Glossary of Terms

401 (k) Plans

Many employers sponsor a 401(k) retirement savings plan for their employees (so-named for a section of the tax code). Under these plans, also commonly known as defined contribution plans, you can save money toward your retirement on a tax-deferred or "pretax" basis - that is, you don't pay federal or state income taxes on your savings or their investment earnings until you withdraw the money at retirement. You are also allowed to make after-tax contributions, if you prefer. 401(k) plans are offered to employees of public or private for-profit companies.

403 (b) Plans

Similar to 401(k) plans, 403(b) plans are offered to employees of tax-exempt or non-profit organizations, such as public schools, colleges, hospitals, libraries, philanthropic organizations and churches.

457 Plans

Similar to 401(k) plans, 457 plans are offered to employees of state and local municipal governments (and some local school and state university systems).

529 Plans

A 529 Plan (or qualified tuition program) is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. You owe no income tax on any appreciation of the account's value if you use the funds to pay for qualified educational expenses.

Annual Fee

A once-a-year fee sometimes charged by credit card providers to maintain a credit card account. Many credit card providers offer cards with no annual fees.

Annual Percentage Rate (APR)

The yearly interest rate charged on outstanding credit card or loan balances. With a loan, the APR includes most of the loan's up-front fees as well as the annual interest rate.

Automated Teller Machine (ATM)

An ATM is an electronic banking device where customers can perform financial transactions, such as withdrawing cash, making a deposit or checking a balance, without assistance from a cashier, clerk or bank teller.

Assets

Assets are everything you own that has any monetary value, plus any money you are owed. This includes money in bank accounts, stocks, bonds, mutual funds, equity in real estate, the value of your life insurance policy and any personal property that has resale value.

Available Credit

The unused portion of an open line of credit (such as a credit card) or a revolving loan (such as a home equity line of credit) that is available for withdrawal or to make purchases.

Balance

An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to an amount of money owed.

Balance Transfer Fee

A fee that often is charged to transfer a credit card balance from one card to another. It's usually a certain percentage of the balance being transferred.

Bankruptcy

Bankruptcy means being insolvent, or unable to pay your debts. When a person files for bankruptcy, their assets are measured and evaluated and then they are used to repay a portion of your outstanding debt. The debtor is then relieved of the debt obligations he/she incurred prior to filing for bankruptcy. A bankruptcy can stay on your credit report for up to 10 years.

Bonds

A bond is a form of loan to the issuer of the bond. The purchaser of a bond receives interest from the issuer (usually a corporation or governmental agency), usually payable at fixed intervals.

Budget

A budget is a plan for your future income and expenditures that you can use as a guideline for spending and saving. A budget is considered balanced, when total revenues are equal to or greater than total expenses - essentially, when you generate more money than you spend.

Capital

Capital is money that is used to generate income or make an investment. For example, the money you use to buy shares of a mutual fund is capital you're investing in the fund.

Certificate of Deposit (CD)

A promissory note usually issued by a bank or credit union and guaranteed by the Federal Deposit Insurance Corporation (CDs issued by credit unions are insured by the National Credit Union Administration). CD terms generally range from one month to five years, and they often offer the highest interest rate of any savings option offered by a bank or credit union. Unlike checking or savings accounts where you can always access your money, if you withdraw from a CD before the term ends you'll usually pay an early withdrawal penalty.

Cash Advance Fee

A fee charged for when you take out a cash advance against your credit card limit. It is calculated as either a per-use flat rate or a percentage of the advance amount.

Compound Interest

A type of interest that accrues on both the initial principal and the accumulating interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.

Consumer Financial Protection Bureau (CFPB)

A regulatory agency charged with overseeing financial products and services that are offered to consumers.

Contribution Amount

The amount deducted from your wages to go toward a savings account, 401(k) plan or retirement account.

Credit

A contractual agreement where you receive something of value now and agree to repay the lender at a later date. Credit also refers to the borrowing capacity of an individual or company. (See Credit Limit.)

Credit Bureau

A reporting agency that collects information on consumer credit usage. The three major credit bureaus in the United States are Equifax, Experian, and TransUnion.

Credit Card

A card issued by a financial institution (issuer) that gives the cardholder the option to borrow funds. The card can be used to make purchases, get cash advances or pay off other debts. The funds need to be repaid within a designated time period set by the issuer; otherwise interest fees will start accumulating.

Credit Counseling

Counseling services designed to help and provide guidance to those who have gotten into trouble financially.

Credit History

Your credit history is a financial profile. It lets lenders, landlords and employers know how you have managed money in the past and helps them decide whether or not to do business with you.

Credit Limit

The maximum amount a credit card company will allow someone to borrow under a revolving credit agreement (such as on a credit card).

