Glossary of Credit Terms

Adverse action notice

A notice sent by a lender after denying a person’s request for credit based on information in the person’s credit report.

Balance

The amount owed on a credit obligation.

Bankruptcy

A proceeding in U.S. Bankruptcy Court that may legally release a person from repaying debts owed, or reduce the amount owed over a few years. Credit reports normally include bankruptcies for up to 10 years.

Charge-off

A declaration by a lender, generally for tax purposes, that an amount of debt is unlikely to be collected, which can happen when a person becomes severely delinquent in repaying a debt. The lender reports to the consumer reporting agencies that it has taken a loss, but the borrower is still responsible for paying back the debt. Also known as a “write-off.”

Collection

Attempted recovery of a past-due credit obligation by a lender’s collection department or a separate collection agency.

Consumer Reporting Agency (CRA)

See credit bureau.

Credit account

A specific lending arrangement between a creditor and borrower that provides the borrower with a loan or a revolving instrument such as a credit card, with an obligation to repay the creditor. Sometimes referred to as a credit obligation.

Credit bureau

An agency that collects and stores individual credit information and sells it for a fee to creditors so they can make decisions on granting loans and other credit activities. Typical clients include banks, mortgage lenders and credit card issuers. Also commonly referred to as consumer reporting agency (CRA), credit reporting agency or credit repository. The three largest credit bureaus in the U.S. are Equifax, Experian and TransUnion.

Credit bureau risk score

A credit score calculated by a credit bureau, based only on the credit history from the person’s credit report.  FICO® Scores are the leading brand of credit bureau risk scores.

Credit file

The credit records at a credit bureau regarding a given individual. The file may include: the person’s name, address, Social Security Number, credit history, inquiries, collection records, and public records such as bankruptcy filings and tax liens.

Credit history

A record of a person’s credit accounts and activities, including how the person has repaid credit obligations in the past.

Credit limit

The amount of credit that a financial institution extends to a borrower. Credit limit also refers to the maximum amount a credit card company will allow someone to borrow on a single card. Credit limits are usually determined based on the applicant’s FICO® Score and information contained in their credit application.

Credit obligation

See credit account.

Credit report

A detailed report of an individual’s credit history as stored in an individual’s credit file, prepared by a credit bureau and used by a lender when making credit decisions. Most credit reports include: the person’s name, address, credit history, inquiries, collection records, and any public records such as bankruptcy filings and tax liens.

Credit risk

The likelihood that individuals will not pay their credit obligations as agreed. Borrowers who are more likely to pay as agreed pose less risk to creditors and lenders.

Credit score

A statistically-derived number that provides a snapshot of a person’s credit risk. FICO® Scores are credit scores and rank-ordering tools—higher scores will correspond to better credit risk than lower scores. Credit risk is the likelihood that the person, compared to other people, will default on a credit obligation. A credit score is usually based only on a person’s past and current credit information. Lenders use the scores when making credit decisions at different points in a person’s credit lifecycle.

Default

When a debtor (or borrower) is unable or unwilling to meet the legal obligation of debt repayment. Usually an account is considered to be “in default” after being delinquent for several consecutive 30-day billing cycles.

Delinquent

A failure to deliver even the minimum payment on a loan or debt payment on or before the time agreed. Because most lenders have monthly payment cycles, they usually refer to such accounts as 30, 60, 90 or 120 days delinquent.

Equal Credit Opportunity Act (ECOA)

Federal legislation that prohibits discrimination in credit. The ECOA originally was enacted in 1974 as Title VII of the Consumer Credit Protection Act.

Fair Credit Reporting Act (FCRA)

Federal legislation that promotes the accuracy, confidentiality and proper use of information in the files of every “consumer reporting agency”. The FCRA was enacted in 1970.

FICO

FICO, formerly known as Fair Isaac Corporation, is the company that invented FICO® Scores. Starting in the 1950s, FICO sparked a revolution in credit risk assessment by pioneering credit risk scoring for credit grantors. This new approach to measuring risk enabled banks, retailers and other businesses to improve their performance and to expand consumers’ access to credit. Today, FICO® Scores are widely recognized as the industry standard for measuring credit risk.

FICO® Industry Score

A type of FICO® Score offered by all three U.S. consumer reporting agencies—Equifax, Experian and TransUnion—that ranges from 250 to 900 and is used by some lenders to address specific types of lending products, such as auto loans or credit cards.

FICO® Scores

Credit bureau risk scores produced using scoring models developed by FICO. FICO® Scores are used by lenders and others to assess the credit risk of prospective borrowers or existing customers, in order to help make credit and marketing decisions. FICO® Scores only use credit report information that has proven to be predictive of credit risk.

FICO® Scores are available through all three major U.S. consumer reporting agencies (credit bureaus).

FICO® Score NG

A type of FICO® Score offered by all three U.S. consumer reporting agencies—Equifax, Experian and TransUnion—that ranges from 150 to 950 and is used by some lenders.

Inquiry

An item on a person’s credit report indicating that someone with a “permissible purpose” (under FCRA rules) has previously requested a copy of the person’s credit report or credit score. FICO® Scores only consider inquiries by lenders resulting from a person’s application for credit; all other inquiries are ignored.

Installment debt

Debt to be paid back at regular intervals over a specified period. Examples of installment debt include most mortgages and auto loans. Sometimes referred to as an “installment account” or an “installment loan.”

Late payment

A failure to deliver a loan or debt payment on or before the due date. Also see Delinquent.

Permissible purpose

The Fair Credit Reporting Act (FCRA) prohibits a consumer reporting agency (credit bureau) from furnishing an individual’s consumer report unless there is a permissible purpose. Permissible purposes include the use of the consumer report in connection with a credit or insurance transaction, for employment purposes, and for account review. The consumer reporting agency may also furnish a consumer report if a consumer gives his or her consent.

Revolving credit/debt

A line of credit that the borrower can repeatedly use and pay back without having to reapply every time credit is used. Bank credit cards are the most common type of revolving credit account. Other types include department store cards and travel charge cards.

Risk-based pricing

The practice of setting credit terms, such as interest rate or credit limit, based on a person’s credit risk is referred to as risk-based pricing. Creditors that engage in risk-based pricing generally offer more favorable terms to borrowers with good FICO® Scores and less favorable terms to borrowers with poor FICO® Scores.

Score

The numeric output from a predictive scoring model. The most common type of score used by lenders is a credit risk score such as a FICO® Score. Also see Credit score.

Score factors

Delivered with a consumer’s FICO® Score, these are the top areas that affected that consumer’s FICO® Scores. The order in which the score factors are listed is important. The first factor indicates the area that most influenced the score and the second factor is the next most significant influence. Addressing some or all of these score factors can benefit the score.

Scoring model

A mathematical formula or statistical algorithm used to predict certain behaviors of prospective borrowers or existing customers relative to other people. A scoring model calculates scores based on data such as information on a consumer’s credit report that has proven to be predictive of specific consumer behaviors.

Utilization

The proportion of the balance owed on revolving accounts divided by the available credit limit(s). Utilization is an input used in determining a person’s credit score. Typically it is the amount of outstanding balances on all credit cards divided by the sum of their credit limits, and it’s expressed as a percentage. For example, if you have a $2,000 balance on one card and a $3,000 balance on another, and each card has a $5,000 limit, your credit utilization rate would be 50%. This ratio may also be calculated for each credit card individually.

Write-off

See Charge-off.

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Redwood Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Redwood Credit Union and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.

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