Debt and Credit Glossary

Credit accounts that have a positive status, which generally means that you are making the minimum payments by the billing due date, or exceeding that amount.

Interest is earned in set intervals, such as monthly or annually, and is paid to the account at the end of that period. Interest that has been earned but not yet paid to the account is accrued interest.

A mortgage (see: mortgage) where the interest rate is changed periodically based on a standard financial index. Since the rate is dependent on market conditions, it carries a certain amount of risk, in exchange for which you will generally enjoy a lower-than-average initial interest rate. An ARM is generally offered in contrast to a fixed rate mortgage (FRM).

Amortization is process of paying down a loan in its entirety through scheduled payments over a set period. This is achieved through set payments that encompass both the interest and the principle. Amortizing loans ensure that a debt is paid within a period of time rather than continued indefinitely. A 30-year mortgage is an example of an amortizing loan.

The period of time it will take to pay off a debt in full. For a 30-year mortgage loan, the amortization period would be 30 years.

The total amount you will be charged annually for carrying a debt on credit. It is also known as the interest rate. The APR is generally charged monthly, rather than annually, by multiplying the current debt by the annual APR and dividing by 12 to arrive at a monthly interest cost. The APR does not factor in compound interest, unlike the APY (see Annual Percentage Yield).

A percentage rate reflecting the total amount of interest paid on a deposit account, including the compound interest on the account. The APY will generally be slightly higher than the APR because of the addition of compound interest.

Anything owned by a person or business that has financial value. In loans, only certain assets are generally considered, such as real estate, cars, jewellery, and stocks and bonds. The term ‘asset’ would cover all your financially valuable property, however, including items such as lawn equipment or furniture.

The sum of your total debts divided by your monthly pre-tax income. If your total debts add up to $1,000, and your pre-tax income is $5,000, your back-end ratio would be 20%. Ideally, lenders look for a back-end ratio below 36%, though there are loans available for those above this ratio. (See Debt-to-Income Ratio)

You may transfer a current debt balance from one lender to another in a process called a balance transfer. These transfers generally occur from one credit card to another, but you may also transfer your debts to other types of lenders. Generally, people use balance transfers to get a lower interest rate on their existing debt.

When a person is bankrupt, they are unable to pay the debts they owe to creditors. Declaring bankruptcy is a legal process through which a court turns the bankrupt person’s affairs over to a trustee or receiver.

A federal act designed to protect the rights of Canadian citizens who intend to declare bankruptcy. It details the responsibilities of the creditors, trustees, and citizens seeking relief from debt, and provides the conditions under which bankruptcy can be granted.

The name of the FICO score from the consumer reporting agency Equifax. This score may vary from scores reported by other consumer reporting agencies such as Experian or TransUnion.

A measurement of a borrower’s ability to repay a loan, capacity is a major factor in determining creditworthiness. Lenders determine capacity by assessing whether a borrower is likely to continue to earn their current income or improve upon it during the period of the loan. They will generally look at the amount of time an applicant has held their current position and how stable that job appears to be.

When you sell an asset, you will either make more money than you originally invested, or be forced by market conditions to sell the asset for less than you originally paid for it. If you profit by the sale of the asset, that is a capital gain. If you take a loss, that is called a capital loss.

An amount charged to your credit card and delivered to you in cash, generally from an ABM or teller. A cash advance is a loan with the interest rate of a credit card purchase, making it a very expensive way to obtain cash. Interest will be charged from the day you withdraw the funds until the day you repay the amount of the advance in full.

When you take out a mortgage, you may have the option to receive a percentage of your mortgage above and beyond the cost of your property, usually at a higher interest rate. Cash back on a mortgage is generally used to pay for new home costs, such as legal fees, renovation costs, or even furniture.

A mortgage agreement that cannot be changed before the end of the term. Such agreements require charges to pay off mortgages early or change the amount of a mortgage payments. Your lender may let you make certain prepayments without paying a charge.

Any loan in which the amount borrowed and any associated finance charges are expected to be repaid in full by a specified date. Such loans are often amortized to ensure the borrower is able to make the total amount of the payment. Common closed-end loans include consumer loans and mortgages.

