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Finance Terms and Definitions

Adjustable-Rate Mortgage (ARM) – A mortgage with an interest rate that can change based on changes in a specified index.

Adjusted Balance – An interest calculation method used by some credit card issuers in which they subtract all payments made during the month, then add the calculated finance charges.

Adjusted Gross Income (AGI) – The amount of your income that is taxable. AGI consists of your gross income from taxable sources minus certain items, such as payments to a Keogh plan or a deductible Individual Retirement Account. AGI minus deductions and personal exemptions equal your taxable income.

Amortization – The gradual reduction of debt by periodic payments (for a specified period of time), that is large enough to cover interest and principal.

Annual Fee – Yearly charge for the use of a credit card, which is billed directly to your statement.

Annual Percentage Rate (APR) – The yearly cost of a loan or credit, including interest and fees, expressed as a percentage rate.

Annuity – Regular periodic payments made by an insurance company for a specified period of time.

Appraisal – A written opinion by a professional of the market value of the property.

Appreciation – The increase in the value of an investment over time.

Asked Price – The lowest amount at which an investor is willing to sell a security or commodity.

Assessed Value – A public tax assessor’s appraisal of the value of an asset to calculate tax.

ATM – Automatic Teller Machine.

Authorized User – Any person who has permission to use a credit card account.

Average Daily Balance – An interest calculation method used by credit card issuers. The average daily balance is determined by adding each day’s balance and dividing that total by the number of days in the billing cycle. The average daily balance is then multiplied by a credit card’s specified periodic rate to compute interest due.


Balance Sheet – A listing of assets, liabilities, and net worth as of a particular date. “Balance” refers to the fact that assets equal liabilities plus net worth.

Balance Transfer – The process of moving an unpaid credit card debt from one creditor to another.

Balance Transfer Fee – A fee charged for transferring an outstanding balance from one creditor to another.

Balanced Funds – Mutual funds that invest in a combination of stocks and bonds. Balanced funds are especially suitable for retirees and nervous stock market investors because there is low risk.

Bank – A commercial institution licensed as a taker of deposits, banks are mainly concerned with making and receiving payments and supplying short-term loans to private individuals.

Bankruptcy – A court proceeding in which a debtor is relieved of debt liability, in whole or in part, depending on the type of bankruptcy filed. There are two primary filings: a Chapter 7 bankruptcy declaration allows for the liquidation of assets and the discharge of most debts; a Chapter 13 bankruptcy allows a borrower with a steady income to pay off bills over a 36- to 60-month period.

Beneficiary – One who receives or is designated to receive assets from a will, insurance policy, trust, retirement plan, etc.

Bequeath – To transfer property to named heirs through a will.

Bid Price – The amount for which a buyer is willing to purchase a security or commodity.

Billing Cycle – The number of days between the last credit card statement date and the current statement date.

Billing Statement – The monthly bill sent by a creditor. It gives a summary of activity on an account, including balance, purchases, payments, credits, and finance charges.

Biweekly Mortgage – A mortgage on which the borrower pays half the monthly payment every two weeks, resulting in a total of 13 annual mortgage payments and an accelerated amortization.

Bond – A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.

Bond Fund – An income-producing mutual fund consisting of corporate, municipal, or government bonds.

Broker – A person or firm that charges a fee or commission to act as an intermediary between buyers and sellers of securities or property.

Bull Market – A term used to describe the stock market when prices of securities are generally increasing.


Call – An option that grants its owner the right to buy a specified amount of a security or commodity at a specified price within a specified time. The opposite of a put.

Call Price – The price at which callable security can be redeemed by the issuer.

Callable Bond – A security that may be redeemed by the issuer before maturity. The term generally applies to bonds or preferred stocks.

Cap – The maximum amount that an interest rate can increase on an adjustable-rate mortgage, or the maximum amount of interest that will be paid on a bond issue.

Capital Gain – Profit from the sale of an asset or security.

Capital Growth – An increase in the market price or value of an asset.

Capital Loss – Loss from the sale of an asset or security.

Capital Stock – The shares representing an ownership interest in a business, including preferred and common stock.

Capitalized Cost – The value of an asset used to calculate depreciation.

Card Holder Agreement – The written statement of the terms and conditions of a credit card account, as required by Federal Reserve regulations. It must include the annual percentage rate, monthly minimum payment formula, annual fee, if applicable, and the cardholder’s rights in billing disputes. The terms and conditions can be changed by the issuer upon written notification to the cardholder.

