10 Common Credit Terms Defined

Whether you’re applying for a personal loan or reading your credit card statement, you may find some terms to be confusing. In order to best manage your credit, it may help to have a clear understanding of standard industry terminology.

Here are 10 common credit terms defined:

1. Billing cycle

The billing cycle for a credit or loan account refers to the number of days between statements.¹ The length of a billing cycle can vary per credit or loan provider but typically lasts between 20-45 days. Once the billing cycle ends, the provider will send a statement to the borrower based on the activity during that cycle.²

2. Principal balance

The principal balance refers to the unpaid portion of a loan or credit account excluding interest and other fees.³ The amount of a payment that goes toward principal and interest or other fees will be defined in your agreement. In order to pay a loan in full, the principal balance must be $0.

3. Interest rate

Interest rate is a percentage of the principal balance charged by a loan or credit provider for lending money.⁴ There are several factors that can influence a borrower’s interest rate including the length of the loan, the risk of default and inflation rates.⁵ The borrower’s credit score can have an impact on the interest rate as well.⁶

4. Annual Percentage Rate (APR)

APR is an annual rate, which takes interest and other fees into account.⁷ The rate is represented as a percentage number and can vary per bank or lender.⁸

5. Minimum amount due

The minimum amount due is a monthly payment that a borrower needs to pay to keep their account current and avoid late fees.⁹ The amount of this payment could be a fixed installment or a percentage of the outstanding balance on the account.¹⁰

6. Payoff amount

A payoff amount is the total dollar amount that must be paid to close a debt.¹¹ The payoff amount could be more than the principal balance because it may include unpaid interest, late charges and fees.¹² To receive a payoff amount, the borrower may need to request a quote from their lender or credit provider.¹³ Some lenders and credit providers may include a prepayment fee in the payoff amount as well.¹⁴

7. Refinance

Refinancing is the process of moving one or more debts to a new loan or changing the terms of an existing loan.¹⁵ The reasons for refinancing may vary per borrower but some potential advantages include a lower interest rate or an extended loan term.¹⁶ However, there are some possible drawbacks such as additional fees that can reduce the overall benefit for the borrower.¹⁷ You should consider the overall cost of refinancing. Common forms of debt that are refinanced include car loans, student loans and mortgages.¹⁸

8. Down payment

Down payments are a one-time cash payment that is submitted early in the loan application process.¹⁹ The amount of the down payment is traditionally a percentage of the item’s full purchase price. For example, the down payment for a mortgage could equal 5-25% of the home’s total value.²⁰ In addition to improving the odds of getting a loan approved, a down payment may lower the monthly payment and reduce the interest rate.²¹ When applying for a mortgage or vehicle loan, a down payment could be required by the bank or lending institution.

9. Cosigner

A cosigner is a person, other than the primary borrower, who signs a credit or loan application with the primary borrower.²² Adding a cosigner to a loan application can potentially strengthen the odds of approval if the cosigner has a higher income or credit score than the primary borrower.²³ If the application gets approved, the cosigner will be equally responsible for repaying the debt and assume legal liability to pay the debt in full if the primary borrower defaults.²⁴

10. Collateral

Collateral is an asset or property that a borrower pledges to a lender to secure the repayment of a loan.²⁵ The type of collateral required by the lender could be fixed or flexible depending on the loan type. However, in order for a loan to be secure, the value of the collateral must be equal to or exceed the loan amount.²⁶ If the amount is not paid in full or the loan defaults, the lender may take possession and sell the collateral to try to regain their losses.²⁷

Types of collateral include:²⁸

• Real estate
• Vehicles
• Equipment & machinery
• Jewelry
• Home equity

A quick lesson in credit terms

To manage your credit effectively, it can be beneficial to understand common terms and how they could affect you. We hope our list was useful and that you learned something that could help you make more informed decisions in the future.

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