Financial Terms

The Differences Between APR, APY, and Interest Rates

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Annual Percentage Yield (APY)

The total amount of interest you pay on a loan or earn on a deposit account, over one year. It includes the nominal interest rate and the effect of compounding.

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Authorized User

An additional member on your credit card account. They receive their own card with their own name on it, but aren’t legally responsible for the credit card bill. Authorized users are typically spouses or other relatives but, technically, could be anyone.

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Average Daily Balance (ADB)

The sum of each day’s balance owed on a credit card, divided by the number of days in the billing cycle. The more activity on a credit card the more complex this calculation is.

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Balance Transfer Credit Card

A credit card with a low or zero introductory APR to make it easier and less costly for users to transfer and pay off balances from other credit cards. Balance transfer credit cards typically charge a transfer fee of 3% or more of the balance being transferred.

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Bill Payment Service

A bill payment service is a third party that facilitates payment from an individual’s or enterprise’s account (e.g., checking or credit card) to a vendor or service provider, for a fee.

Business Credit Card

A credit card designed for business owners and employees, often with business-focused rewards programs. Business cards may be charge cards or standard credit cards.

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Cash Advance

Using your credit card to obtain cash, such as through an ATM. All cash withdrawn must be paid back, usually with an added fee and accrued interest based on a different APR than the card’s APR for purchases.

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Cash Back

Cash back is a credit card rewards benefit that refunds to the card member a small percentage of each purchase made with the card, usually as a statement credit. There are generally three tiers of cash back credit cards: flat-rate cash back cards offer the same percentage back on every purchase; tiered cash back cards offer a higher cash back percentage in certain spending categories like groceries or gas, and a lower rate on all other purchases; and rotating bonus cards, with which the spending categories that earn higher cash back percentages change periodically.

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Cash-Out Refinancing

A cash-out home loan refinancing is about raising cash. It involves replacing your existing mortgage with a new one whose amount is higher than what you owe on your current home loan, providing you with cash for other expenses and investments.

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Charge Card

A credit card with either no credit limit or a much higher limit than standard credit cards, but users must pay the balance in full each month. Charge cards do not charge interest for on-time payments but late payments can incur substantial fees.

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Child Tax Credit

A $2,000 per child reduction in your federal taxes for raising children. It phases out based on income, but the threshold level is high. For married couples, it starts phasing out above $400,000. Part of the child tax credit is refundable, meaning that you may get money from the IRS even if you pay no taxes.

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Childcare Tax Credit

A reduction in the federal tax bill of working parents and guardians caring for children or other dependents who can’t provide self-care. Up to $3,000 in expenses can be claimed for one child, or up to $6,000 for two or more. The percentage of those expenses you can get as a tax credit varies from a maximum of 35% to a minimum of 20%, depending on your income, but there is no maximum income level that would eliminate you from using this tax credit. The childcare tax credit is nonrefundable at the federal level, but could be at least partially refundable on certain state tax returns.

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Closed Loop Gift Card

Can be used only at the store or brand issuing them—as opposed to open loop gift cards, which can be used virtually anywhere. Closed loop gift cards usually can be purchased without a fee from the issuing brand.

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Compound Interest

This method of calculating interest accrues interest at various frequencies, escalating interest earnings. Used for an investment, you earn more; for a debt, it costs you more.

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Continuous Interest

An extreme form of compound interest whereby the frequency of compounding is considered infinite, used mostly in the world of financial derivatives.

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Cosigner

A person who, along with the primary applicant, signs a credit card or loan application. The cosigner agrees to guarantee payment if the primary applicant is unable to repay the debt. The cosigner assumes legal responsibility for the debt.

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Credit Card

A payment card that offers users “mini-loans” to purchase goods and services, or to obtain cash, typically with monthly payback cycles. Users aren’t required to pay their balance in full each month, but when they don’t, they begin accruing interest on any unpaid purchase balance. Cash withdrawals typically accrue interest right away. A minimum payment is usually required each billing cycle.

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Credit Card Annual Fee

A fee you’ll pay just for having certain credit cards. Though there are "no-annual-fee" credit cards available, most experts agree it makes sense to compare how you intend to use a card with the perks and benefits it offers, then “do the math” to determine whether paying the fee makes sense for you.

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Credit Card Outstanding Balance

The total amount of money you owe to your credit card company at any given moment. It changes with every purchase and payment.

Credit Card Statement

A printed or online summary of the credit card transactions you made during a billing period, usually monthly. It includes information such as purchases, fees, interest charges, payments, refund credits, and a total statement balance due.

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Credit Card Statement Balance

The amount you owe the credit card company on purchases, cash advances, and other transactions made with your credit card for a given period, usually a month. This will change from billing period to billing period, unlike your outstanding balance, which changes with every transaction.