Cash Advance Fee – A charge by the bank for using credit cards to obtain cash. This fee can be stated in terms of a flat per-transaction fee or a percentage of the amount of the cash advance.

Cash Flow – The difference between what you earn and your expenses.

Cash Value Life Insurance – Life insurance coverage that incorporates a tax-deferred savings component in addition to providing a certain death benefit.

Certificate of Deposit (CD) – An FDIC-insured investment that guarantees a specific rate of interest for a specified period of time.

Certificate of Title – A legal document that lists a property’s current owner.

Certified Financial Planner (CFP) – Someone certified by the Certified Financial Planner Board of Standards to give financial advice. See also a financial planner.

Certified Public Accountant (CPA) – designation from the American Institute of Certified Public Accountants awarded to those who pass an exam and meet specific accounting related work experience requirements.

Charge Card – A card that requires full payment of the charge by the due date. Unlike credit cards, charge cards do not allow carrying a balance, and no interest is charged. American Express and Diner’s Club are examples of charge cards.

Charge-Off – When your creditor elects to transfer a delinquent account to a category called “bad debt” or “loss” and turns the account over to a collection agency.

Check Card – A plastic card that automatically withdraws funds from your checking account instead of a check, for purchases or cash.

Classic Card – Brand name for the standard card issued by VISA.

Closing – The process of finalizing the sale of property that includes the transfer of title from the seller to the buyer. Also called settlement.

Closing Costs – Fees and other expenses that must be paid by buyers and sometimes sellers when transferring ownership of a property. Costs typically include a loan origination fee, attorney’s fee, advance on taxes (which is placed in an escrow account), title insurance fees, recordation, and transfer taxes, and other fees. Also called settlement costs.

Co-Branded Cards – A type of affinity card issued through a partnership between a bank and a retail company.

Collateral – The underlying security, mortgage, or asset pledged or held in trust for securitization or borrowing and lending activities.

Collection Agency – A company hired by a creditor to collect a debt that is owed. Creditors typically hire a collection agency only after they have made efforts to collect the debt themselves, usually through letters (called “dunning”) and telephone calls. Collection agencies are regulated by the federal Fair Debt Collection Practices Act.

Collision Insurance – The type of auto insurance that covers damage to your vehicle, resulting from a collision with another vehicle or object.

Commission – Compensation paid to a broker for acting as an agent in the purchase or sale of securities or property.

Common Stock – Stock, other than preferred stock, that does not pay dividends at a set rate but offers a higher potential return.

Community Property – Refers to assets or a method of ownership. Generally, it means that each spouse owns a 50 percent interest in an account. Upon the death of one spouse, the survivor claims his or her ownership of one-half of the asset. The other half will pass following a will or to law. Each state has different laws and interpretations.

Compound Interest – Payment of interest, not only on principal investment but also on the interest accumulated in previous periods.

Comprehensive Insurance – The type of auto insurance which covers damage to your vehicle, caused by events other than a collision, such as a flood, fire, hail, theft, or vandalism.

Conforming Loan – A conventional mortgage that conforms to the loan amounts and mortgage guidelines used by the Federal National Mortgage Association (FNMA or “Fannie Mae“), and/or the guidelines of The Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac“).

Consolidation Loan – A single loan obtained to pay off multiple loans. A consolidated loan may offer a lower monthly payment but a longer repayment period. Also called debt consolidation.

Consumer – One who buys goods or services.

Consumer Credit Counseling – A form of credit assistance for financially distressed consumers who need help managing finances. Also called debt relief.

Contingency – A condition that must be met before a contract is legally binding. Buyers and sellers often each add several contingencies.

Contract – An oral or written agreement to do or not to do a certain thing.

Conventional Mortgage – A regular loan that may be privately insured, but is not insured or guaranteed by the government.

Corporate Bond – A bond issued by a corporation.

Co-Signer – A person who signs a loan application with the primary applicant and agrees to be equally liable for the balance.

Credit – A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date.

Credit Bureau (Credit Reporting Agency) – A company that collects and sells information about how consumers handle credit. The three major credit bureaus are EquifaxExperian, and TransUnion.

Credit Card – A plastic card with a coded magnetic stripe that, when signed, entitles its bearer to a revolving line of credit, whose size and interest rate are determined by the borrower’s creditworthiness. A card that allows you to purchase items without cash and delays the payment for about 25 days. Some credit cards carry annual fees, and all assess interest for charges that are not paid by the end of the grace period. Other charges and fees may apply. See affinity card, co-branded card, classic card, gold card, standard card, and titanium card.

