The finance world has acronyms and personal finance terms that might sound alien to many people. We’ve put together a glossary of financial terms to help you better understand money and credit. (This isn’t an exhaustive list).
Finance terms defined
401(k): This is an account sponsored by your employer that enables you to contribute funds for retirement either before or after taxes depending on the options offered in your plan.
AnnualCreditReport.com: The only site authorized by federal law to provide free credit reports. Americans are entitled to one free credit report annually from each of the three credit reporting bureaus: Equifax, Experian, and TransUnion.
Amortization: When you get a mortgage or car loan, you might receive an amortization schedule. This schedule shows the gradual repayment of your loan over a period of time.
APR: APR stands for annual percentage rate. It’s the interest rate you pay when you get a loan or what you earn on an investment in one year, including fees.
APY: APY stands for annual percentage yield. It’s similar to APR, except it takes into account the compound interest you earn over a year. APY is higher than APR because it includes the interest you’ve already accumulated in its calculations. Banks advertise APY for savings accounts and APR for loans.
ARM: ARM stands for an adjustable-rate mortgage. Your interest rate starts at a certain APR, but it can go up (sometimes down) over time, which could make them riskier compared to fixed-rate mortgages.
Asset allocation: A diversification strategy in which you spread your money across different investment types called asset classes. There are three basic asset classes:
- Cash: Yup, cold hard cash. When you’re investing, it also means your savings and money market accounts.
- Bonds: Bonds are considered less risky than stocks, and when you buy a bond, you’re basically loaning money to an organization, company, or government.
- Stocks: It’s a share in the ownership of a company. When you purchase stock, you become a shareholder in the company.
Cash flow: The net amount of cash and cash equivalents moving into and out of a business.
Capital gains (and losses): If you sell something for more than you spent to acquire it, that’s a captain gain. If you sell it for less than your original purchase, that’s a capital loss.
Credit limit: The maximum credit you can get on a financial product, such as a credit card or line of credit from a lender or financial institution.
Credit report: A credit report is a detailed record of an individual’s credit history created by a credit bureau. It includes payment history, account balances and the status of your credit accounts.
Credit score: Lenders use credit scoring, among other things, to determine your creditworthiness. A person’s credit score is a number between 300 and 850.
Credit terms: The agreement between borrower and lender that stipulates the monthly payment amount due, due date, fees and interest.
Creditworthiness: Measure of whether you’re financially sound enough to extend credit to.
Debt consolidation: The process of combining several loans or other debts into one to obtain a lower rate or reduce fees.
Diversification: You know the adage, “don’t put all your eggs in one basket.” It’s a risk management technique that divides funds among securities of different industries or classes.
Financial wellness: When a consumer is on top of their finances, they’re referred to as financially healthy. It’s a highly personal state, regardless of income, that we all strive for.
Fixed-rate loan: A loan where the interest rate doesn’t fluctuate for the duration of the loan.
Gross income: The total money earned before taxes are deducted.
Hard inquiry (or hard pull): Inquiries that affect your credit score. Hard pulls must be authorized by you and are generally made by potential creditors to determine your creditworthiness.
Identity theft: Acquiring personal information to obtain credit under another person’s name.
IRA: IRA stands for individual retirement account. Unlike 401(k)s, an IRA can be opened by an individual and don’t have to be sponsored by your employer. You can contribute income up to a set maximum dollar amount.
Net income: It’s the total money earned after taxes and other deductions are taken out.
Net worth: The difference between your assets and your debts.
ROI: ROI stands for return on investment. To calculate ROI, take the gain of the investment, subtract the cost of the investment, and then divide the total by the investment cost.
Soft inquiry (or soft pull): Inquiries that do not affect your credit score. Soft pulls are usually initiated by utility providers, lenders or employers.
Secured credit card: A credit card backed by a cash deposit. When you are rebuilding your credit, these types of cards can be helpful.
Secured debt: A debt secured with collateral to reduce a lender’s risk (e.g., a car loan, mortgage, or home equity line of credit).
Unsecured debt: A debt that isn’t secured with collateral (e.g., credit cards, certain personal loans).
Variable interest rate: When the interest rate of a loan change for the duration of the loan.
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