When you purchase a home, there are generally costs that must be settled before you can take possession of the property, such as appraisal fees, legal fees, or prepaid property taxes. In general, closing costs range from 1.5% to 4% of a home’s selling price.

The Canadian Housing and Mortgage Corporation, which oversees and executes various federal housing programs under the National Housing Act.

The assets you use to secure credit of any type, including loans. In a real estate mortgage, the usual collateral is the house being purchased. If you default on the loan or credit issued, the collateral is subject to seizure.

A company hired by a creditor to collect a debt that is owed. Collection agencies are typically hired after the creditor has made a set number of efforts to collect the debt and failed to do so. Collection agencies focus exclusively on collecting debts, and may therefore be more aggressive in contacting debtors than the creditor can be. Also see Collections.

When you are in default on a debt owed and your debt is sold to a collection agency, you are considered to be “in collections.” Debts frequently in collections include credit card debts, medical bills, cell phone bills, utility charges, library fees and video store fees. If an account goes to collections, it is reported to the credit agencies and issued a negative report on your credit record. Collection records can remain on your credit report for 7 years from the last 180 day late payment on the original debt. Collection agencies are regulated provincially.  In Ontario, the Collection and Debt Settlement Services Act outlines your rights with collection agencies.

If the Commissioner of the Financial Consumer Agency of Canada deems it necessary, it can require a financial institution to comply with additional measures to meet the federal consumer provisions. If such a step is a required, the formal measure is called a compliance agreement.

A formal offer made by a debtor to a creditor in an attempt to resolve an outstanding debt. Consumer proposals may propose paying a percentage of what is owed, extending the time to pay off debts, or both, in additional to some other measures. The creditor determines whether the proposal will be accepted.

The Consumer Reporting Act ensures that credit reporting agencies will collect information on, maintain, and report your credit and personal information in a responsible manner. The Consumer Reporting Act also states that you have the right to know what has been reported about you and to whom, and that you have the right to correct any information on these reports that is inaccurate. You can read the full Consumer Reporting Act here.

A fixed-rate mortgage is a fully amortizing loan where the interest rate and payments do not change over the term of the loan. It is known as a “conventional” mortgage because fixed-rate mortgages are the most common type offered. Other types include convertible rate mortgages, interest-only mortgages, and graduated payment mortgages.

Also known as an adjustable rate mortgage, a convertible rate mortgage is a loan where the borrower has the option to convert to a fixed-rate mortgage or another type of rate at a future time. The advantage of a convertible rate is that it is sometimes possible to avoid rising interest rates.

If your credit or collateral for a loan is insufficient for the amount you wish you borrow, you may be asked to supply a cosigner. This is an individual who is willing to legally agree to back your loan with their own collateral, becoming responsible for your obligation in the event that you are unable to pay it.

Trust extended that a person will be capable of paying for goods and services after they are rendered. Credit used to be informally granted to any person known to have the wealth to cover any debts they incurred; it is now more formally calculated by credit bureaus. To determine whether credit should be extended to a new client, most companies require a credit application.

A form required by most lending entities, such as banks or credit card companies, to determine creditworthiness. This form will request details regarding identification, residence, income, employment, and existing debt to determine whether the company requesting the form has enough confidence to extend credit. In some cases, the form may require an application fee to cover the cost of loan processing.

Also known as a consumer reporting agency or credit reporting agency, a credit bureau collects individual credit information and sells it for a fee to entities considering extending credit to that individual. The most well-known credit bureaus are Experian, TransUnion, and Equifax.

A plastic card that allows the holder to purchase goods and services on the credit extended by the company issuing the card. Credit cards may be paid in full at the end of the monthly billing period, or may be paid off over time with interest, as calculated by the card’s APR. Credit cards may also be used to obtain cash, though usually the card holder will be charged a fee for doing so.

A contract between the credit card issuer and the credit cardholder explaining the terms of the credit agreement. Such agreements will generally include the terms, pricing, conditions, and penalties, among other stipulations.

