Common Debt Terms and Acronyms Defined

Whenever you take on new debt—whether a mortgage, car payment or credit card—your lender will provide you with documents with financial terms and acronyms you might not understand.

Getting a hold on these terms is critical for you to fully grasp what you’re signing, so it’s important for you to either look up any debt terms on your documents you don’t understand or ask your lender for more information.

Below, we’ll outline several common debt terms and acronyms that are common in loans and other documents relating to debt.

Note, however, that these definitions will only provide you with a basic understanding of what these terms mean and may not map perfectly onto how they’re used in your financial documents.

It’s always a good idea to go over your loan with your lender or a local banker so you can best understand the responsibilities and obligations that surround your debt.

Common Debt Terms and Acronyms You Need to Know

Annual percentage rate (APR)

The annual percentage rate of a loan—usually referred to as APR—is the interest rate charged on a credit card or other loan. Your loan’s APR will generally include both interest on the loan itself as well as any fees and other costs charged by your lender. For example, if you borrow $1,000 at an APR of 7%, you’ll have to pay around $70 in interest and fees each year for the loan. Since APR is calculated as a percentage of the principal loan, paying down your loan will also likely reduce the monthly interest charged on your account. Importantly, by federal law lenders must disclose the APR on all loans they offer.

Authorized User

When you take out a credit card, you’re known as the “primary user” for the account. This means that you can borrow up to your credit limit but are also responsible for paying this money back in a timely fashion. An authorized user is someone you add to your account with the ability to make purchases as if the credit card was their own. Importantly, authorized users aren’t responsible for paying back any money they spend on the primary user’s card. Instead, the primary user is solely responsible for any charges on the card.

Available Credit

Your credit limit is the maximum amount of money you’re authorized to have outstanding in a single billing cycle. If you subtract your current amount owed from your credit limit, you’re left with your available credit. This is the amount of money you can still spend in the current billing period before reaching your credit limit.

Balance

The “balance” of an account is the final, calculated amount of money either owed or saved in a particular account type. For example, your checking account balance should have a positive balance, meaning you have money available in your account. Meanwhile, a credit card may hold a balance that shows you how much money you owe at your current position in the billing cycle.

Balance Transfer

Balance Transfer A balance transfer is a process where you move debt from one account or credit card to another. Generally, the point of a balance transfer is to take advantage of a better APR or another perk of a new account or card. Many lenders offer specific balance transfer credit cards with a 0% introductory APR that you can use to pay off debt interest-fee for a set period (usually at least a year). However, you should note that you’ll usually have to pay a balance transfer fee to take advantage of these cards (usually a small percentage of the total balance transferred).

Bankruptcy

Bankruptcy is a legal process that occurs when you can no longer repay your outstanding debts and obligations. The bankruptcy process is effectively a legal way of reorganizing your finances so you can have the best possible chance of paying back your creditors and moving on with your life. Bankruptcy often starts with a detailed assessment of your assets and accounts, at which point the bankruptcy judge will determine how your assets can be used to pay back the outstanding debt. Then, the court will help you find a solution to relieve you of the rest of your debt obligations. Primary impact of filing bankruptcy is on your credit score. Focusing on re-establishing credit can be done through paying reaffirmed debts and any new loans on time. 

Co-Signer

Whenever you borrow money from a banker or other lender, you’re responsible for paying that money back. As the main person asking for and paying back the loan, the bank would refer to you as the “borrower.” If you take out the loan with another person, then you would be co-borrowers. This means that you’ll each share ownership of and responsibility for the loan. On the other hand, a co-signer is someone who only takes on the responsibility to pay back the loan in the event you can’t pay it back yourself. Co-signers are much rarer since they have no ownership of the loan but are still responsible for paying it back in the event you can’t make the payments.

Collections

If you fail to pay your bills on time, the creditor may choose to send your debt to collections. Put simply, most creditors don’t have the staff or time to collect money from individuals who won’t or can’t pay their bills, so they’ll either sell or outsource the debt to a third-party company known as a debt collector. Once the original creditor sends the debt to collections, the collections agency will report the debt to the three major credit bureaus, which can lower your credit score. While the mark against your credit will stay on your credit report for years, it’s still smart to pay off the amount in collections as quickly as possible to prevent further marks. However, remember that sometimes debts can be placed into collections by accident, so it’s always wise to ask for a confirmation of the debt from both the debt collector and the original creditor before you begin making payments.

Credit Limit

Your credit limit is the maximum amount of money you can borrow on a particular revolving credit account.

