Chapter 6 - Building and Maintaining Good Credit

credit

An arrangement in which goods, services, or money is received in exchange for a promise to repay at a future date.

credit score

An indication of a person's credit worthiness or how likely the individual will be able to repay any credit extended in a timely manner.

credit cards

Cards that allow repeated use of credit as long as the consumer makes regular payments.

loan

Consumer credit that is repaid in equal amounts over a set period of time.

credit history

Continuing record of a person's credit usage and repayment of debts.

promissory note (note)

Contract that stipulates repayment terms for a loan.

credit agreement

Contract that stipulates repayment terms for credit cards.

continuous-debt method

If you are unable to get completely out of debt every four years (except for a mortgage loan), you probably lean on debt too heavily.

reaffirm a debt

If you repay a single dollar of the old debt, and it means you reaffirm the debt. Thus you have agreed that you are personally liable for the whole debt again.

means test

In bankruptcy a court determines whether an individual debtor's Chapter 7 filing can be presumed to be an abuse of the bankruptcy laws requiring dismissal or conversion of the case.

credit report

Information compiled by a credit bureau from merchants, utility companies, banks, court records, and creditors about your payment history.

credit freeze (or credit report freeze)

It prevents a credit reporting company from releasing your credit report to merchants and financial institutions without your consent.

wage earner plan

Known as Chapter 13 this is a bankruptcy protection scheme that allows income earners to satisfy outstanding debts in whole or in part within a specific time frame.

straight bankruptcy

Known as Chapter 7, it provides that a debtor's assets are sold, creditors receive payment, and the debtor is freed from his/her debts.

invitation-to-apply

Refers to a credit card offer sent without any prior screening, thus one must fill out the application and see if it is approved.

prescreened

Refers to a credit card offer that a bank aims at certain consumers based on their borrowing histories, and card approval is likely although not necessarily for the interest rate and credit line outlined in the offer.

Consumer credit counseling agencies

The objectives of these nonprofit agencies are to help the creditor avoid bankruptcy, to provide basic education on financial management, and to negotiate with unsecured creditors on behalf of the borrower to reduce interest rates and late fees.

credit utilization ratio

The percentage of a consumer's available credit that he or she has used, which is a key component of one's credit score; a high credit utilization ratio can lower your score.

debt settlement

The process of offering a large, one-time payment toward an existing credit balance in return for the forgiveness of the remaining larger debt.

credit-monitoring service

These companies allow one to access his/her credit report as often as daily and obtain a personal FICO credit score.

negative option

This is a business practice in which a customer agrees to have goods or services to be provided automatically, and the customer must either pay for the service or specifically decline it in advance of billing.

annual percentage rate (APR)

This is the annual rate that is charged for borrowing expressed as a percentage number that represents the actual yearly cost of funds over the term of a loan.

deficiency balance

This occurs when the sum of money raised by the sale of the repossessed or foreclosed collateral fails to cover the amount owed on the debt plus any repossession expenses (collection, attorney, and court costs) paid by the creditor.

refinancing

This occurs when you refinance or rewrite a loan for an even larger amount before it has been completely repaid.

finance charge

Total dollar amount paid to use credit.

repossession

When a financial institution takes back an object that was either used as collateral or rented or leased for nonpayment of a loan.

overindebted

When one's excessive personal debts make repayments difficult and cause financial distress.

debt-consolidation loan

A loan taken out to pay off several smaller debts.

disposable income

Amount of income remaining after taxes and withholding for such purposes as insurance and union dues.

bankruptcy

A constitutionally guaranteed right that permits people (and businesses) to ask a court to find them officially unable to meet their debts.

garnishment

A court order directing that money or property of a third party (usually wages paid by an employer) be seized to satisfy a debt owed by a debtor to plaintiff creditor.

credit application

A form and/or an interview that requests information that sheds light on your ability and willingness to repay debts, such as your income, assets, and debts.

Debt-consolidation loan

A loan taken out to pay off several smaller debts.

credit bureau

Firm that collects and keeps records of many borrowers' credit histories.

tiered pricing

Lenders that offer the lowest interest rates to applicants with the highest credit scores while charging steeper rates to more risky applicants.

Fair Credit Reporting Act (FCRA)

One part of the law requires that credit reports contain only accurate relevant information and allows consumer to challenge errors or omissions of information in their reports.

debt limit

Overall maximum you believe you should owe based on your ability to meet repayment obligations.

denied credit

People who are turned own in their request for credit, and the law requires they must be told why, and if the reason was one's credit score he/she may request a credit score report at no charge.

subprime borrowers

People with poor credit histories who are required to pay lenders more than others for credit.

debt payments-to-disposable income method

Percentage of disposable personal income available for regular debt repayments aside from set obligations.

Fair Debt Collection Practices Act (FDCPA)

Prohibits their-party debt collection agencies from using above, deceptive, or unfair practices to collect past-due bills.

preapproved

Refers to a credit card offer based on a pre-qualification of the individual's credit from a credit bureau report, and upon acceptance the issuer obtains more detailed credit information and sets an interest rate.

interest

The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

consolidation loan

The combining of several unsecured debts into a single, new loan that is more favorable, and it may result in a lower interest rate, lower monthly payment or both.

identify theft

The fraudulent acquisition and use of a person's private identifying information, usually for financial gain.

foreclosure

The legal process of taking possession of a mortgaged property as a result of the mortgagor's failure to keep up mortgage payments.

FICO score

The most widely known credit scoring system developed by Fair Isaac Corporation and used by 90-plus percent of companies when making lending decisions.

debt-to-income method

Your monthly debt repayments (including your prospective mortgage, and any other loan or alimony payments you must make) are divided by your gross monthly income and multiplied by 100.

consumer statement

Your version of disputed information in your credit report when the credit bureau refuses to remove the disputed item.