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  Category: Articles » Finance » Article

Understand Credit Terminology

By Olivia Andrews

Most of us deal with credit in our day to day lives sometimes in the form of credit purchases or making use of credit cards. But there are many credit terms that you should understand clearly to know exactly what is involved in your credit.

1. Credit Score A credit score is a statistical calculation of the credit information obtained in a consumer's credit report. FICO score is a common credit score type that includes Beacon and Empirica. They are all used to calculate the future probability for you repaying any loans based upon your credit history.

2. FICO FICO is a mathematical calculation that lenders use so as to evaluate the risk associated with lending you money. FICO stands for Fair Isaac Company, the company that originally created the formula.

3. Liquidation Liquidation is the process of converting assets into cash to pay off creditors and this process is used in personal and corporate bankruptcy as a solution to get out of debt from the lenders.

4. Repossession Repossession is voluntary surrender of merchandise as a result of the failure of the customer to pay what is being owed. So if you purchase an item on credit and fail to pay for it then the entity who sells it to you reclaim it.

5. Revolving Account A revolving account is an account that requires a minimum payment each month in addition to a service charge. When this balance decreases, the service charge or interest also declines.

6. Bankruptcy This is a form of financial protection where the borrower is unable to pay the rent or mortgage and has no credit or means of paying for it and therefore he is unable to reconcile with the collection agencies.

7. Average Daily Balance The average daily balance is the method of calculation of your credit balance and interest. It involves crediting your account from the day your payment is received.

8. Annual Percentage Rate (APR) APR is the yearly rate that lenders charge the borrowers for borrowing the money. This is also known as "the cost pf credit".

9. Amortization Amortization is a payment plan that allows the borrowers to reduce their debt through monthly payments of principal.

10. Adjusted Balance Adjusted balance is a method of calculating your credit balance and Annual percentage rate where payments made during the billing cycle are subtracted from your balance at the end of the previous billing cycle.

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About the Author
Olivia Andrews, writer of is a freelance journalist and has written many reviews on subjects such as finance, education, health, entertainment, music, gifts, crafts, travel, apparels and mobile phones.

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