Credit History – Kept by a credit bureau, this record details a person’s line of credit and debt repayment history. It is used by lenders to help determine if a potential borrower is a good risk.

Credit Insurance – An insurance policy that pays off debts should the borrower lose their job, die, or become disabled.

Credit Limit – The maximum amount of credit granted to a borrower.

Credit Report – A report of a person’s credit history, prepared by a credit bureau, that lists how individuals manage their debts and make payments, how much-untapped credit they have available, and whether they have applied for any loans. The reports are made available to individuals and to creditors who profess to have a legitimate need for the information.

Credit Score – A statistically derived, numerical score, based on various characteristics of an individual’s credit history, which measures creditworthiness.

Creditor – A person or business from whom you borrow or to whom you owe money.

Creditworthiness – Past and future ability to repay debts.


Daily Periodic Rate – The interest rate factor is used to calculate interest charges on a daily basis. The factor equals the annual percentage rate divided by 365. See the periodic rate.

Debit Card – A bank card with direct access to a cardholder’s account, usually a checking or savings account. The card acts as a check, with the money withdrawn from the existing account balance.

Debt – An amount of money owed from one person or firm to another.

Debt Service – The sum of monthly payments required on credit cards, installment loans, home equity loans, and other debts, but not including payments on the loan applied for.

Debtor – A person or entity (such as a bank) that owes money

Debt-to-Income Ratio – A measure of creditworthiness that calculates your debts as a percentage of income, and is calculated by dividing the total of your long-term debt payments by your gross income.

Deductible – Under an insurance policy, the amount of loss or expense for which the insured is responsible before the insurance company begins paying.

Deed – A legal document that conveys title to real property.

Deed in Lieu (of Foreclosure) – When a homeowner can’t make the mortgage payments and can’t find a buyer for the house, the lender may accept ownership of the property in place of the money owed on the mortgage.

Default – An account on which the payments have not been made according to the terms.

Defendant – A person charged in legal action.

Deferred Annuity – An annuity that delays payments until the holder elects to receive them.

Deflation – A decrease in the prices of goods and services.

Depreciation – Decrease in the value of an asset over time.

Derivatives – Financial instruments with returns that move in response to some underlying asset or index.

Digital Certificate – A digital certificate is an electronic document, which verifies the identity of the owner of a public key.

Disability Insurance – Insurance that replaces your income if you’re unable to work for an extended period due to illness or injury.

Discharge of Debts – A bankruptcy court’s erasure of the debts of a person or business that has filed for bankruptcy.

Dischargeable Debts – Debts that can be erased through bankruptcy. Most debts incurred prior to declaring bankruptcy are dischargeable, including back rent, credit card bills, and medical bills. Compare to non-dischargeable debts.

Discount – The extent to which the price of an asset is lower than its face value.

Discount Bond – A type of bond that is sold for less than face value. The difference between the purchase price and the face value is the interest received by the investor.

Diversification – The spreading of investment dollars among a variety of different assets or securities in a portfolio to reduce the potential risk or adverse impact of any single asset’s poor performance

Dividends – Payment made by a company to its stockholders that is usually a portion of profits.

Dollar-Cost Averaging – Investing a fixed sum at regular intervals, regardless of the share price, to reduce timing risk.

Dow Jones Industrial Average – Widely quoted stock index composed of 30 blue-chip stocks. The value of this index, which does not include dividends, is calculated daily.

Down Payment – The portion of the purchase price is usually paid immediately upon purchase, in the form of cash or trade-in value.


Earnest Money – A deposit paid upfront as part of a purchase price, to demonstrate good faith on the part of the buyer.

Electronic Fund Transfer (EFT) Systems – A variety of systems and technologies for transferring funds electronically rather than by check.

Endorsement – A provision added to an insurance policy to add to or alter the existing coverage. May be referred to as a rider.

Equity – Ownership interest in an asset. Also, security is based on an ownership interest.

Escrow – A process in which a neutral third party holds documents, money, or other property until agreed-upon conditions are fulfilled.

Estate – All property owned by an individual at the time of death.

Estate Planning – Arranging to make sure your assets pass in an orderly and efficient manner to those who you want to have after your death.

Estate Taxes – Taxes levied by federal and state governments on the transfer of your assets after you die.

Executor – A person named in a will to oversee the distribution of an estate, as directed in the will.


Federal Deposit Insurance Corporation (FDIC) – An agency created by the federal government to protect depositors against losses arising from the financial failure of a bank.

Federal Insurance Contributions Act (FICA) – Law that mandates employers withhold Social Security and Medicare taxes from wages.