Professional advice on how individuals can repay their debts and improve their credit. In Canada, credit counselling companies are generally not-for-profit, and offer helpful and affordable counselling as a public service. However, some credit counseling agencies are for-profit, and these are almost invariably expensive, ineffective, and can even be damaging to your credit. Before signing up with a credit counselling agency, be sure to thoroughly review that company’s reputation and not-for-profit status.

If you become ill or injured and cannot work as a result, credit disability insurance will make payments on your loans on your behalf.

When a lender issues you credit, that entity will state how much credit they are willing to extend you. The maximum amount of credit available to you is called your credit limit. If you have a credit card with a credit limit of $5,000, you may only charge $5,000 worth of purchases to that card. Attempts to exceed your credit limit will either be declined or charged a fine.

Credit agencies create a rating system to give potential lenders an easy-to-understand gauge of your creditworthiness. Each credit agency has its own credit rating system. Technically, a credit rating is different from a credit score, though the terms are often used interchangeably. Your credit score will indicate what credit rating you are accorded — for example, someone with an 850 credit score would be given a credit rating of “Excellent” or “AA rating.”

“Credit repair” is a term generally employed by unscrupulous credit counselling agencies to indicate that negative items can be removed from your report even though they are accurate. While credit scores can be improved over time with responsible behaviour, “credit repair” of accurate items on your report is not possible.

Your credit report summarizes your credit history and supplies your credit rating as calculated by the credit reporting agency. You are entitled to a free copy of your credit report every year from both Equifax and TransUnion, though you must formally request it and prove your identity to the agency before your report will be supplied.

A private assessment by your creditor of the likelihood that you will be able to pay your credit obligations. Someone with poor credit is “high risk”, while someone with good credit would be designated “low risk.”

A three-digit number that is calculated using a mathematical formula based on information in your credit report. Credit scores range from 300 to 900. In general, standard loans are available to those with credit scores of 650 and up, though each institution has its own standards and may be willing to issue a loan to someone with a lower score, or unwilling to issue a loan to anyone under 800 points. It is therefore wise to keep your credit rating as high as possible.

Unlike a bank, a co-operative financial institution is owned by its members and operates for their benefit. Credit unions and caisses populaires (a form of credit union located primarily in Quebec) are subject to provincial regulation. They are usually small and locally oriented, and often provide members with superior rates by way of investing in the communities in which they are located.

A person or entity to which money is owed. These people or entities may provide credit, loans, or other forms of obligation. Not to be confused with credit provider, a creditor ceases to be a creditor once the financial obligation is resolved.

A determination of the amount of trust that a credit provider or lender feels they can extend to a borrower. To decide on a candidate’s creditworthiness, the credit provider or lender will generally consult the candidate’s credit report and get a credit score and credit rating, and may also request a credit application.

A plastic card that, when used in conjunction with a personal identification number (PIN), allows you to electronically access your bank accounts from automated banking machines or at retailers offering the Interac Direct Payment service.

The amount of money owed.

The process of combining multiple debts into a single loan or repayment plan. If you owe three debts to different creditors, for example, you may ask a financial institution or counselling service for a single loan to cover all debts, thus consolidating your three loans into one. Consolidation can often provide the borrower with a better overall interest rate for the total amount of the debt. Student loans are commonly consolidated for this reason. Debt management programs are a common type of consolidation program provided by reputable credit counseling agencies.

A debt consolidation program that enlists the services of a credit counselling agency to ensure a favorable repayment plan. Debt management programs will generally help you achieve a lower monthly payment and more timely payments to creditors.

Debt settlement is the process of paying an agency to negotiate with your creditors for a reduced settlement on your debt. While debt settlement can result in ultimately reducing the amount of debt you owe, it can also significantly damage your credit, as creditor are often unwilling to negotiate unless many late payments and collection records indicate that you cannot repay the debt in full. There are many unscrupulous debt settlement companies, so thoroughly research any company before enlisting their services. It is also worth researching the consequences of debt settlement to your credit before attempting this form of resolution.

