Module 4: Building Credit
Glossary of Terms
Following are some commonly used terms related to credit and lending. Feel free to bookmark this and link to it so you can easily refer back to it if needed.
|Bankruptcy||A legal proceeding that can release a person from repaying debts.|
|Business Credit History||A record, sometimes also referred to as a business credit file or profile, of a business’s ability to repay debts and its demonstrated responsibility in repaying debts (see also personal credit history).|
|Business Credit Report||A document detailing information generated by a business credit reporting agency. This report includes a summary of company ownership, trade and payment information, commercial banking relationships, public records, and federal government information.|
|Business Credit Reporting Agency||An agency that maintains the credit history of businesses. Also referred to as a “credit reporting agency” or a “credit bureau.”|
|Business Credit Score||A proxy for your business’s ability to repay its debts is developed through statistical algorithms (see also personal credit score).|
|Collection Amount||A past-due account that has been referred to a specialist to collect part or all of the debt (e.g., if you do not pay your bills, after a period of time, the creditor may ask a collection agency to collect the amount you owe).|
|Consumer Credit Reporting Agency||An agency that regularly collects or evaluates individuals’ credit information or other information and sells reports for a fee to creditors or others. Typical clients include banks, mortgage lenders, credit card companies, and other financing companies.|
|Community Development Financial Institution (CDFI)||
A U.S. Treasury Department-designated financial institution dedicated to delivering responsible, affordable lending to low-income and underserved communities. CDFIs have multiple areas of focus, including microenterprises and small business development. CDFIs include regulated institutions, such as community development banks and credit unions, and unregulated institutions, such as loan and venture capital funds. Certified CDFIs can apply for awards for various programs offered by the CDFI Fund. CDFIs may have more flexible underwriting than traditional lenders because their mission incentivizes and fosters development in distressed areas and communities.
When a person promises to repay a loan if the original borrower does not. Cosigning can only be required when the applicant does not otherwise qualify for a loan (each loan request you make is evaluated on its own merit). The Equal Credit Opportunity Act limits when a creditor may seek an applicant’s spouse as a cosigner. In general, a spouse should not be required to guarantee a business loan unless the spouse is a partner, director, officer of the business, or shareholder of a closely held corporation. However, the documents that a spouse may need to sign and the liability they may incur will depend on the circumstances, such as whether any property securing the loan is held jointly or whether state law treats marital property as community property.
An account that a consumer or business has with a financial institution or other company that allows for buying goods and paying for them later.
|Credit Repair Organization||A person or organization that sells, provides, performs or assists in improving a consumer’s credit record, history, or rating (or says it will do so) in exchange for a fee or other payment.|
|Credit Utilization||The amount of credit in use compared with how much credit has been extended by a lender.|
|Creditworthiness||A term used to describe an individual’s access to credit. Individuals who have established credit and maintained a positive credit history are considered creditworthy (i.e., an acceptable risk for the extension of additional credit based upon their ability and willingness to repay past and current debt obligations).|
|DUNS Number||A unique nine-digit identifier for businesses used by Dun & Bradstreet for business credit reports.|
|Employer Identification Number (EIN)||
A number used to identify a business entity. Also known as a Federal Tax Identification Number. Businesses need an EIN to perform transactions such as opening accounts and fulfilling their tax obligations.
|Equal Credit Opportunity Act (ECOA)||Legislation that prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act.|
|Fair Credit Reporting Act (FCRA)||Legislation that promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies.|
|Fair and Accurate Credit Transactions Act (FACTA)||Legislation that amends the Fair Credit Reporting Act by adding provisions designed to improve the accuracy of consumers’ credit-related records. It gives consumers the right to one free credit report each year from the credit reporting agencies. The FACTA also requires the provision of risk-based pricing notices and credit scores to consumers in connection with denials or less favorable offers of credit, and it adds provisions designed to prevent and mitigate identity theft.|
|Financial Statements||A set of documents that provides the financial position of a business. These statements traditionally include a balance sheet, a profit-and-loss statement, and a statement of cash flow.|
|Foreclosure||A legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making loan payments, thus forcing the lender to exercise its right to take and sell the collateral for the loan to obtain the funds owed. For example, when your mortgage lender loaned you money to buy your house, you agreed that if you cannot repay the loan, the lender can foreclose to take ownership of the house.|
|Guarantee||An individual’s legal promise to repay a business loan or line of credit. Providing a personal guarantee means that if the business becomes unable to repay its debts, the individual guarantor is personally responsible.|
|Hard Inquiry (on credit report)||When a lender checks the credit of a consumer or business to make a lending decision (also known as hard pulls). Such inquiries are a factor in calculating personal credit scores (see also inquiry).|
|Inquiry (on credit report)||A request to look at your credit file. An inquiry generally falls into one of two types: a hard or soft inquiry (see also hard inquiry and soft inquiry).|
|Installment (for a credit account or loan)||A contractual agreement under which a borrower provides a lump-sum amount of money in exchange for payments made in equal amounts over a number of years.|
|Judgment||A court-ordered lien for debt owed to a creditor.|
|Lien||A legal claim against a property.|
|Line of Credit||An arrangement in which the lender disburses funds as they are needed, up to a predetermined limit. The customer may borrow and repay repeatedly up to the limit within the approved timeframe, which is defined in the contractual agreement.|
|Personal Credit History||A record, sometimes also referred to as a consumer credit file or profile, of an individual’s history of managing credit. It includes information on individual credit accounts and those closed within a period of time.|
|Personal Credit Report||A document compiled by a consumer credit reporting agency detailing information about that person or business using information derived from that person’s or business’s respective personal or business credit history.|
|Personal Credit Score||A number representing a person’s creditworthiness. A credit score predicts how likely the borrower is to pay back a loan on time. A scoring model uses information from a credit report (see also business credit score).|
|Public Records (on a credit report)||Information related to legal matters on the handling of indebtedness. Unpaid bills that are not resolved through the legal system may turn into public records. Examples of public records that are often included in credit reports are bankruptcies and foreclosures.|
|Soft Inquiry (on a credit report)||When an individual or lender checks a credit report of a consumer or business for informational or educational purposes only, such as examining existing accounts or considering new offers. Soft inquiries will not change your credit score.|
|Small Business Administration 7(a) Loans||A loan guarantee program that allows participating lenders to take on risks that they would not otherwise be able to without a guarantee. To be considered eligible for the SBA 7(a) Loan Program, a business must meet SBA’s size standards, be considered small within its particular industry as defined by the North American Industry Classification System, or operate for profit, and have reasonable equity to invest. Applicants are also required to do, or propose to do, business in the United States or its possessions. Applicants also must have tried to use other financial resources, including personal assets, before applying for a loan.|
|Trade Creditor||A business that has not yet been paid for goods and services that it has supplied to other businesses.|
|Uniform Commercial Code (UCC)||A set of statutes enacted by various states to provide consistency in commercial law across territories. It includes negotiable instruments, sales, stock transfers, trust and warehouse receipts, and bills of lading.|