Federal Reserve System – The nation’s central banking system, designed by Congress to help provide the United States with a safe and stable monetary and financial system. It regulates U.S. monetary policy, and has the power to influence key, short-term interest rates, and control the amount of money and credit flowing through the U.S. economy

FHA Mortgage – A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium.

Finance Charge – The cost of using credit, comprised of interest costs and other fees.

Finance Company – A business that makes consumer loans. The interest rates charged by a finance company may be higher than those charged by other creditors, and credit criteria may be more relaxed, allowing those with problem credit to qualify.

Financial Planner – A financial adviser, ideally with a broad knowledge of all areas of personal finance. Fee-only planners are paid solely by their clients—that is, they do not receive sales commissions or other compensation from other sources. Fee-plus-commission planners charge fees for advice and other services, and also on the sale of investment and insurance products. See a certified financial planner.

First Mortgage – The first-priority claim against real property in the event the borrower defaults on the loan.

Fixed Annuity – Guaranteed payments fixed over the life of the annuity.

Fixed-Rate Mortgage – A mortgage on which the interest rate is specified in the loan contract, and remains unchanged throughout the term of the mortgage loan.

Flexible Spending Account – An employer-sponsored benefit that allows employees to have pretax dollars withheld from their salaries to pay for medical expenses and dependent-care expenses that were not reimbursed, such as babysitting or eldercare fees.

Float – In a mortgage transaction, the option which the borrower may exercise to allow the rate and points to vary with changes in market conditions, rather than to “lock-in” those prevailing at that time. Also, insecurities, the number of shares outstanding and available for trading. In banking, the time between deposit and payment of checks. In credit, the time between a charge purchase and the date on which payment is due.

Forbearance – Voluntarily refraining from doing something, such as asserting a legal right. For example, a creditor may forbear on its right to collect a debt by temporarily postponing or reducing the borrower’s payments.

Foreclosure – The legal process where the mortgage lender sells real property in the event of a default. Proceeds are applied to the mortgage debt, and the owner’s right of ownership is terminated.

401(k) Plan – An employer-sponsored, tax-deferred, retirement savings plan funded by employees with contributions that are deducted from pre-tax pay. Employers frequently add matching contributions up to a set limit. Employees are responsible for managing the money themselves by allocating the funds among a selection of stock, bond, and cash investment funds. Investment gains are not taxed until the money is withdrawn.

Fraud – Dishonest and illegal practice.

Full Faith and Credit – An unconditional commitment to pay interest and principal on debt; usually issued or guaranteed by the U.S. Treasury.


Garnishment – A legal proceeding in which money or property that is owed to you is applied to the payment of the debt. Also called wage garnishment.

Gold Card – A credit card that offers a bigger line of credit, generally $5,000 and up, than a standard card. Income requirements are higher, usually a $35,000 minimum. In addition, issuers provide extra perks or incentives to cardholders.

Good Faith Estimate – A preliminary estimate of the fees associated with closing a loan that is given to you within three business days of submitting a loan application.

Government Bond – A bond issued by the U. S. government. See glossary entries for Treasury Bill, Treasury Bond, and Treasury Note.

Grace Period – A period of time when no interest or fees accrue.

Graduated Payment Mortgage (GPM) – A type of mortgage that allows for a lower initial payment that increases over time, and then levels off. The difference between the lower initial payment and the required amortized payment is added to the unpaid principal balance and referred to as negative amortization

Gross Income – Salary and wages before income taxes are deducted.

Growth Fund – A mutual fund that invests primarily in stocks for capital appreciation, as opposed to current income.

Growth Stock – Stock of a company with a record of rapid earnings growth, relative to its industry.

Guarantee – A promise by one party to pay a debt or perform an obligation if the person with primary liability fails to pay or perform, as required.

Guardian – The person legally designated as being responsible for the minor children and/or personal property of another person.


Hazard Insurance – A type of insurance that protects the policyholder against property damages caused by fire or a severe storm.

Heir – A beneficiary in a will.

Home Equity Line of Credit – A type of mortgage loan that provides the ability to access funds at any time and any amount, up to the maximum credit limit or line. Repayment is secured by a second mortgage and is based on the equity in your home. Specified interest paid is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan – A fully funded loan, obtained for a variety of purposes, secured by a second mortgage, and based on the equity in your home. Interest paid is usually tax-deductible.

Home Inspection – An inspection by a professional of the condition of the structure, electrical and plumbing systems, and other mechanical systems of a home being purchased.

