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Credit Vocabulary

TermDefinition
Creditor A party to whom money is owed.
Capital Wealth in the form of money or assets.
Collateral Specific asset pledged as a secondary security by a borrower or guarantor.
Principal Capital as distinct from the income derived from it.
Finance Charge Total cost of borrowing, including interest charges, commitment fees, and other charges paid by the borrower for availing the loan facility.
Debt Collector A company or agency that is in the business of recovering money that is owed on delinquent accounts.
Credit Bureau A company that collects information relating to the credit ratings of individuals and makes it available to credit card companies, financial institutions, etc.
Character One of the five key factors considered in evaluation of a loan application is the applicant’s credit history and reputation in the community.
Credit Report Document supplied by a bank or a credit reporting agency that summarizes an entity’s credit history and present financial position.
Capacity Borrower’s ability to repay a debt on a timely basis, determined by deducting total cash outflows from the borrower’s total income during (usually) a month.
Credit History Record of a borrower’s payment behavior that reflects his or her ability to repay a loan. A critical factor used in credit rating.
Credit rating Evaluation of the timely repayment ability of an individual, firm, or debt security. It is built up on the basis of credit history.
20/10 Rule Money borrowed should total below 20% of your annual after-tax income; not including mortgage/rent. Payments on all the loans and credit cards should be no more than 10% of your monthly after-tax income.
Debtor A person who owes money.
Bankruptcy Legal procedure for liquidating a business which cannot fully pay its debt out of its current assets.
Secured Loans Loan agreement under which a borrower pledges a specific asset or property which the lender can seize in case a default.
Unsecured Loans Loan extended only on the basis of the borrower’s financial position, creditworthiness, credit history, and general reputation. The borrower signs a promissory but does not pledge any specific assets as collateral.
Reaffirmation An agreement in which a borrower agrees to continue to be obliged to repay a debt, even if it otherwise would be discharged in bankruptcy.
Involuntary Bankruptcy A legal proceeding in which a person or business is requested to go into bankruptcy by creditors, rather than on the person or business’ own accord.
Voluntary Bankruptcy Legal proceedings whereby a debtor entity, on its own initiative, files a petition seeking relief from creditors.
Discharged Debts The cancellation or forgiveness of a debt. It results in taxable income to the debtor unless the forgiveness is a gift or bequest.
Liquidation Winding up of a firm by selling off its free assets to convert them into cash to pay the firm’s unsecured creditors. Any remaining amount is distributed among the shareholders in proportion to their shareholdings.
Reorganization Readjustment of a firm’s debt and capital structure after a bankruptcy or receivership order.