Debt Terms

Loan and credit card agreements sometimes use terms you may not use regularly. However, it is important that you understand what these terms mean so you have a clear idea about the detail of a loan contract before you sign on the dotted line or receive updates about your loan. Being an educated consumer can help you make good financial decisions.

Bankruptcy

One of the possible negative outcomes of debt, bankruptcy is when an individual asks the courts to dismiss all she owes to her creditors. In response, the courts will order the individual to set up a repayment plan, dismiss the case or relieve the individual of all her debts. A bankruptcy filing remains on a personal credit report for up to 10 years, which can affect an individual's ability to access new lines of credit during that time. There are two main forms of bankruptcy filings: Chapter 7 and Chapter 13. Chapter 7 bankruptcy refers to the liquidation of an individual's nonexempt property with the proceeds going to the creditors. Chapter 13 bankruptcy is when the court adjusts an individual's debts to match his income; thus, allowing him to keep his belongings and pay the debt off over a period of three to five years.

Debt-to-Income Ratio

A debt-to-income ratio is a formula that calculates the amount of income used towards paying a debt. The DTI ratio formula is (total debt payments per month) (monthly income) x 100. A lender may use the DTI ratio formula when deciding to grant an individual a loan. If a DTI ratio is too high, meaning too much income will be spent on paying the loan, a lender may deny a loan to the applicant.

Annual Percentage Rate

The annual percentage rate is the interest rate a lending company charges annually to borrow money. Consumers sometimes use the APR to compare credit cards and loans from lenders to determine which loan offer is the cheapest.

Balance Transfer

A balance transfer is when a consumer uses a credit card to pay off the total balance owed on a different credit card. The debt is not removed, but is transferred to a different credit card company at a lower interest rates. Some credit card companies charge a transfer fee when customers complete a balance transfer. Other companies may offer a low introductory rate on balance transfers to new clients, but then charge a different interest rate when the introductory period expires.

FICO Score

Named after the Fair Isaac Corporation, a FICO score is a statistical calculation of an individual's credit score. The calculation includes reports from other credit bureaus, an individual's history of making bill payments on time, the amount of debt owed, the number of accounts he has, the number of years in his credit history and the amount of current credit card applications. Lending institutions often use an individual's FICO score to determine his credit worthiness after he applies for a loan. The FICO score ranges from 300 to 850.