Financial Literacy Lingo

Annual Fee: The amount that credit card companies charge for the use of a credit card.

Annual Percentage Rate (APR): APR allows you you to evaluate the cost of the loan in terms of a percentage. If your loan has a 10% rate, you'll pay $10 per $100 you borrow annually.

Annual Percentage Yield (APY): The effect, or true, annual rate of return.  The APY is the rate actually earned or paid in one year, taking into account the effect of compounding.  The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year.  For example, a 1% per month rate has an APY of 12.68% (1.01^12).

Asset: Any possession that has value in an exchange, e.g. cash, stocks, bonds, real estate and personal possessions.

Bank: A for-profit company that is owned by its stockholders and provides saving and checking accounts and other financial services to its customers.

Budget: A plan for managing money, dividing up expected income and expenses among spending and saving options based on personal financial goals during a given time period.

Capitalization: When interest is capitalized, the outstanding (unpaid) interest on your student loan is added to the principal balance.  When this happens, you are essentially paying interest on top of interest.

Credit: Amount of money a creditor is willing to loan another to purchase goods and services, based on the expectation that the money will be repaid as promised with interest.

Credit Limit: The maximum amount of credit a lender will extend to a customer.

Creditworthiness: The maximum amount of credit a lender will extend to a customer.

Credit Rating/Score: A measure of creditworthiness based on an analysis of the consumer's financial history, often computed as a numerical score, using the FICO or other scoring systems to analyze the consumer's credit.  A creditor's evaluation of a person's willingness and ability to pay debts as judged by character, capacity and capital; a mathematical model used by lenders to predict the likelihood that bills will be paid as promised.

Credit Union: A financial institution owned by its members that provides savings and checking accounts and other services to its membership at a low fee.

Debit Card: A card used to pay for goods and services directly from a checking account by transferring funds electronically from one's checking account to the store's account to pay for a purchase; also called check cards. 

Debt: The entire amount of money owed to lenders.

Deferment: A temporary postponement on federal student loans.  Deferments are granted if you meet the specific criteria, for example, unemployment or economic hardship.

Earned Interest: The payment you receive for allowing a financial institution or corporation to use your money.

Employee Benefits: Additional benefits, beyond a paycheck, offered by employers (e.g., health insurance or pension plan).

Federal Student Loans: Loans that are guaranteed by the federal government including Stafford, Direct, Parent PLUS, and Grad PLUS loans.  These loans have a fixed interest rate, as well as deferment and forbearance options.

Fixed Expenses: Expenses that cost the same amount every time.

Grace Period: The length of time that you have before you start accumulating interest on an unpaid balance.

Gross Income: The total amount of income from wages before any payroll deductions.

Identity Theft: When someone uses your name, Social Security number, credit card number, and other personal information without your permission.

Income: Any money an individual receives.

Interest: Interest is the additional amount you will pay to a lending institution to borrow money.  In terms of savings, interest is the additional amount you will earn for having your money in a bank account or other savings vehicle.

Simple Interest: Interest paid only on the "principal" or the amount originally borrowed, and not on the interest owed on the loan.

Compound Interest: Interest credited daily, monthly, quarterly, semi-annually, or annually on both principal and previously credited interest.

Investment: Setting aside money for future income, benefit, or profit to meet long-term goal; using savings to earn a financial return.

Late Fee: A penalty on all types of credit for making a payment after its due date.

Loan Term: The length of time you have to pay off a loan.

Needs: Essentials or basic necessities for maintaining physical life, including food, clothing, water, and shelter - sometimes called material well-being.

Net Income: Also called "take-home pay" - it is the amount of income left after payroll deductions.

Origination Fee: A charge for setting up a loan that is typically associated with home and student loans.

Payroll Deductions: Amounts subtracted from gross income that are withheld by an employer for items such as taxes and employee benefits.

Promissory Note: A legally binding document signed when you take out a student or parent loan.  The promissory note (sometimes referred to as a "prom note") lists the conditions under which you're borrowing and the terms under which you agree to pay back the loan.  It will include information on how interest is calculated and what deferment and cancellation provisions are available to the borrower.

Saving: The process of setting income aside for future spending.  Saving provides ready cash for emergencies and short-term goals, as well as funds for investing.

Subsidized: The federal government pays the interest that accrues on the subsidized portion of federal loans during the in-school period, grace period, and periods of deferment.

Unsubsidized: The borrower is responsible for interest that accrues on any unsubsidized loan.