Homeowner’s Insurance – An insurance policy that covers a homeowner against damages to property. It also includes liability protection for lawsuits from people injured while on the premises.

Household Income – The total income of all members of a household. An important measure used by creditors evaluating applications for joint credit.


Immediate Payment Annuity – An annuity purchased with one payment. Payments begin immediately.

Impound Account – Portion of the borrower’s monthly mortgage payment that is held by the lender to pay for property taxes, hazard insurance, mortgage insurance, ground rent, and other items as they become due. Also called an escrow account.

Income Fund – A mutual fund that seeks current income, rather than capital growth.

Index – A published, market-based figure used to establish a lending rate. Common indices include the one-year Treasury Constant Maturity Yield, the Federal Home Loan Bank (FHLB) 11th District Cost of Funds, and the prime rate, as listed in The Wall Street Journal.

Index Fund – A type of mutual fund that seeks to mirror a broad-based index, such as the S&P (Standard & Poor’s) 500 stock index. Because they are not actively managed, these funds usually have low management fees.

Indexed Rate – The sum of the published index, plus the margin, in an adjustable-rate mortgage.

Individual Retirement Account (IRA) – A tax-deferred investment account that an employed individual establishes to provide retirement funds.

Individual Retirement Account Rollover – The movement of qualified retirement funds from one account to another in order to avoid taxability and penalty. The rollover must occur within 60 days into an IRA-qualified retirement account.

Inflation – An increase in the prices of goods and services that are generally expressed as an annual percentage increase in the Consumer Price Index, as compiled by the Department of Labor.

Installment Loan / Installment Credit – An account in which the debt is divided into amounts to be paid successively at specific intervals set by the terms of the loan.

Interest – The cost of borrowing money. Also, the earnings on invested money.

Interest Rate – The fee charged or paid for money lent, expressed as a percentage of the principal.

International Fund – A mutual fund that invests in foreign securities.

Intestate – To die without a will.

Introductory Rate – The low rate charged by a lender for an initial period to encourage borrowers to accept the credit terms. After the introductory period is over, the rate charged increases to the indexed rate or the stated interest rate. Often called a teaser rate or intro rate.

Investment – An asset or item of value that is purchased to generate a profit at some future point.

Investor – A person who makes investments.


Joint Credit – Any account owned by two or more people where all parties are responsible for repaying the debt.

Judgment – A court verdict that requires a person to do something, such as pay a debt.


Kappa – The ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility.


Late Payment Fee – Charge to a customer whose monthly payment has not been received as of the due date or stated deadline for payment, as shown on the billing statement.

Lease – A contract that allows you to use or occupy the property (such as a car, an apartment, or a computer) for a set amount of time, during which you make regular payments.

Liability – A financial obligation or another amount you owe.

Liability Insurance – Insurance coverage that protects you against injuries you cause to other people or damage you cause to their property.

Lien – A secured claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Life Expectancy – The age to which half of the people in an age group are expected to live.

Liquidity – A measure of the ease with which an asset can be converted to cash without the loss of principal.

Living Will – A legal document that voices your medical decisions if you are unable to speak for yourself as a result of medical incapacitation.

Load – The sales commission is charged when you buy or sell shares from a mutual fund.

Load Fund – A mutual fund that carries a sales charge.

Loan – When a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the borrowed money, along with interest, at a predetermined date in the future.

Loan Commitment – A written agreement between lender and borrower to loan money at a future date, subject to the specified terms and conditions.

Loan-to-Value Ratio (LTV) – A ratio expressed as a percentage, determined by dividing the loan amount by the sales price or appraised value, expressed as a percentage.

Lock-In – A commitment obtained from a lender assuring a particular interest rate or feature for a specified time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan.

Long-Term Care Insurance – Insurance that provides some coverage for nursing home stays, and home health care for people with disabling conditions.


Margin – In an adjustable-rate mortgage, the amount added to the interest rate index, to calculate the new indexed interest rate. Also, borrowing money from a broker to purchase securities.

Market Timing – Shifting money in and out of investment markets in an effort to take advantage of rising prices and avoid downturns.

Market Value – The price at which buyers are willing to buy and sellers are willing to sell.

Maturity – The date a debt is due for payment.

Medicaid – The government program that provides health care assistance for the poor.

Medicare – The government program that provides health care assistance for older and disabled people.

Minimum Payment – The minimum amount, usually 2-3 percent of the outstanding balance, a cardholder can pay to keep a credit card account from going into default.