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Credit Counseling Agency

A non-profit organization with counselors trained in debt management, budgeting, and consumer credit. They offer financial advice and can help get consumers out of debt through debt management programs.

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Credit Freeze

A free government-regulated function that prevents a credit reporting agency from releasing your credit report to anyone except existing creditors or a government agency with a court order, a subpoena, or a search warrant. You must freeze your credit with each credit bureau individually.

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What Is a Credit Limit and Why Does It Matter?

Credit Limit

The maximum amount of money you can owe to your credit card company at any given time.

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Credit Lock

An unregulated private service provided by credit bureaus and some independent providers that may carry a fee. It lets you quickly approve or deny access when a potential lender requests your credit report.

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Credit Report

A detailed, objective account of your financial situation and payment history that is typically provided to companies you want to borrow from or do business with (including when you apply for a job or to rent an apartment). Credit report data is used to calculate the simplified numerical representation of financial reliability known as your credit score.

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Credit Reporting Agencies

Also known as credit bureaus, these agencies collect data from multiple sources to assess your creditworthiness—basically, whether you tend to pay what you owe. They then sell their credit reports to companies you want to do business with.

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Credit Score

A credit score is a three-digit number that summarizes your credit history and is used by lenders to predict the likelihood you might fall 90 days or more behind in debt payments during the next two years. Any one person can have dozens of credit scores due to variations in data, scoring models, and timing. All current mainstream credit scores use a 300-850 scale, but older and some industry-specific credit scores can go higher or lower.

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Credit Utilization Rate

The ratio of your outstanding credit card balances to your credit card limits. It measures the percent of available credit you are using. Credit rating bureaus reward lower credit utilization rates with higher credit scores, and 30% or less is considered good.

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Daily Periodic Rate (DPR)

A credit card’s APR divided by 360 or 365 days. DPR is applied to average daily balances as part of credit card interest charge calculations.

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Debit Card

A payment card that lets users electronically transfer money directly from their bank account to make a purchase or to obtain cash.

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Debt Avalanche

A debt repayment strategy that targets paying off debts from highest to lowest interest, regardless of loan size.

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Debt Consolidation

Rolling up several credit card balances, outstanding loans, and other debts into one, bigger loan with a single, lower monthly payment.

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What is Debt Free Living?

Debt Free Living

Purists define debt free living as achieving and maintaining zero debt, in the interest of saving money and enjoying financial independence. Pragmatists keep some kinds of debt, such as mortgages, out of their equation for debt free living.

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Debt Management Program

Agreed-upon plans between a creditor, debtor, and third-party non-profit credit counseling agency to help the debtor reduce their outstanding, unsecured debt, typically over a payoff period of about five years.

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Debt Relief Services

Agencies that act on your behalf to renegotiate, settle, or change the terms of debt with your creditor(s), often for a large fee. The U.S. Consumer Financial Protection Bureau considers dealing with debt relief (or debt settlement) companies as risky, and suggests working with nonprofit credit counselors or directly negotiating with your creditors.

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Debt Settlement

A debt reduction method in which the credit issuer allows a consumer to pay off their debt for less than the original balance owed, typically in the form of a lump-sum.

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Debt Snowball

A debt repayment strategy that targets paying off debt from smallest to largest, regardless of interest rate.

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Debt Snowflaking

A debt repayment strategy that involves putting any extra sums of money toward debt repayment.

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Dividends

Money corporations regularly pay to shareholders, often quarterly. Dividends are usually expressed as a percentage of the value of one share of company stock.

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Down Payment

The amount of money paid by a buyer at the time of purchase, most often when buying a house or a car. With a car, it can take the form of a cash payment, a trade-in, or a combination of the two. The difference between the down payment and the price of the car is the amount that the buyer needs to finance through a loan.

Early Retirement

The modern view of early retirement is broad and fluid. Some people look to retire as early as 30- or 40-something. And they may “retire” in name only, actually embarking on a second career. To many other people, it means an end to work in their early to mid-60s, which is when Social Security benefits can begin (age 62, at a discounted level from “full retirement age”), as well as Medicare benefits (age 65). The full retirement age is gradually being extended by the Social Security Administration to 67, for those born in 1960 or later.

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Earned Income Tax Credit

The earned income tax credit helps low- and lower-middle-income workers and their families get a tax break or a refund. In tax year 2019, you could get up to $6,557. Even if your earnings are so low that you owe little or no taxes, you could get money “back” from the IRS that you never paid into the system—akin to a grant—because of the way this “refundable” credit works. The earned income tax credit phases out completely for taxpayers with adjusted gross income (AGI) of approximately $56,000 or more. State and local credits are also available in some parts of the country.

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Effective Annual Rate (EAR)

Another term for annual percentage yield (APY).

