Let’s be honest, some of the key terms and phrases used to discuss credit can be confusing. This introductory guide tells you what you need to know about some of the most common financial jargon.
APR: This stands for ‘annual percentage rate’, and tells you the total amount of charges you’d pay if you borrowed a set amount of money over the space of a year. It includes the total interest plus any other charges such as an annual fee. The APR allows you to compare different types of credit options from a range of lenders, making it easier to shop around for the best deal.
Arrears: If you’re ‘in arrears’ it means you’ve fallen behind on your agreed payments to the credit company. Ideally you should try to pay this amount back as quickly as possible. If you can’t make the payment then contact the lender to discuss next steps, and consider talking to a debt charity such as National Debtline or StepChange if you’re struggling financially.
Balance: The total amount you currently owe to your credit provider.
Credit limit: The highest amount of money that a credit company will lend to you, according to the terms of your credit agreement.
Credit score: This is a number rating that individual consumers are given by consumer credit reporting companies (also called credit bureaus or credit reference agencies) such as Experian and Equifax, based on their past financial behaviour. It’s part of a general credit report. When you apply for credit, a potential lender will check your credit score and your credit report to decide whether you are creditworthy.
Default: If you miss several repayments on a traditional loan, your credit company will send you a default notice and take steps to begin to recover the debt from you. This can include being taken to court. A default will be listed for six years on your credit report.
Hard credit search: When you apply for credit the lender will contact a credit reference agency to find out your credit score. A ‘hard search’ is the type of search that’s visible to on your credit file to potential lenders. Too many hard searches on your credit file in a short time will lower your credit score and put some credit companies off of lending to you, and others may decide to charge you a higher than average interest rate.
Interest free period: The amount of time allowed after a purchase before a lender starts charging you interest on it. If you pay the money back in full before the end of the interest free period then you won’t have to pay interest on it. Some lenders offer up to 56 days but others offer none, so it’s worth checking for in the small print of any credit agreement.
Minimum monthly repayment: This is the smallest monthly repayment amount that a credit company will allow you to make. It’s usually worked out as a set percentage of your outstanding balance, but it may also be a specific amount of money. If you only pay the minimum monthly amount it will take harder to clear what you owe, because spreading out repayments over a longer period means you pay more interest.
Soft credit search: A ‘soft search’ is a search on your credit file that’s not visible to credit companies. They’re sometimes carried out as part of a general background check, but you may also see them offered on comparison websites and apps, and sometimes by individual credit companies. A soft credit search will not lower your credit score, unlike a hard credit search.
Understanding financial jargon helps you to make better informed, more empowered decisions about your money. The clearer the terms are around credit, the better.
Penny Golightly is a journalist and author who set up her site to share bargain-hunting tips and information. After living below the poverty line as a child, she decided to avoid running up unnecessary debts as an adult and now lives happily and creatively within her means, and loves finding all the nicer things in life for less. She has written for titles including the Huff Post, The Times, The Guardian and Independent.