Debt

A debt is an obligation that one party owes to another party. Generally, debts are recorded in cash. Individuals often take on debt as a way of deferring payments over a set period of time, so they don’t have to pay the full amount upfront. Discussions on debt are often paired with discussions on credit, as your credit will determine how much debt you can take on at any one time. Put another way, your credit is based on your ability to pay back debt in full and on time.

Debt Consolidation

If you have several debts from multiple different sources (such as a credit card, auto loan or personal loan), you may find that the interest rate on these payments is higher than you’d like, and that it’s hard to keep up with the payments. Debt consolidation is the strategy of rolling all your other debts under a single new loan that you can pay off easier over time. Generally, the benefit of debt consolidation is that it makes it easy to keep track of how much you owe, and you’ll often end up with a better interest rate on the larger loan than you would with all the smaller ones.

Debt Relief

The term “debt relief” refers to a wide array of measures that you can take to make your debt more manageable. Put simply, anything that makes it easier for you to repay your debts can qualify as debt relief. Debt consolidation is a common form of debt relief that borrowers often use to bring all their debts under one larger loan. Other options include reaching out to your creditors and negotiating forgiveness for a portion of the loan, a lower interest rate or a longer repayment schedule.

Delinquency

If you fail to pay your loans on time, your loan provider may refer to your loan as delinquent. Delinquency is a slightly less serious form of defaulting on a loan, and generally refers to situations where you miss one or two debt payments. Missed credit card payments are also a form of delinquent debt. The consequences of delinquency will depend on your creditor. However, most will report the late payment to the three major credit bureaus after 30 days of non-payment and may charge you fines and interest until you pay off the debt.

FICO Score

Your credit score is a three-digit number that predicts how likely you are to pay back a loan in full and on time. Lenders rely on your credit score and the information found on your credit report. The most common system for calculating your credit score is the FICO scoring model, which is used by around 90% of top lenders. Under the FICO model, your score is made up of five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).

Interest

When you take out a loan or charge something on your credit card, the lender will charge you interest based on the amount you borrowed and the account’s APR. Lenders make money by charging interest on loans, and the specific amount of interest charged will depend on the risk involved in the loan. For example, mortgages are low risk because they’re secured by the underlying asset, and thus have lower interest rates. Meanwhile, credit cards are riskier investments because they’re unsecured, so lenders will usually charge higher interest rates.

Line of Credit

A line of credit is a preset borrowing limit that you can tap into whenever you need to make a purchase. Unlike mortgages and other installment loans where you’ll have to pay off a set amount of debt over time, lines of credit give you the flexibility to borrow and pay back the money as you see fit. The most common line of credit is a credit card, though other options—such as a home equity line of credit (or HELOC)—are also common for homeowners.

Minimum Payments

Whenever you take out a loan, whether an installment loan or a line of credit, your borrower will ask you to pay a minimum payment so you can make progress on paying down the principal and any accrued interest. This minimum payment will generally be calculated as either a percentage of the total loan amount (in the case of a loan like a mortgage or an auto loan) or as a set minimum amount (in the case of a credit card or other line of credit).

Past Due

A loan that’s past due refers to a situation where you make a payment after the formal due date. In the event you miss a payment but still pay the money back within 30 days, your creditor will likely charge you a fee or some other penalty but will likely not report the payment as late on your credit report. However, if you fail to make the payment within 30 days, your lender will likely mark your account as delinquent and report the missed payment to the three major credit bureaus.

Principal

A loan’s principal is the amount of money you originally agreed to borrow and pay back. For example, if you borrow $5,000 from the bank, the principal on your loan would be equal to $5,000. As you begin paying on your loan, you’ll have to pay for any interest accrued plus the underlying principal.

Residual Interest

Residual interest (also sometimes known as trailing interest) is interest that accrues on a credit account between the billing date and the date the payment is due. For example, if your billing date ends on the 30th of the month, you might have until the following 5th to pay down your credit card. However, any funds present in the account during this period may accrue residual interest, which will be applied to the following month’s balance.

Finding the Right Language to Speak with Your Banker

The terms and acronyms involved with debt are often difficult to understand and even harder to apply to your own situation.

It’s always a good idea to start up a discussion with your local banker if you have any questions about your debt or the terms and conditions that surround it.

The exact specifics of your debt will depend on the terms and conditions of the paperwork you sign when you take out a loan. It’s critically important that you understand all the language used when you review your loan documents.

The definitions above should provide you with a good place to start as you compare different debt and loan options. However, they’re no substitute for speaking with an experienced financial professional who can help guide you through the process.

If you have any questions about any of these terms or the specifics of the debt and repayment process, call us at 800-236-8866, schedule an appointment or stop in at any of our Associated Bank locations.

Our local bankers would be happy to help you find a debt repayment strategy that works for your unique financial situation.