Also known as the “waterfall” method, debt stacking is a payment strategy designed to help pay off debts more quickly. If you have $500 to pay toward your debts each month, debt stacking recommends paying the minimum payment due on each account and the remainder on the last card. Once that debt is paid in full, you then put the remainder toward your second debt. As each debt is paid, the “remainder” available after paying the minimum balances on the outstanding debts will increase. The total amount you pay each month toward debt in your plan never changes, but the speed with which you start to pay down your debts increases over time as you begin to pay off your debts. When you get to your last debt, the total monthly amount is applied to this one debt each month until it is paid off.

The percentage of your monthly pre-tax income that is used to pay off debts such as auto loans, student loans and credit card balances. Lenders look for the lowest possible ratio, though anything below 40% is considered good. For example, if you pay $1000 on your mortgage, $100 toward an auto loan, and $400 to your debts, your total debt is $1,500. If your income before taxes is $5,000, your debt-to-income ratio is 30%, and you would be considered a good candidate for a loan.

If you fail to pay your account for an extended period of time, your account will be indicated as being “in default.” Creditors generally indicate at what point an account will be considered in default on their credit or loan agreements; it can be as little as a single billing period, though 60 days is a common point to change an account’s status to in default. Defaults are a serious negative item on a credit report.

A payment postponed until a future date with the agreement of a creditor.

A failure to deliver even the minimum payment on a loan or debt payment on or before the time agreed. Accounts are often referred to as 30, 60, 90 or 120 days delinquent because most lenders have monthly payment cycles. Accounts that are delinquent for a creditor-indicated period will have their status changed to “in default.”

A court of law can release a debtor from most of his debts included in a bankruptcy. Not all debts can be included in a bankruptcy, however, and these debts cannot be discharged. Alimony, child support, liability for wilful and malicious conduct and certain student loans cannot be discharged through bankruptcy.

When you buy a home, you will be asked to pay a percentage of the total price of the home as a “down payment.” Most lenders prefer a down payment of 20% or more, but it must be at least 5% of the purchase price. The price of the home after the down payment is paid will be the amount you need for a mortgage loan. If you have a down payment of less than 20% of the purchase price, you will have to pay mortgage default insurance.

The transfer of money between accounts by consumer electronic systems rather than by check or cash. Automated teller machines (ATMS) and bill pay services fall into this category. (Wire transfers, checks, drafts, and paper instruments do not fall into this category.)

The market value of your purchase less the amount remaining due and any fees associated with payment. Equity increases as you pay down your debt or the value of the investment increases. For example, if you buy a home worth $500,000 and pay a 20% down payment, at the beginning of your mortgage term you will have $50,000 of equity in the home. At the end of a 20-year mortgage, you will own the home outright, and your equity will increase to the full $500,000. If the house has increased in value over those 20 years, your equity will increase to the new value of the home. Equity can be calculated at any point over the duration of a loan. Equity is also known as the lendable value or net value.

Money held by a third party on behalf of two other transacting parties, most commonly used in real estate transactions. When you pay money on a mortgage loan, the bank does not receive those funds directly. The funds are held in escrow until the mortgage is paid in full, or until instructions are issued to the contrary. Though mortgages are the most commonly known escrow transactions, securities, funds, and other assets can be held in escrow.

The assets and liabilities of a deceased person, including that person’s property, possessions, and debts.

A specific credit score developed by Fair Isaac Corporation, your FICO score is one of the best-known and most commonly used credit scores to determine your creditworthiness.

A mortgage with an interest rate that is locked in at the time the mortgage is signed. The payments for a fixed rate mortgage remain the same over the life of the loan because all terms regarding payment are fixed and do not change.

If you fail to pay a debt, your creditor can seek a court order requesting that funds be removed directly from your bank account to pay off your debt. Such a court order is known as a garnishment. There are restrictions on the percentage of your wages that can be garnished.

A federal government program that allows first-time homebuyers to withdraw money from their Registered Retirement Savings Plans (RRSPs) tax-free to make their down payment or other closing costs. Usually, taxes are owed on any monies removed prematurely from a RRSP, but HBP allows for this exception.

