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Financial Planning

Credit glossary: Terms your clients should know

Are your clients turning to you more and more for financial education? If so, it's important to be prepared to answer their questions in ways that are quick and easy for them to understand.

One topic your clients may be interested in learning more about is credit, especially if their financial goals include a big purchase or repairing past financial missteps. Consider sharing this glossary with your clients who are looking for easy-to-understand definitions of basic credit terms.

Credit bureau

A credit bureau is a credit reporting agency. It collects credit information on individuals and businesses and then generates reports which are used to create credit scores. In the U.S., there are three main credit bureaus: Experian, TransUnion and Equifax.

Credit history

Your credit history is what's found on your credit report. Often the terms are interchangeable. It's a summary of all of your credit obligations from your past, including late payments, payment history, tax liens and more.

Credit inquiry

A credit inquiry happens when an entity, such as a credit card company or bank, checks your credit report. Soft inquiries (when you check your own score or a credit card company checks to give you a pre-approval offer) don't impact your credit. However, hard inquiries, which are pulled when you apply for a credit card, mortgage or loan, do impact your credit score. Having too many hard inquiries in a short time frame can have a negative impact.

Credit limit

Your credit limit is a term typically used for credit cards, but also applies to lines of credit loans. It's the total amount of credit you're given. When calculating your credit score, a high credit limit with a low balance can help improve your score.

Credit report

Your credit report is an overview of your financial history. Beyond information such as your address and employment history, it highlights your credit card debts, loans — such as car and mortgage notes — collection records on overdue bills and public bankruptcies or tax liens (if you have any). You can check your credit report for free once a year, which is a good idea so you can see if there are any errors you need to dispute.

Credit score

Your credit score is a number, ranging from 280-850, depending on the credit bureau. It's calculated using a complex algorithm based on a variety of factors from your credit report including how much debt you have and your payment history. While the number will vary slightly depending on the formula used, the number indicates your creditworthiness to potential lenders. Having a good credit score can mean the difference between achieving your long-term financial goals and struggling with higher interest rates and longer payment terms.

Debt to credit ratio

Your debt to credit ratio is an important factor for your credit score and your overall financial health. It's an equation that takes the total amount of credit you're using and divides it by the total amount of credit that's available to you. This is a key part of your credit score, so having a low ratio, ideally under 30%, can improve your credit, which can help you get better terms and lower some of your costs.

FICO Score

A FICO Score is one type of credit score that's calculated by the Fair Isaac Corporation, which is used by lenders to assess your credit risk. Your FICO Score is used by the majority of lenders today and provides a range from 300-850.

Interest rate

An interest rate is what a lender charges, expressed as a percentage, for the borrower to use the money loaned. For example, a mortgage lender will charge an interest rate on the loan that the borrower must pay.

Late payment

A late payment is when you miss the agreed upon deadline for submitting a payment on a loan, including credit card, car or mortgage. A history of late payments can impact your credit score, and payments over 30 days late can appear on your credit report.

A basic glossary like the list above is a great tool to help you educate your clients and get them comfortable with key financial terms. Plus, it goes a long way toward strengthening the relationship you have with your clients. When they know they can ask for financial education —without judgement — they'll feel more prepared to get a handle on their financial future with you as their trusted partner.

Understanding how credit works is an important part of your clients' financial well-being. Want to learn more? Find out how you can talk to your clients about debt consolidation.

SM.2022033.07.20

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