you by the financial institution.
Refinancing: The act of obtaining a new loan that pays off an existing loan, preferably at a lower interest rate.
Reverse Mortgage: A type of mortgage only available to seniors. The loan funds are disbursed to the senior, but the loan does not have to be paid back until the borrower moves or dies.
Rollover: Allows a person to move retirement funds from one account to another without any tax penalties. The account holder does not have access to the funds during the rollover.
Roth 401(k): This is a retirement account through an employer that allows people to pay taxes on the contributions now instead of later, which may save money in the long run.
Roth IRA: A retirement account where taxes on the contributions are paid beforehand, which makes the eventual distributions at retirement age not taxable.
Service charge: A fee that is charged for a service. For example, some credit card companies charge a monthly service fee to cardholders.
Stafford Loan: A federally subsidized student loan that is available to college students who attend school at least part-time.
Tax-sheltered: Refers to an account that is not charged full taxes.
Term: The length of time, usually in months, that a loan is amortized to be paid back. For example, most car loans have a term of 60 months.
Treasury Bills (T-Bills): A savings method where you lend a certain amount of money to the government for a certain amount of time in order to receive interest back.
Unified Managed Account (UMA): An investment account that includes several different forms of investments, but are all managed collectively as a whole by a professional.
Withdrawal: Occurs when money is taken out of your account. For example, if you use your debit card to purchase lunch, the amount of the purchase is withdrawn from your account.