The difference between the value of your home and the unpaid balance of your mortgage. Your home equity increases with time as you pay your mortgage down and/or as the value of your home increases. See Equity.

You can use your home to secure a line of credit with that property listed as collateral. The credit limit is usually a percentage of your home’s value, and there is an agreed-upon period in which the loan must be paid. If you default on a home equity line of credit, your creditor may take possession of your home as payment for the loan. Because of the high cost of defaulting on such a loan, they are usually only issued for major purchases such as education, home improvements, or medical bills.

When a copy of your credit report is requested by any entity, including yourself, an inquiry is recorded on your credit report. A large number of hard inquiries (inquiries made by creditors assessing someone's credit report for credit granting purposes) can indicate high risk to a potential lender, as a large amount of inquiries are usually only made when that individual is seeking multiple loans or lines of credit in a single year.

Money paid by a borrower to a lender in addition to the total amount borrowed. Interest is paid to the lender for convenience of paying the loan back over time, or simply for the use of a large sum of money.

Interest is usually calculated as a percentage of the loan, rather than as a set fee. An interest rate of 2% on a $1000 loan would require the borrower to repay the total amount of the loan — $1,000 — plus 2% of the total — $20. The total amount to be repaid would be $1,020. The interest rate is not to be confused with the annual percentage rate.

Some credit card issuers offer a special annual percentage rate (APR) on credit card balances for a specific period of time, usually from a few months to a year. These low introductory rates are designed to attract new customers, and usually increase to a high APR after the set period of time has expired.

An account owned by two or more persons, with terms dictating when each individual has the right to deposit or withdraw funds. In general, joint accounts are used by married persons and have few or no restrictions on depositing and withdrawing funds. Some joint accounts may have restrictions that dictate that no party may withdraw more than a set amount without the consenting signature of the other party or parties.

A contract that allows a consumer the right to use or occupy property during a set period in exchange for a monthly payment. Leases are common for items like cars and apartments. The consumer does not own the property at the end of the lease agreement; they are paying strictly for the rental of that property.

A legal claim upon the property of another to ensure that a debt will be paid. A tax lien is a lien filed by a government agency. The Federal Government's Internal Revenue Service, for example, may place notices of liens in county courts, listing the consumer's unpaid federal income taxes.

The ease with which assets or investments can be converted into cash—that is, made “liquid.” Savings accounts have high liquidity, as banks can issue the amount of cash in the account on almost no notice. A home, by contrast, has low liquidity, because it takes time and other factors to transform that asset into cash.

A sum of money that is borrowed by one entity from another, with the expectation that the sum will be paid back — usually with interest.

The ratio of amount borrowed for the purchase of an asset to the selling price of that asset. If a home has a selling price of $100,000 and the purchaser puts down a $20,000 down payment, the amount borrowed for a mortgage loan on the house would be $80,000. The loan-to-value ratio would therefore be 80%. In general, the lower the LTV, the more favorable the program terms that will be offered by lenders.

A Registered Retirement Savings Plan with the condition that funds received will be used solely for retirement income purposes — therefore the funds are “locked-in” for a specific purpose. (Some provinces do have permitted exceptions to the “locked-in” condition.) A locked-in RRSP can also be an investment bought through a financial institution, with the monies locked in for a specific period as agreed by both parties at the time of the purchase.

The time at which a loan, insurance policy or annuity reaches the end of its term. In a loan, maturity is the time at which the total amount is due.

A property loan in which the lender can take possession of the property if the loan is not repaid on time. Mortgage payments include the principal and the interest, and on some occasions a percentage of the property taxes.

Right of offset is the legal right of banks to seize funds that a guarantor or debtor may have on deposit to cover a loan in default at that same bank. For example, if you default on a mortgage loan and have $50,000 in savings at the bank that provided the mortgage, the bank may seize your savings funds to pay for the remaining cost of the mortgage.

A small, short-term loan that a borrower promises to repay out of their next paycheck or deposit of funds. Payday loans are subject to unusually high fees, making it extremely difficult for a borrower to repay them in full. Often, a borrower will have to take out another loan to cover the cost, or default on the loan and be indebted to the creditor.