Credit Line (or Line of Credit)

A revolving credit agreement that allows you to write checks or make cash withdrawals of amounts up to your credit limit. Common examples include a home equity line of credit (which is secured by your home's value) and checking account overdraft arrangements (which are unsecured by assets).

Credit Rating

An independent statistical analysis of your ability to repay debt, based on your borrowing and repayment history. It is necessary to have a good credit rating if you intend to borrow money or have credit cards.

Debit Card

A banking card enhanced with ATM (automated teller machine) and POS (point-of-sale) features that can be used to purchase goods and services electronically. The card is used in place of cash or checks to make purchases. Transactions are deducted from the cardholder's checking account either immediately or within one to three days. Depending upon the type of card, a debit card may require the user to sign his/her name or enter a personal identification number (PIN) to complete a transaction.

Debt

An obligation to repay an amount you owe.

Debt Collection

The act of recovering a loan or other debt that is past due. The collection can either be done by a division of the lending company, or by a 3rd party debt collection agency.

Deed

A legal document that transfers ownership of property (such as real estate or a car) from the owner to the buyer. For example, when you pay off a mortgage, the home's deed is transferred to you from the lender.

E-mail Spoofing

A user receives an email from a source pretending to be someone else in order to gain access to privileged information such as passwords and banking information (see also Phishing)

Emergency Fund

To prepare for unexpected events, it is recommended that individuals save the equivalent of 3-6 months' worth of living expenses.

Eviction

A landlord can legally remove a tenant from his or her rental property if rent has not been paid or the terms of the rental agreement have been violated. The landlord must serve the tenant an eviction notice (laws vary from state to state).

Federal Deposit Insurance Corporation (FDIC)

The FDIC insures deposits in banks and savings and loan institutions (a.k.a. thrifts) in case of a bank failure. The FDIC will insure up to $250,000 per depositor per institution as long as the bank is a member of the FDIC. (Note: Credit unions are similarly insured by the Nation Credit Union Administration, or NCUA.)

FICO Scores

Named for the Fair Isaac Corporation, FICO scores are among the most commonly used credit scores. The five factors that determine the score are payment history, amount owed, credit history duration, newly opened credit accounts, and types of credit used.

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts (FSAs), also known as reimbursement accounts, are optional benefits plans offered by many U.S. employers that allow employees to set aside money from their paychecks on a pretax basis to pay for eligible out-of-pocket medical and dependent care expenses. There are two main types of FSAs:

• Dependent Care FSAs: A Dependent Care FSA lets you use pretax dollars to pay for eligible expenses related to care for your child, disabled spouse, elderly parent, or other dependent who is physically or mentally incapable of self-care.
• Health Care FSAs: you're a Health Care FSA lets you pay for qualified medical expenses that are not covered or reimbursed by your employer's medical, dental or vision plans, or by any other type of insurance. Your employer might provide you a debit card to use for payment of these types of expenses.

Foreclosure

When a homeowner is unable to make principal and/or interest payments on a mortgage or home equity line of credit, the lender is allowed to seize (repossess) the property and sell it under the terms agreed to in the mortgage contract.

Grace Period

The number of days a borrower has after the payment due date to pay off the balance due without beginning to accumulate interest.

Guarantor

A person who commits to pay for someone else's debt if he/she defaults on a loan or credit card obligation. Also referred to as a cosigner. People with a poor or limited credit history often need a guarantor before they'll qualify for a loan or credit card.

Health Insurance

A type of insurance coverage that pays for medical and surgical expenses that are incurred by the insured.

Identity Theft

The crime of obtaining the personal and/or financial information of another person for the purpose of assuming that person's identity in order to make financial transactions or purchases, obtain employment, or other fraudulent actions.

Income Tax Rate

The percentage of your income that the government takes in taxes.

Introductory Rate

Credit card issuers may offer low introductory annual percentage rates as special promotions. It is important to fully understand how long the introductory rate will last and what the standard rate will be when the introductory rate expires.

Interest Free Period

The time period you have to make payments on your credit card before interest is charged (see also Grace Period).

Interest Rates

The fee paid for the use of money. For example, interest may be paid by an individual to a bank on the outstanding balance on their credit card, or by a bank to an individual for the balance in their savings account. Interest is typically expressed in terms of annual percentage rate (APR).

Individual Retirement Account (IRA):

A tax-advantaged investment tool used by people to save for their retirement. There are several common types of IRAs:

• Traditional IRAs: Individuals direct pretax income, up to specific annual limits, toward investments that grow tax-deferred until withdrawn, usually at retirement. Distributions (withdrawals) are taxed as ordinary income. There are usually penalties for early withdrawals before the age of 59 ½.
• Roth IRAs: Similar to a traditional IRA except that contributions are made with after-tax dollars so qualified distributions are completely tax-free.
• Simplified Employee Pension Individual Retirement Arrangement (SEP IRAs): This type of IRA is often adopted by self-employed people and small business owners to save for retirement. Contributions are typically 100% tax deductible and earnings grow tax-deferred, until withdrawn at retirement.

