Glossary of Credit & Personal Finance Terms: General Meanings & Definitions
Below you'll find an assortment of common terms used when discussing debt, credit and personal finances. Understanding these definitions will help you talk with a Credit Counsellor and give you a better sense of the options available to you.
A
Amortization - the repayment time period of a loan or debt / the number of years over which you'll repay the loan or debt.
APR - Annual Percentage Rate - a standard calculation by lenders to show what the interest rate and fees are on a credit product (e.g. loan, credit card, etc.); allows borrowers to compare different loan products.
Arrears - the past due amount owing.
Assets - things you own, even if you still owe money against them.
B
Bankruptcy - a legal process performed under the Bankruptcy and Insolvency Act. This process relieves consumers of most debts and legal proceedings by creditors will stop.
Bankruptcy and Insolvency Act - the Act, or laws, in Canada which govern all bankruptcies.
Bankruptcy Counselling - As part of completing the bankruptcy process and obtaining the discharge papers, someone must attend two financial counselling sessions to fulfill the bankruptcy requirements.
Bankruptcy Trustee - an individual licensed by the Superintendent of Bankruptcy to administer bankruptcies and consumer proposals. A bankruptcy trustee must follow the Bankruptcy and Insolvency Act. In December of 2015, bankruptcy trustees officially changed their name to "licensed insolvency trustee."
Beacon / FICO Score - this is the credit score that creditors look at when determining your credit worthiness. It ranges from 300 – 900 points and incorporates a variety of factors about your financial behaviour. This helps lenders assess the likelihood that you will pay them back the money you are borrowing from them.
Borrower - a person who incurs a loan or debt.
Budget - a spending plan that accounts for your sources of income, all of your monthly and annual expenses as well as your future needs and possibilities. Budgeting is the process of forecasting your future income and expenses and making a spending plan to ensure your expenses do not exceed your income.
C
Co-borrower - the secondary person on a loan / debt – this person is still 100% responsible for repaying the debt at any time.
Collateral - an asset pledged as security on a debt so that if the debt isn’t repaid as agreed, a lender can collect the collateral and sell it to recover any money owing on the debt.
Collection Agency - a company that recovers funds owed on a debt that is past due.
Compound Interest - interest earned on previously accumulated interest as well as the principal.
Co-signer - someone who signs on a loan as a guarantor for the primary borrower to the application.
Consolidation Loan - a loan obtained for the purpose of paying out other debts.
Consumer Proposal - under the Bankruptcy and Insolvency Act you may make a legal proposal to your creditors to reduce the amount of your debts, extend the time you have to pay off the debt, or provide some combination of both. Learn more about what a consumer proposal is.
Cost of Borrowing - the cost to you to borrow money – includes interest, fees and any other costs associated with the loan.
Conditional Discharge - part of the bankruptcy process. For those who reach the end of their bankruptcy process and the Court reviews their application to be released from their obligations, some people must still fulfill additional obligations. The Court imposes these extra requirements as part of the discharge process. Once the Court is satisfied that someone has met the extra conditions, they are granted an (absolute) discharge.
Credit - the purchase of goods or services in the present with a promise to pay in the future, with money you still plan to earn.
Credit Bureau - a company that is licensed to collect and compile information about your financial behaviour. The information comes from a variety of credit granting sources as well as public records information. In turn, they sell the information, in the form of a credit report, to those authorized to obtain it.
Credit Counselling - professional counselling provided by organizations that help consumers find ways to repay their debt - through careful budgeting and management of money. People refer to credit counselling and the work that Credit Counsellors do using dozens of different terms: debt counselling, credit card counselling, consumer debt advice, debt relief, debt management, credit card consolidation services, and even Christian credit counselling. Learn more about what credit counselling is.
Credit Rating - an evaluation of the likelihood of a borrower to default on a loan. Credit reporting companies provide information about your financial behaviour to lenders to help them decide whether or not to lend you money. The information may include your payment history, a list of current and past credit accounts and their balances, employment and personal information and a history of past credit problems.
Credit Report - a summary that provides information to potential lenders of the risk involved in extending credit and the probability of repayment. It is created when you start to apply for credit. Contains personal information, to whom and how often you apply for credit, how regularly you make payments and public records (court judgements). Each lender gives you a rating depending on your “performance” with them. Equifax and TransUnion are the two largest credit reporting agencies in Canada.
Creditor - someone you owe money to.
D
Debt Management Program - a repayment program that helps you get out of debt within a reasonable amount of time. After working out a budget, your creditors would be asked to reduce your monthly payment to match the repayment plan. Creditors will often eliminate or reduce further interest charges.
Debt Settlement - Negotiating an agreement with a creditor to repay a debt to them for less than the full amount owed. While a creditor normally expects to be repaid the full amount of money someone has borrowed from them, extreme, unexpected circumstances can significantly reduce someone's ability to repay a debt. Examples of circumstance such as these could include a workplace accident, prolonged illness, or something else that unexpectedly and dramatically reduces someone's ability to earn an income and repay their debts. If a creditor realizes that someone no longer has the capacity to fully repay a debt, they may be open to a settlement negotiation and allow someone to repay less than the full amount owed. The final, reduced amount of debt settled on (the amount to be repaid), typically has to be paid off with one lump sum of money. The money to settle (pay off) the reduced debt often comes from a family member, friend, or inheritance. Creditors of course, are far less likely to agree to a settlement if they know the borrower has assets they could easily sell to repay the debt.
Debt Settlements are also possible if someone has fallen really far behind on their debt payments, creditors have little hope of seeing the full amount of debt repaid, and the debtor now has a family member offer to repay the debt or they receive some inheritance money.
