Basic Financial Terms

There are many terms used in the financial world. It may sound foreign or intimidating at first but here you can learn all about them so that you can be prepared for any discussion about your finances.

Interest

Interest is a percentage that is charged on borrowed money or earned on invested money. There are two primary types of interest: simple and compound. Simple interest is calculated based on the initial amount of money borrowed or invested while compound interest is based on the initial amount plus the amount of interest. 

Annual Percentage Rate (APR)

The annual percentage rate or APR is the yearly interest rate. This rate is expressed as a percentage and indicates how much interest you will pay on borrowed money or earned on invested money.

Capitalization

Capitalization is when a loan with a compound interest rate has the interest added to loan amount. 

Principal

This is the amount of money due on a loan.

Credit

Credit is a financial arrangement in which money is borrowed for a purchase and paid back at a later date. It allows you to make purchases over many small payments instead of in one large payment. Typically, you will pay interest on the amount you borrow which makes it cost more than making one payment up front. Common types of credit include loans and credit cards.

Creditworthiness

Creditworthiness refers to how confident a lender is that you will repay what you borrow. This is based on how well you have previously managed borrowed money.

Credit Bureau

Credit bureaus are businesses that keep track of your credit history and provides that information to you or businesses you have given permission to. Most companies will require you to provide permission for them to approve you for a loan or credit card. Some businesses will require this before hiring you for a job or renting an apartment to you.

Credit Report

A credit report is a record of your credit history including your financial accounts, payment history, application history, personal information, and public records. It is produced by credit bureaus based on information provided to them from companies you have received credit from. 

Credit Score

A credit score is a three-digit number that represents your creditworthiness. It is calculated based on the information in your credit report and ranges from 300-850. The higher your credit score, the more likely you are to be approved for credit and receive lower interest rates.

Budget

A budget is a plan for what income you receive and where it goes. It can also help you determine if you can afford to take on a new bill and keep track of your spending.

Asset

An asset is any resource that holds value and could be turned into money. If you own a shoe collection that you could sell for $200, then you have a $200 asset.

Debt

Debt is the money that you owe to others.