Lease

A long- or short-term rental agreement, usually legally binding. Once a lease is signed, its terms cannot be changed unless both parties agree. Common examples include leases for housing and cars.

Ledger

A ledger is used to record monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. You should keep a personal ledger to ensure you do not overdraw an account.

Lender

An individual, public or private group (such as a bank) that makes funds available to another with the expectation that the funds will be repaid, plus any interest and/or fees.

Liability

An amount you owe to creditors (the people or organizations who lend you money). Typical liabilities include a mortgage, car loan, educational loan or credit card debt.

Life Insurance

A contract you sign with an insurance company, obligating it to pay a benefit to your beneficiaries after your death

Medicare

Medicare is government-provided health and hospitalization insurance for people age 65 and older and those under 65 with certain disabilities. Some portions of Medicare are free and others cost money, with premiums typically deducted from your Social Security benefit checks. Medicare tax is deducted from workers' wages.

Minimum Payment

The lowest amount of money that you are required to pay toward your credit card balance each month in order to keep the account in good standing.

Minimum Finance Charge

A fee that is collected by some credit card issuers each billing period. It applies when the actual finance charge you owe is below this minimum.

Money Markets

The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.

Monthly Fixed Expenses

Payments that must be made every month such as rent, car payments or mortgage.

Monthly Flexible Expenses

Costs that can change each month such as gas, phone, or electric bills.

Monthly Net Income

The amount of income you receive each month after taxes and other deductions have been taken out of your pay.

Mortgage

A long-term loan obtained by individuals to buy a home that legally transfers ownership from the debtor to the creditor until the debt is paid.

Mortgage Interest Rates

The rate of interest you will pay on a mortgage over a certain fixed period, usually 15 or 30 years.

Mutual Funds

A professionally managed investment vehicle that is made up of a pool of funds collected from many investors for the purpose of purchasing securities such as stocks, bonds, money market instruments and similar assets. The company that operates the fund collects the money and keeps track of how much each person contributed and earned.

Overdraft

A withdrawal from a bank account that exceeds the funds you have available.

Overdraft Protection

Basically a line of credit. If you overdraw your account and have overdraft protection, the bank will transfer money up to the limit on your line of credit to your account to cover the overdraft. Although you'll pay interest on the amount transferred, it will probably be less than the fee you'd pay for bouncing a check.

Over-the-limit-fee

An over-the-limit fee is charged when you exceed your credit limit through purchases, fees, or finance charges.

Payday Loan

A type of short-term borrowing where an individual borrows a small amount at a very high interest rate. Also known as cash advance loans or check advance loans.

Price-to-Earnings Ratio (P/E Ratio)

The relationship between a company's earnings and its share price. It's calculated by dividing the current price per share by the earnings per share.

Perkins Loans

This federal program provides low-interest student loans to undergraduate and graduate students who demonstrate exceptional financial need.

Phishing

A method used to try to get personal information through the creation of a website that seems to represent a legitimate company (see also E-mail Spoofing).

Personal Identification Number (PIN)

A numerical code, usually four digits, used to authenticate the user in electronic financial transactions.

PLUS Loans

Federal loans that parents of dependent undergraduate students can use to help pay for college or other post-secondary education.

Prepaid Card

A type of payment card that works much like regular debit cards except that instead of funding them through a checking or savings account, you load money on the card by cash, check, funds transfer or direct deposit from an employer or government entity.

Renters' Insurance

A type of property insurance that provides coverage for an individual's belongings within a rental property in cases of theft, damage or personal liability claims.

Savings Accounts

A bank account used to set aside funds for long- or short-term savings goals or as part of an Emergency Fund (see Emergency Fund). Deposits are typically FDIC-insured (see Federal Deposit Insurance Corporation.)

Security Deposit

A monetary deposit given to a lender, seller or landlord as proof of intent. They can be either refundable or nonrefundable, depending on the terms of the transaction.

Shareholder

Any person that owns at least one share of stock in a company.

Simple Interest

Calculated by multiplying the interest rate by the principal and the duration of the loan.

Social Security

A federal program of social insurance and benefits, which includes retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits.

Stafford Loans

Federal fixed-rate student loans for undergraduate and graduate students attending college at least half-time.

Stock

A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

The Power of 50

The principle that paying just $50 above the minimum amount due each month will make an incredible difference in how quickly you can repay debts.

Unemployment Rate

The percentage of the labor force that is unemployed but still seeking employment and willing to work.

Unemployment Insurance

A source of income for workers who have lost their jobs through no fault of their own.