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Electric Vehicle Tax Credit

Officially called the Plug-In Electric Drive Vehicle Tax Credit, this aims to encourage Americans to buy electric cars by refunding up to $7,500 in income tax. There has been confusion over whether the EV tax credit is still available, but as of January 2020 only two car makers had begun to phase out—leaving many qualifying cars still on the market.

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Exact Interest

A calculation of the daily periodic interest rate typically used in credit card interest formulas that uses 365 days per year.

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Expense Ratio

In mutual funds, the expense ratio is the fee charged to an investor for managing the fund, expressed as a percentage of fund assets.

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Fiduciary Standards

Fiduciary standards refers to the code of conduct requiring that financial advisors put their client’s interests above their own. Fiduciary standards are regulated by the Securities and Exchange Commission (SEC) and by state securities regulators.

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Finance Charge

The sum of all fees associated with using credit, to be paid to the credit card issuer or lender. Finance charges include interest, foreign transaction fees, annual fees, and any other credit-related fee.

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Financial Planning

A process by which you develop a savings and investment plan to help you achieve your goals in life. It requires building statements of income, expenses, assets and liabilities, and generally starts by assessing your net worth and personal cash flow. Some aspects of the financial planning process can be emotionally difficult—like figuring out what your life goals really are. Some require making choices about future uncertainties.

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Financial Planner

A financial planner helps clients with planning retirement, managing taxes, choosing insurance, setting up their estates, and meeting other financial objectives, often working for fixed hourly or project-based fees. They may or may not also act as investment advisors. The Certified Financial Planner Board of Standards’ website is a hub of information about financial planners.

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FIRE Movement

FIRE stands for Financial Independence Retire Early, and members of this informal movement begin looking to retire—or at least engage in alternative workstyles and passion projects—as early as their 30s and 40s.

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Fixed Interest Rate

In the context of debt, fixed interest rates are those that stay the same for the entire life of a loan or other form of credit. Similarly, when discussing savings and investing, fixed interest rates stay the same over the lifetime of an investment.

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Foreign Transaction Fees

A fee for making a purchase in a foreign currency. Not all cards have foreign transaction fees.

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Fraud Alert

A free government-regulated function that allows creditors to get a copy of your credit report only if they take steps to verify that you are really the person making the credit request.

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Gas Credit Card

A credit card that provides discounts, cash rebates or other rewards towards gas purchases. Gas credit cards are usually associated with one brand of gas and are co-branded with a credit card network.

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Grace Period

The period between the end of a billing cycle and the date your payment is due. You usually aren’t charged interest during the grace period, as long as you pay your statement balance in full, on time, each month.

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Guaranteed Approval

Generally for people with poor credit such as first time or subprime borrowers, guaranteed approval credit cards are “guaranteed” because they don’t require a credit check. They include secured credit cards, for example, which require a cash deposit. Your application may still be declined if you don’t meet certain basic criteria, such as having a valid bank account.

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Health Care Tax Credit

Also known as the premium tax credit, the health care tax credit is a refundable credit designed to help eligible individuals and families with low to lower-middle income afford insurance purchased on public health insurance marketplaces.

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Home Equity

The portion of a home’s value actually owned by the homeowner. It’s calculated as the property’s current market value minus any mortgage balance, other loan balances for which the property was used as collateral, and any liens on the property.

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Hotel Credit Card

A type of rewards credit card that is created by a hotel company in partnership with a credit card issuer. It typically provides the greatest benefits for spending with, and staying at, that hotel company’s properties.

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Identity Theft

Using another person's private identifying information for financial gain. Identity thieves can open new credit card accounts in your name, for example, or file false tax returns for large refunds. They have been known to file false requests to stop your mail delivery in order to intercept documents.

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Inheritance Tax

A half-dozen states impose an inheritance tax on inherited money and property, but there is no such tax in the rest of the states. Nor is there a federal inheritance tax. Where inheritance tax applies, it kicks in at different asset levels at rates that vary, depending on the state, your relationship with the deceased, and other factors.

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Installment Loan

The borrower is loaned a lump sum that is then paid off in regular monthly payments at a fixed interest rate. By comparison, revolving loans generally have a principal balance that varies and carries forward from month to month, and monthly payments can fluctuate due to purchasing levels and variable interest rates.

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Instant Approval

A process in which a credit card application is evaluated and a decision made in real time. Instant approval is typically done with an online application. Despite the “approval” in the term, it’s always possible that your application will be “instantly” declined.

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Interest

The amount of money a lender charges a borrower for a set amount of money (the principal), usually expressed as an annual percentage of the principal.

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Investment Advisor

Investment advisors focus on helping clients handle their investment portfolios of stocks and bonds, usually charging a percentage of the assets under management. They may also provide other services associated with financial planning, such as tax advice. Background information on investment advisors and their firms is easily accessed on the Securities and Exchange Commission’s Investment Advisor Public Disclosure website.

