Glossary of Credit Terms


Credit Score

A credit score is a three digit numerical representation of the probability you will pay a loan back usually referred to as creditworthiness. This number is based on a statistical analysis of all the information found on your credit reports. This information usually comes from the three main credit bureaus which are TransUnion, Equifax and Experian. Although the intent of these bureaus is to maintain a concise accurate portrayal of your credit history they sometimes do make errors, which is why it is good to know what is on your credit report. If there is anything you see on your report you don't understand or need consultation about please donot hesitate to ask.

FICO

FICO stands for Fair, Isac and Corporation which according to their website www.fico.com is the leader in Decision Management, transforming business by making every decision count. They use predictive analytics to help businesses automate, improve and connect decisions across organizational silos and customer lifecycles. What all that means is that they created the formula used to calculate your credit score using every bit of information from your credit reports. When you hear FICO credit score all this means is that the score was calculated using their formula which is the standard for most credit scores.

Fair Credit Reporting Act

The FCRA is a very long very complete 84 page conglomeration off all the laws that govern the fair practice of credit reporting. It includes information on all of the procedures that govern what the bureaus can include on your credit report, how the information must be maintained, and what to do in the event of identity theft act. Its contents are essential in knowing how and what you can do to fix your credit report. It is a lovely read and can be found by Clicking Here if you would like to take a look.

Subprime

If you have ever heard the term subprime referred to lending, loans or credit it essentially means that the person does not have good credit but the banks are still willing to lend money to these people. The banks will always charge higher interest rates on loans to people with low credit scores. The higher interest rates will always result in someone paying the bank more to let them borrow the same amount of money as someone with a good credit score.

Prime

When prime is referred to lending, loans or credit it means that the person has a good credit history. Banks are always willing to lend money to prime clients and these clients will always get a lower interest rate than someone with a low credit score. This will result in spending the least amount of money to access money for home purchases (huge savings), auto payments, cell phones, rent ect. For a detailed diagram check our chart's HERE to see a real representation.

Interest Rate

An interest rate is a fee that a bank will charge for allowing you to borrow money from them. Interest is usually calculated on a percentage of the amount borrowed per year. For example if you borrow $250,000.00 from the bank at 6.5% the amount of interest in a year you would pay would be $16,250 vs. a loan at 5.5% with $13,750. Keep in mind the way the principal balance is paid off is different for different kinds of loan. For a mortgage you pay almost all interest when the loan starts and slowly begin to pay more towards principal as the term of the loan progresses. For a 30 year $250,000 mortgage you would save over $65,000 during the term of the loan for having a 5.5% vs. having a 6.5% interest rate.

Principal

The principal, when referring to loans and credit, describes the amount borrowed not including any of the fees or interest associated with the loan. The worse your credit situation is the more you will be charged to borrow money from any lending institution. Also very important, is the interest rates and principal amount on your credit cards. Many cards charge such high rates that if the minimum payment is made you will end up spending over ten times the purchase amount and never begin to pay down your principal balance.

Credit Crunch

A credit crunch is a simple term for a complex situation. The underlying cause of a credit crunch is that banks are scared to lend money to other banks. Usually this will cause banks to raise interest rates to cover their greater risk (have you checked your credit card lately). This puts a great strain on our entire economy with retailers finding it harder to finance goods and consumers finding it harder to purchase them. In this unique economic situation (which is happening now) we are faced with a credit crunch. The Federal Government has chosen a remedy to this situation which includes infusing our economy with cash to provoke banks to lend again, in addition to buying mortgage backed securities. This creates a counterproductive situation where mortgage rates are extremely low but the banks have tightened their requirements on who they will lend to. It is becoming increasingly harder to get a home loan financed, which happens to be our specialty.

Credit Default Swap

A credit default swap is a method of transferring the risk of fixed income securities to another party. The buyer of the swap gets guaranteed protection because the seller has to guarantee the credit worthiness of a product. This is largely a tool used by large banks when transferring investments in mortgages and other fixed income securities. Similarly, a CDS is when smaller consumer credit companies sell their defaulted debts to investors. These investors are not guaranteed any money but they do have the right to pursue the debtor for collection of the funds. This could have an adverse effect on your credit report if you have an unpaid debt because it can be sold multiple times and appear on your credit report as multiple defaulted debts. We can help scrub your reports for these kinds of derogatory marks and have the ability to get them removed pursuant to the FCRA.