Your mortgage agreement may have limits on the amount that you are allowed to “prepay” against your mortgage, or indicate that a fee will be charged if you pay off a closed mortgage before the end of the term. In either case, a prepayment penalty will be charged.

Financial institutions issue different interest rates for loans varies depending on the creditworthiness and financial assets of the loan applicant. The best possible rate, reserved for a financial institution’s best customers, is known as the “prime rate.”

The outstanding balance on a loan, excluding interest and fees.

Lenders may look at a number of qualifying factors to determine if you are a candidate for a loan or a line of credit, including your debt-to-income ratio and your housing expense to income ratio. These are known as your “qualifying ratios.” Your housing expense to income ratio is determined by dividing your monthly housing expenses (including rent or mortgage payments) by your monthly income.

The process of analyzing two related records and bringing the two records into agreement if they differ. For example, one might attempt to reconcile an up-to-date check book with a monthly statement from the financial institution holding the account.

It is sometimes possible to take out a new loan under more favorable terms after a period of time has gone by on the original loan. If you had average credit when you took out your original mortgage, for example, you might not have received an ideal interest rate. After 10 years, your bank may be willing to refinance your mortgage loan with a lower rate of interest.

An investment plan that allows savings to grow tax-free until a child is ready to pursue a post-secondary education, at which time the money can be withdrawn without penalty to help finance the costs. Contributions added to an RESP will accrue interest over the period of the investment plan. For more information, visit the Employment and Social Development Canada website.

An income fund arranged between an individual and a carrier such as an insurance company or a bank. Assets deposited in an RRIF will be paid out after retirement in instalments. Earnings in an RRIF are tax free, though amounts paid out of an RRIF are taxable on receipt. It is worth noting that you cannot contribute annually to an RRIF as you can to an RRSP.

A government-approved savings plan designed to encourage Canadians to save money for retirement. Contributions to an RRSP, along with the earnings they generate, are allowed to grow tax-free until the money is withdrawn. RRSPs must be converted to a retirement income option, such as an RRIF, by December 31 of the year in which you turn 71.

If you provide collateral against a debt, that collateral can be claimed by your creditor if your debt payments are significantly overdue, in a process called repossession. Repossession generally applies to property such as cars, boats, equipment, or houses.

When a credit grantor, direct marketer or potential employer request information about your credit, you will see that inquiry appear on your credit report. This is a request for your credit history, and you are entitled to know what entities have requested your credit information. According to the Fair Credit Reporting Act, credit grantors with a permissible purpose may request your credit history without your consent.

A credit agreement that allows a customer to borrow against a preapproved credit line when purchasing goods and services. The most well-known type of revolving credit is a credit card. The borrower is only billed for the amount that is actually borrowed plus any interest due. Revolving credit is also known as open-end credit, or a charge account.

The snowball repayment method is a payment strategy designed to motivate you to tackle the task of repaying multiple lines of credit. The snowball method suggests paying the card with the lowest amount first, then the second-lowest, and so on. Many people are highly encouraged by the ease with which the first card is paid off, and are motivated to keep putting in effort to pay off each card thereafter. The snowball repayment method is rarely the most cost-effective method, but it does seem to provide the psychological motivation necessary to tackle debt repayment, which is very important.

Your total monthly costs divided by your gross income. The total monthly costs will include mortgage payments, property taxes, heating and 50% of condo fees (if applicable), plus all your other debts, such as credit card payments, car payments, student loans or lines of credit. If you earn $5,000 a month in gross income (before taxes) and your total monthly costs are $2,000, you have a TDS ratio of 40%. Lenders look for a TDS ratio of less than 40%.

Charging an illegally high interest rate on a loan.

Any interest rate or dividend that changes on a periodic basis, as opposed to a fixed rate, which remains the same over the length of the loan. The variable rate is tied to a particular market index. When the market changes, so does the variable rate.

A transfer of funds from one point to another by wire or network such the Federal Reserve Wire Network (also known as FedWire). Wire transfers can be made from one bank account to another, or by paying cash to a service that will wire money on your behalf.