Money Market Account – A federally insured, demand account available through banks, credit unions, and savings and loan associations. Not to be confused with a money market mutual fund; which is not insured.

Money Market Mutual Fund – A type of mutual fund that invests in stable, short-term securities. These funds are designed to be easily convertible into cash and are structured to maintain an unchanging value of $1 a share. Only the yield is supposed to fluctuate.

Monthly Periodic Rate – The interest rate factor is used to calculate the interest charges on a monthly basis. The factor equals the annual percentage rate divided by 12. See the periodic rate.

Mortgage – A loan secured by real estate, where the borrower allows the lender a lien on the property as security until the loan is repaid

Mortgage Insurance – Insurance that protects the lender against loss in the event a mortgage borrower defaults. Also called private mortgage insurance.

Municipal Bond – A bond issued by a state or a political subdivision, such as a county, city, town, or village. The term also designates bonds issued by state agencies and authorities. Interest payments from municipal bonds are generally free from federal income taxation.

Mutual Fund – A mutual fund is a pool of money managed by an investment company, which raises money from shareholders and invests in stocks, bonds, options, commodities, or money market securities. A mutual fund offers the advantages of diversification and professional management, for which the investment company charges a fee.


NASDAQ – The National Association of Securities Dealers Automated Quotation System. Often referred to as the over-the-counter market, the NASDAQ is a computer-based, securities exchange that does not have a physical trading location. Transactions are carried out via telephone and computer networks.

Negative Amortization – An increase in a mortgage loan balance that occurs when the monthly payment is too small to cover the principal and interest due. The amount of the shortfall is added to the remaining balance to be repaid later. See graduated-payment mortgage.

Negotiable Instrument – A written document that represents an unconditional promise to pay a specified amount of money upon the demand of its owner. Examples include checks and promissory notes. Negotiable instruments can be transferred from one person to another, as when you write “pay to the order of” on the back of a check and turn it over to someone else.

Net Worth – The difference between a person’s assets and liabilities.

No Load Fund – A mutual fund that has no sales commission.

Non-Dischargeable Debts – Debts that cannot be erased through bankruptcy. Examples of non-dischargeable debts include alimony, child support, many student loans, and most income tax debts. Compare to dischargeable debts.

Non-Profit Corporation – A business entity formed for civil, social, or charitable purposes for which the generation of profit is not part of its function. Non-profit corporations are taxed differently and are incorporated differently than for-profit business organizations.


Open-End Credit – A line of credit that may be used over and over again, including credit cards, overdraft credit accounts, and home equity lines.

Origination Fee – A loan processing fee paid to the lender as a percentage of the loan amount, where one percent equals one point.

Outsource – To have a service performed or a function completed by others outside of the company primarily offering the service.

Overdraft Checking – A checking account with a line of credit that allows the borrower to write checks or draw funds for more than the actual account balance.

Over-the-Limit Fee – A fee charged for exceeding the credit limit on a credit card.


Penalty Rate – Several percentage points higher than a credit card’s current annual percentage rate, which goes into effect after a predetermined number of late payments.

Periodic Rate – The interest rate is described in relation to a specific amount of time. The monthly periodic rate, for example, is the cost of credit per month. The daily periodic rate is the cost of credit per day.

Personal Identification Number (PIN) – A secure code used to access bank or credit card accounts at ATMs or point-of-sale locations.

Personal Loan – A loan secured by property other than real estate, or unsecured.

PITI – Shorthand for Principal, Interest, Taxes, and Insurance, which are the components of a monthly mortgage payment.

Platinum Card – A credit card with a higher limit and more perks than a gold card.

Plaintiff – The person who institutes a suit in a court.

Points – Charges paid to the lender, usually at closing. One point is 1% of the mortgage face amount.

Policyholder – A policyholder is a person who pays a premium to an insurance company in exchange for the protection detailed in an insurance policy.

Portfolio – The securities or investments owned by an individual.

Power of Attorney – A legal document that allows someone to appoint an attorney, in fact, to conduct personal and financial business, even in the event of legal incompetence. It expires upon the giver’s death.

Pre-Approval – A process used to assess a prospective borrower’s ability to pay back a loan. It determines how much money a prospective homebuyer can borrow before an actual application is made.

Preferred Stock – A class of stock that generally pays dividends at a set rate, and is given preference with regard to the payment of dividends and the distribution of corporate assets in the event of a liquidation. Preferred stock generally does not have voting rights.

Premium – The fee you pay for insurance, usually a recurring expense paid at fixed intervals.