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Late Payment

A bill payment made after the due date. Late payments may incur a fee.

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Limited-Purpose/Store Credit Cards

Credit cards that can only be used at specific locations, like a particular gas station or retail store brand. Otherwise, they typically operate like standard credit cards and may provide discounts or rewards points.

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Loan Term

The length of a loan, typically given in months or years. For cars, some common loan terms are 36 months, 48 months, and 60 months; for home loans, the most common term is 30 years, though 15- and 20-year terms are also available.

Modified Adjusted Gross Income

A key factor when filing your taxes, for purposes like qualifying for a Roth IRA or getting a government-subsidized health insurance plan, modified adjusted gross income is your adjusted gross with certain items added back in.

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Money Order

A printed order for payment of a specified sum, issued by a bank, the U.S. Postal Service, or certain retailers.

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Money Management

A process of budgeting, saving, investing, spending, or otherwise overseeing the funds available to an individual or group.

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Nominal Interest Rate

The stated annual interest rate on a loan.

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Nonrefundable Tax Credits

Tax credits that can lower the taxes you owe to zero, but not lower. In this way they differ with refundable tax credits, which can keep lowering your taxes even below zero, so that you can get more “back” from the IRS than you paid in taxes in the first place.

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Open Loop Gift Card

Typically issued by major credit card companies or financial institutions, open loop gift cards can be used virtually anywhere, online or in store. You’ll often pay a fee to buy an open loop gift card, depending on where it is purchased.

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Ordinary Interest

A calculation of the daily periodic interest rate typically used in credit card interest that uses 360 days per year..

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Periodic Interest Rate

The nominal interest rate for a specific period of time, such as monthly or daily. It is determined by dividing the annual interest rate by the number of times per year interest compounds.

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Phishing Email Scams

Phishing is a crime in which someone impersonates another person or an institution in order to trick you into revealing sensitive information, such as your Social Security number, name and address, mother’s maiden name, bank or credit card account details, and usernames and passwords. Though phishing scams deceive many people every year, the technique is almost as old as email itself – it’s been observed since the 1990s. The name is generally thought to be a combination of “fishing” – indicating that criminals are using a lure to tempt you into providing your information – and “phreaking,” a once-notorious practice of hacking phone systems in order to get free calls.

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Prepaid Cards

A card that must be pre-loaded with cash before it can be used for purchases. Prepaid cards are not technically credit cards and therefore do not affect your credit score.

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Pre-Qualification

Pre-qualification is how you find out which offers you're eligible for when a lender reviews your credit and extends a conditional offer. Depending on your credit profile, you might be eligible for more personalized offers, say, a higher Welcome Bonus, or a lower APR. If you apply for a credit card, your application will still be subject to the card issuer’s credit approval process.

Prime Rate

A common benchmark used for setting variable interest rates for consumer loans, the prime rate is the interest rate banks charge their very best customers.

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Principal

An amount of money being borrowed or invested. If a loan, the principal will initially be the total amount of the loan. After each monthly payment, the outstanding principal declines, although not by the full amount of the payment because a portion goes toward paying the loan’s interest.

Rate-and-Term Refinancing

A rate-and-term home loan refinancing is about saving money, usually by replacing your current mortgage with a new one that has a lower interest rate and/or shorter repayment schedule.

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Refundable Tax Credits

Tax credits that, in some cases, can get you “back” more money from the IRS than you paid in taxes in the first place. Unlike nonrefundable tax credits, which can lower the tax you owe to zero but no lower, refundable tax credits keep going below zero.

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Rewards Credit Card

A credit card that rewards spending with cash rebates, points or other rewards.

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Secured Credit Card

A secured credit card is backed by a cash deposit from the card member. This deposit is collateral on the account, acting as security in case the card member can't make payments. Secured credit cards are often issued to borrowers with poor, limited, or no credit history.

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Secured Loan

A loan for which the borrower pledges some asset, such as a car or property, as loan collateral.

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Securities

Financial instruments that can be traded, such as stocks, bonds, or other investments. Securities do not include owned tangible assets, like a home or boat.

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Simple Interest

The most straightforward way interest is calculated, it multiplies the principal times the nominal, or published, annual interest rate times however many years the sum will be outstanding.

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Store Credit Card

Credit cards that can only be used at specific locations, like a particular gas station or retail store brand. Otherwise, they typically operate like standard credit cards and may provide discounts or rewards points.

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Student Credit Card

A product offered by some banks and intended to be a consumer’s first credit card. Applicants typically must prove they are enrolled at a qualifying college or university. They often have higher interest rates, lower fees, and lesser rewards than standard cards.

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