From time to time, there are companies who advertise they can obtain Debt Settlements for everyone and no significant financial hardship is required. These companies typically end up with a lot of disappointed, angry customers who are left worse off with more debt and less money.
Debtor - the person who owes money to someone.
Demand for Payment - a letter from a creditor or collection agency outlining an amount of time in which to pay a debt. The letter may also outline what further action will be taken if payment is not made, e.g. legal action.
Discharge - also known as "absolute discharge." Part of the bankruptcy process. After someone who declares bankruptcy meets all of the requirements to legally resolve their debt problems, they are released from their obligations. This is what "discharged from bankruptcy" means.
E
Equity - the difference between the price for which a property could be sold and the total debts registered against it.
F
Foreclosure - the forced sale of property pledged as security for a debt that is in default.
G
Garnishment - a legal order to withhold money from your pay cheque and remit it to another party, such as a creditor.
Gross Income - how much your pay cheque is before taxes are deducted.
Guarantor - a person who pledges collateral for the contract of another or who guarantees to pay a certain debt if the original borrower defaults.
I
Identification Theft - when someone collects and steals people’s personal information for the purpose of pretending to be someone else in a fraudulent financial transaction. This type of theft often takes the form of a thief using people’s personal information to apply for credit cards in the victim’s name. The thief then profits from this crime by racking up large bills on these new credit cards.
Interest Rate - the cost of borrowing money, expressed as a percentage, usually over a period of one year.
J
Joint Debt - a debt that is agreed to by two individuals. Each debtor is fully responsible for 100% of any amount owing.
Judgement - the formal decision made by a court following legal proceedings.
L
Layaway - a method of paying for merchandise through several installments; the merchandise is set aside for the client until it is paid for in full.
Lease - a contract granting the use of property for a specified length of time in exchange for a specified rental price.
Liabilities - the debts and other financial obligations of a person or company; the opposite of assets.
Licensed Insolvency Trustee - an individual licensed by the Superintendent of Bankruptcy to administer bankruptcies and consumer proposals. They are required to follow the Bankruptcy and Insolvency Act and the directives of the Superintendent of Bankruptcy. Up until December of 2015, licensed insolvency trustees where called bankruptcy trustees.
Lien - a claim against an item by another party which utilizes that item as security for repayment of a loan or other claim. A lien affects the ability to transfer ownership.
Line of Credit - also known as a demand loan or operating line. An agreement by a lender to extend credit up to a certain limit whenever the borrower needs to use it.
Liquid Assets - assets which can be turned into cash easily, e.g. term deposits.
Loan - a sum of money lent at a specified interest rate.
Locked-In RRSP - a Registered Retirement Savings Plan that is preserved for the owner's retirement and cannot be accessed or withdrawn before the owner reaches retirement age. A locked-in RRSP is usually pension funds from someone's previous employer that are meant to be perserved to provide income for that person in retirement. However, if someone encounters specific types of financial hardship, it is possible to unlock and withdraw the RRSP funds in some cases.
N
Net Income - how much your pay cheque is after taxes have been deducted.
Notice of Claim - the notice that you receive if you are being sued in Small Claims Court.
O
Orderly Payment of Debts - a legal proceeding that will consolidate your debts into one payment which must be paid to the court on a periodic basis. Upon receiving payments the court will disburse payments to creditors on a debtor’s behalf.
Overdraft - the extension of credit by a lending institution which allows withdrawals to exceed deposits in a bank account.
P
Payday Loan - usually a small, short-term loan that is secured by the borrower's next paycheque. The interest charged on these loans is often substantial.
Payment Hearing - a hearing held before a judge or justice of the peace to assess a debtor's ability to pay and / or to determine how the debtor will pay the judgement against them.
Principal - the amount you’ve borrowed.
R
Recidivism Rate - the percentage of people who repeat a debt repayment program or declare bankruptcy for a second or third time because they didn’t learn how to effectively manage their personal finances and debt the first time. Popular personal finance author and TV host, Gail Vaz-Oxlade has expressed concern about high recidivism rates among some credit counselling organization on her Toronto radio program.
Refused Discharge - part of the bankruptcy process. When the Court reviews someone's application to be discharged (released) from their obligations, the Court has the option to refuse someone's discharge.
Repossession / Seizure - to take back possession of collateral for failure to pay as agreed. A repossession can be involuntary, or it can be voluntary, meaning that the debtor chooses to return the collateral to the lender.
Right of Offset - a financial institution’s legal right to seize deposited funds to cover a debt that is in default with them.
RRSP - Register Retirement Savings Plan - a savings product that allows individuals to save for their retirement while gaining some income tax benefits.
S
Security - property which is pledged as collateral for a loan, which can be taken back by the lender if the borrower defaults on the loan.
Settlement (Debt Settlement) - when a creditor agrees to accept a reduced payment on a debt, giving up their right to the remainder that is outstanding. To learn more about the advantages and disadvantages of debt settlements, click here.
Suspended Discharge - part of the bankruptcy process. This is an (absolute) discharge that doesn't come into effect until a future date.
Statute of Limitation - the maximum period of time after certain events that legal proceedings, based on those events, may be initiated. e.g. the length of time that a creditor has the right to start legal action for a debt that has become due.
T
Term - the number of months for the current period of the loan.
Trustee - a person licensed by the Superintendent of Bankruptcy to administer consumer proposals and bankruptcies.
W
Writ of Summons - that notice that you receive if you are being sued in Supreme Court.