Prepayment Penalty – A charge imposed by the lender if a borrower pays off a loan early. The charge is usually expressed as a percent of the loan balance at the time of the prepayment.

Prequalification – A process used to assess a prospective borrower’s ability to pay back a loan. It determines how much money a prospective homebuyer can borrow before an actual application is made.

Previous Balance – An interest calculation method used by some credit card issuers where finance charges are based on the amount owed at the end of the previous billing cycle.

Prime Rate – The interest rate banks use to price loans to their best or “prime” customers. Many institutions quote prime rates established by large money centers commercial banks, such as Citibank or Chase Manhattan. There is also a prime rate average listed in The Wall Street Journal that is an average of the largest commercial banks.

Principal – The original or remaining amount of money invested or lent, not including profits or interest earned or due on that money.

Probate – The process of distributing a deceased person’s estate.

Profit-Sharing Plan – A compensation plan funded by employer contributions, based on a share of the company’s profits. Compensation can be in the form of stocks, bonds or cash, and can be immediate or deferred to a future date.

Public Offering – Sale of stock by a corporation to the public.

Put – An option that grants its owner the right to sell a specified amount of a security or commodity at a specified price within a specified time. The opposite of a call.


Qualified Retirement Plan – A retirement plan that meets certain Internal Revenue Service (IRS) regulations and is eligible for tax deferment and in certain cases tax-deductible.

Qualifying Ratios – The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you could afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments, which are divided by your gross monthly income.


Real Property – Another term for real estate. It includes land and things permanently attached to the land, such as trees, buildings, and stationary mobile homes. Anything that is not real property is termed personal property.

Rebate Card – A credit card that allows the customer to accumulate cash, merchandise, or services based on charges.

Refinancing – Paying off one loan with the proceeds from another loan.

Replacement Cost Coverage – Homeowner’s insurance that pays the cost to replace or repair the insured home or possessions, up to the policy’s set maximum. Provides more protection than actual cash value coverage.

Reverse Mortgage – An equity loan that allows a homeowner to receive tax-free payments on a monthly basis up to the credit limit, which is based on the equity in the home.

Revolving Line of Credit – An agreement to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. Most credit cards offer revolving credit.

Rider – A provision added to an insurance policy to add, amend, or alter the original coverage.

Risk – The degree of uncertainty regarding the rate of return on and/or the principal value of an investment.

Roth IRA – A tax-deferred retirement account. Contributions to a Roth IRA are not tax-deductible, but there is no tax on withdrawals as long as the taxpayer is age 59 ½ and the account has been open for five years.


Second Mortgage – The second-priority claim against a property in the event that the borrower defaults on the loan. A riskier form of lending since the lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.

Secured Card – A credit card that a cardholder secures with a savings deposit to ensure payment of the outstanding balance if the cardholder defaults on payments. It is typically used by people new to credit, or those trying to rebuild their poor credit ratings.

Secured Debt – A debt on which collateral has been pledged by the borrower. The creditor can institute a foreclosure or repossession, or take the property identified by the lien, called the collateral, to satisfy the debt if you default. Compare to unsecured debt.

Securities – Stocks, bonds, or other types of investments that represent equity ownership or a debt obligation of an organization.

Securities and Exchange Commission (SEC) – The federal government agency that enforces federal securities laws.

Securities Investor Protection Corporation (SIPC) – An agency created by the federal government to protect investors against losses arising from the failure of a brokerage firm. It does not protect investors against losses arising from fluctuating securities prices.

Servicing – Term used to describe the administration of mortgage loans between the time of loan disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.

SIMPLE IRA – A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax-deferred retirement plan that may be used by a sole proprietor, or offered by a small business that doesn’t contribute to any other retirement plan.

Simplified Employee Pension (SEP) – This type of pension allows you to make contributions to your own retirement plan if you’re self-employed, and to your employees’ plan.

Social Security – A U.S. government program providing economic assistance to the unemployed, disabled, or aged, which is financed by the taxation of workers and employers. It includes several programs, including, retirement insurance, disability insurance, and supplemental security insurance.

Spread – The difference between the bid price and the asked price of a security or commodity.

Standard Card – The basic credit card offered by issuers

Standard Deduction – The fixed amount you can deduct from your taxable income if you do not itemize your deductions. About 70% of all individual income tax returns use the standard deductions.

Stock – An equity security that evidences ownership interest in a corporation. Holders of stock may have certain rights, including the right to receive dividends and the right to elect members to the board of directors of the corporation. See common stock, preferred stock.

Stock Certificate – A document that provides physical evidence of stock ownership.

