The credit industry is full of terms that you may not use in your everyday life and will unlikely see anywhere outside of the credit industry. Yet many of these terms can have a significant impact on your financial well-being. What that means is it’s important to understand these terms even if you only run into them on occasion.
Common Credit Terms in Alphabetical Order
Below is a guide to many of the credit-related terms you would likely read about or hear if you were to eavesdrop on a risk manager’s weekly meeting. Once you understand the 25 terms below, you’ll be on your way to becoming a credit pro.
A charge-off is an entry on a credit report. To charge off means that a creditor has given up trying to collect on a debt and has written it off as a loss. It does not mean, however, that the debt is forgiven. Charge-offs are also commonly referred to as defaults.
Once you fall far enough behind, or default, on the payments of a credit obligation, the lender may turn the account over to a third-party collection agency. At that point, the collection agency may report a collection account to the credit bureaus, which means it will appear on your credit report where it can remain for up to seven years according to the Fair Credit Reporting Act.
3. Credit Bureau
There are three major credit bureaus in the United States — Equifax, TransUnion, and Experian. These credit bureaus collect information about consumers, their credit obligations, and other personal details.
The credit bureaus sell consumer credit data to lenders, creditors, and other companies with permissible purpose to review your credit information. Companies use this information to make more informed decisions about lending money to consumers, what to charge customers for financing, etc. These companies are also commonly referred to as credit reporting agencies or CRAs.
4. Credit Check
When an individual or a company pulls a copy of your credit report, that action is called a credit check or a credit inquiry. You can also perform free credit checks of your own credit reports once every 12 months by visiting AnnualCreditReport.com.
5. Credit Dispute
Despite the best efforts of the credit bureaus, sometimes mistakes happen where consumer credit reports are concerned. If an error shows up on your credit report, the Fair Credit Reporting Act (FCRA) gives you the right to send a credit dispute to the associated credit bureau or the company that furnished the incorrect information.
Per the FCRA, a credit bureau must investigate your credit dispute and send you a response (typically within 30 days). Depending on the results of your dispute, the credit bureau will generally delete the disputed account from your credit report, update it, or verify that it is accurate.
6. Credit File
A credit file describes all the raw, unsorted data that a consumer credit bureau has collected about you and your credit management history. Sometimes, and incorrectly, credit reports are referred to as credit files. They are two separate things.
7. Credit History
More commonly referred to as your credit report, your credit history is a record of how you have managed your credit obligations in the past. The report details the accounts you’ve opened, when you opened them, your balances, whether you made late payments, among other information.
Thanks to the Fair Credit Reporting Act (see below), there are limits on how long certain types of negative information can remain on your credit report.
8. Credit Repair
Credit repair is the process of trying to improve your credit scores or your credit reports with the consumer credit reporting agencies. Credit repair is generally performed by a third-party credit repair company, which charges a fee for its services. You can attempt to repair your credit on your own at no cost.
9. Credit Report
Also referred to as your credit history, a credit report is a one-time snapshot of the information in your credit file with a credit reporting agency. Credit reports are commonly used by banks, credit unions, debt collectors, insurance companies, and even employers.
10. Credit Risk
Credit risk is a measurement considered by lenders before they will do business with you (and also during). Credit risk is also referred to as your creditworthiness. When you apply for financing, such as a credit card or a loan, a lender will evaluate your credit risk before it decides whether to approve or deny your application and how much to charge you if you do qualify.
11. Credit Score
A credit score is a three-digit number that predicts the likelihood that you’ll pay a credit obligation 90 days late or later in the next 24 months. Lenders use credit scores as a tool to help them more accurately predict credit risk. The most common brand of credit scores used in the US credit market is the FICO brand of credit scores, of which there are many.
A creditor is a company to which you owe a debt or credit obligation. Normally a creditor is a bank, credit card issuer, credit union, or finance company. But your landlord, property management company, and utility providers are also creditors.
A default is the failure to repay a credit obligation according to the terms of your credit card agreement or promissory note. Different types of credit have different default points, meaning some credit obligations will default faster than others in cases of nonpayment.
14. Equal Credit Opportunity Act
The Equal Credit Opportunity Act, or ECOA, is a federal civil rights law. Its primary purpose is to prevent lenders from discriminating against consumers based on factors that include race, religion, sex, gender, marital status, and age, among other things. The ECOA also defines the minimum standards of design and development for credit scores used in the US credit market.
Equifax is one of the three major consumer credit reporting agencies in the United States. It is headquartered in Atlanta, Georgia.
Experian is one of the three major consumer credit reporting agencies in the United States. It is headquartered in Costa Mesa, California.
17. Fair Credit Reporting Act
The Fair Credit Reporting Act, commonly referred to as the FCRA, is a more than 50-year-old consumer protection statute that ensures the fairness, accuracy, and privacy of consumer credit information maintained by the credit bureaus. This federal statute has been amended dozens of times since the early 1970s.
FICO, or Fair Isaac Corporation, is the company that invented credit scoring. It designs and develops the widely used FICO brand of credit scores. Its scores are used billions of times each year by lenders in the United States to predict credit risk and make more informed lending decisions. According to FICO, 90% of top lenders use FICO scores.
When someone requests a copy of your credit report, a record of the credit check will appear on your credit report. This record is called a credit inquiry. The credit bureaus are required to maintain a list of inquiries so consumers will know which company accessed their credit reports and when.
Some credit inquiries are soft, such as those that occur when you ask for a copy of your own credit information. Soft credit inquiries do not impact your credit scores. Other credit inquiries, such as those that occur when you apply for financing, are called hard inquiries.
Hard inquiries can, but do not always, impact your credit scores. In fact, most hard inquiries are ignored by credit scoring systems.
20. Line of Credit
A line of credit is a type of revolving financing that you may be able to obtain from a bank, credit union, or online lender. When you qualify for a line of credit, the lender approves you for a maximum amount that you can borrow (aka the credit limit). You can use the line of credit and withdraw up to the credit limit.
As you repay the money you borrow plus any applicable interest and fees, you can access the same credit line again as long as the draw period on your account is active. Think of lines of credit as credit cards, just without an actual credit card.
A preapproval is a preliminary offer for financing, such as a loan or credit card. It’s a good indication that a lender will likely approve your formal application, but not a guarantee that you qualify. All preapprovals are subject to normal underwriting procedures before being formalized.
A prequalification indicates that a credit card issuer or lender has conducted a basic credit review of your information and believes you may qualify for a financing product such as a credit card or loan. But the criteria tend to be somewhat less rigorous than a preapproval.
In some cases, a preapproval for credit must also accompany what’s referred to as a firm offer, meaning the lender has to provide the promised form of credit or something similar.
23. Prime Rate
The Prime Rate is the interest rate that commercial banks use as a guide to set rates for a variety of financing products, including home equity lines of credit, credit cards, and personal loans, among other types of financing.
TransUnion is one of the three major consumer credit reporting agencies in the United States. It is headquartered in Chicago, Illinois.
The VantageScore credit score is another popular credit score brand in the United States. As with most FICO scores, VantageScore credit scores range from 300 to 850. The higher your credit score climbs on the scale, the better.
Created in 2006, VantageScore is a joint effort by the three major credit bureaus. There are now more than 3,000 unique users of VantageScore credit scores, including 2,600 financial institutions. The adoption of its scores has increased significantly over the years.
Many of these terms, such as charge off and credit repair, are going to be more familiar and relevant to consumers who may have had some credit difficulties in their past. But they’re still important for all of us to recognize and understand.