Stock Dividend – A dividend paid in stock rather than cash. The dividend may be additional shares of the issuing company or shares of another company (usually a subsidiary) held by the issuing company.

Stock Fund – A mutual fund that invests primarily in stocks.

Stock Split – A division of the outstanding shares of a corporation into a larger number of shares. The number of shares increases, but the total value remains the same.

Strike Price – In an option contract, the stated price the holder can either buy or sell upon exercise of the option.

Surrender Value – The amount of money a policyholder would receive after canceling a life insurance policy.


Tax-Deferred – An investment with earnings and/or contributions that are taxed at a later date.

Tax-Free – Investments whose earnings are never taxed. For example, municipal bond fund dividends are never taxed at the federal level. However, you may still have to pay capital gains taxes if you sell them at a profit.

Teaser Rate – The low rate charged by a lender for an initial period to encourage borrowers to accept the credit terms. After the introductory period is over, the rate charged increases to the indexed rate or the stated interest rate. Often called a teaser rate or intro rate.

Term Life Insurance – Life insurance that covers you for a fixed period of time.

Thrift – Another name for a savings & loan.

Titanium Card – A credit card with an even higher limit than a platinum card.

Title – A legal document evidencing property ownership or a right of ownership.

Title Insurance – Insurance that protects the policyholder against loss arising from disputes or claims regarding ownership of a property.

Total Debt Ratio – Total monthly debt plus housing payments divided by your gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.

Total Return – A security’s total return reflects not only the income that it pays out from interest or dividends but also any change in its share price or principal value.

Trade-In Value – The amount a dealership will credit you for a vehicle you provide as partial or full payment for another vehicle.

Transaction Date – The date goods and services are purchased, or the date a cash advance is made

Treasury Bill – Fixed-income security issued by the U.S. government having a maturity of less than one year at issue. Backed by the government’s full faith and credit (unconditional commitment to pay).

Treasury Bond – Fixed-income security issued by the U.S. government having a maturity of more than 10 years at issue. Backed by the government’s full faith and credit (unconditional commitment to pay).

Treasury Note – Fixed-income security issued by the U.S. Government having a maturity of two to ten years at issue. Backed by the government’s full faith and credit (unconditional commitment to pay).

Trustee – An individual or organization that is given legal responsibility to manage assets in the best interest of, or for, the benefit of another.

Two-Cycle Billing – With the two-cycle method, the average daily balance is calculated from two billing cycles rather than one, and finance charges are typically higher. This method, in effect, wipes out the grace period for customers who carry a balance. If the bill is not paid in full at the first billing, interest becomes retroactive back to the purchase date.


Umbrella Liability Coverage – Supplemental liability insurance, providing increased protection against lawsuits or other losses for which you are legally responsible.

Underwriting – The process of verifying data and approving a loan.

Unearned Income – Income derived from investments and other sources not related to employment.

Universal Life Insurance – A cash value life insurance policy that provides life insurance protection and a savings component, with a guaranteed rate of return.

Unsecured Debt – Debt, such as most credit cards, that is not secured with collateral. Compare to secured debt.

Unsecured Loan – A loan based on your promise to pay without savings or other collateral as a guarantee; sometimes called a signature loan.


VA Mortgage – A mortgage, of which the only Veteran is eligible, where the lender receives a guarantee to reduce loss from the Veteran’s Administration (VA). The major advantage of a VA mortgage is that the required down payment is very low, and maximum allowable loan amounts are higher than on FHA loans.

Variable Annuity – Payment amounts are not guaranteed but are based on the performance of the investment.

Variable Interest Rate – An interest rate that changes up or down on a set schedule based on an economic index such as the prime rate.

Variable Life Insurance – This type of insurance provides coverage for your entire life and builds up savings over time. You can invest your savings in a menu of mutual funds, which generally are managed by the insurance company.


Whole Life Insurance – A life insurance policy that remains in effect for your entire life.

Will – A legal document that specifies how assets will be distributed upon death.

Workers Compensation – Employer-paid insurance required by law that compensates employees who are injured on the job.



Yield –The rate of return on an investment, usually expressed as a percentage rate. It doesn’t include capital gains or losses.


Z bond – Also known as an accrual bond or accretion bond; a bond on which interest accretes interest but is not paid currently to the investor but rather is accrued, with accrual added to the principal balance of the Z and becoming payable upon satisfaction of all prior bond classes.

Zero-balance account (ZBA) – A checking account in which zero balance is maintained by transfers of funds from a master account in an amount only large enough to cover checks presented.

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