If you borrow money or enter into a credit agreement there are all sorts of charges, terms and conditions you need to consider. Read our jargon buster to make sure you’re clued up on what you need to know.
The average credit card debt per household in the UK was £2,241 in August 2020, according to the Money Charity. While this may seem a lot, credit in itself is not a bad thing. As long as you don’t overstretch yourself when you borrow, credit can be very useful. Millions rely on it to manage their finances and it can help people to spread the cost of buying goods and services they may not otherwise be able to afford.
What is credit?
Credit is when you borrow money or are given goods and services which you agree to pay for at a later date. There are several types of credit, including credit cards, personal loans, bank overdrafts, store cards and catalogue credit (when you buy goods from a catalogue and pay for these by making regular repayments for these over a set period of time).
As long as you keep up with your payments, a credit card is a good way to build up your credit history and improve your credit score, as it shows how you manage credit on a regular basis. If you have a good credit score, you’re more likely to qualify for better interest rates from lenders, meaning you might pay less interest.
Common credit and debt terms
Here are some of the most common terms you might come across when you borrow money or take out a credit agreement. For more help and guidance on debt, borrowing and credit cards visit the Money Advice Service website.
|The term||What it means|
|Annual Percentage Rate (APR)||The cost you pay each year to borrow money. It’s made up of the interest rate plus any fees (e.g. arrangement fees) that are included as part of your loan.|
|Asset||Anything you own that has a value, including money in savings accounts, small items like jewellery or watches and larger items such as cars, property or land. In certain situations, assets can be sold to release some money if you’re struggling with debts.|
|Bailiff||Also called an enforcement agent, a bailiff has legal powers to collect a debt (e.g. a Council Tax bill, parking fine, court fine or county court, high court or family court judgment). If you ignore letters saying that bailiffs will be used, they’ve got a right to visit your property and remove and sell your goods to pay off a debt. Bailiffs can work on behalf of private companies or the council, or be self-employed.|
|Balance||The total amount of money you owe to your lender (e.g. credit card company or loan provider). With credit cards, your balance will increase when you make a purchase and decrease when you make a repayment. With a loan, your balance is the remaining amount you must pay off.|
|Balance transfer||This is when you move all or part of a debt from one credit card to another. Balance transfers can help you to take advantage of lower interest rates from other providers, meaning you could reduce the overall cost of your credit card borrowing as well as combine multiple debts.|
|Bankruptcy||You can apply for bankruptcy if you can’t pay back your debts. A court will have to issue an order against you for you to be made bankrupt, either at your own request or at the request of your creditors. Bankruptcy can have serious consequences, so it’s important to go through all your options before you consider it.|
|County Court Judgement (CCJ)||A type of court order (in England, Wales and Northern Ireland) that could be registered against you if you fail to repay money you owe. The CCJ will explain how much you owe, who and how to pay and the deadline for paying it. It’s important that you don’t ignore a CCJ. If you believe you don’t owe any money, you can ask the court to cancel the judgement. If you do owe it, you should arrange to pay what you can afford.|
|Creditor||A person or organisation that’s owed money because they’ve provided goods or services, or loaned money, to another person or entity.|
|Credit limit||The maximum amount you’re allowed to borrow on a particular line of credit (e.g. a credit card).|
|Credit reference agency||An independent organisation that holds data on how well you manage credit, as well as your financial behaviour. The three main credit reference agencies in the UK are Experian, Equifax and TransUnion.|
|Credit report||A record of your history managing and repaying debt that’s held by credit reference agencies. Each agency will hold a file on you, although the information might differ between them, and they have a statutory obligation to provide you with a copy of your credit report for free.|
|Credit score||A rating that lenders use to see how much of a credit risk you are and determine whether you qualify for certain products, such as credits cards, loans or mortgages.|
|Debtor||A person or entity that owes money.|
|Default / late payments charges||A type of charge that can be issued by your creditor. If you pay off less than the minimum amount required, you’ll be counted as behind with your payments and could face default or late payment charges.|
|Default notice||Your creditor may send you a default notice if you miss any repayments or pay the wrong amount. These notices can be recorded in your credit report, which may impact your credit score.|
|Individual voluntary arrangement||A formal debt solution between you and your creditors to pay back your debts over a period of time. It must be set up by a qualified professional and it’s legally binding, which means it’s approved by the court and your creditors must honour it.|
|Interest rate||The cost of borrowing money, which is usually expressed as an annual percentage of the loan. If you have a savings account, it’s the rate that your bank or building society will pay you for borrowing your money. If you owe money, you’ll pay back the original amount loaned plus the interest.|
|Insolvency practitioner||Someone who’s licensed and authorised to deal with individual or company insolvency (inability to pay debts that are owed).|
|Introductory rate||An interest rate charged to a customer for an initial period after taking out a loan or credit card. This rate isn’t permanent and a standard (usually higher) rate will apply after the initial period ends.|
|Joint liability||Where more than one person is legally responsible to repay a loan or debt. If you take out a joint loan with someone, you aren’t just responsible for your share. You’re agreeing to pay the entire debt if the other person can’t or won’t pay it.|
|Minimum repayment||The lowest amount you must repay to your creditor each month to avoid a charge or fine. With credit cards, the minimum repayment is usually a percentage of your total balance.|
|Secured/ unsecured loan||A secured loan is money you borrow that’s secured against an asset you own, usually your property. They typically have lower interest rates but can be risky as the lender can repossess your property if you don’t keep up repayments. Unsecured loans tend to have higher interest rates but are more straightforward – you borrow money from a lender and agree to make regular payments until the loan is completely paid off.|
|Store card||A type of credit card you can only use with one high street chain or group. You can use one to purchase items on credit and pay them off each month. Like a credit card, you’ll have to pay interest if you don’t pay off the debt within the interest-free period.|
Help with debt
If you’re in debt or worried about going into debt, these organisations offer free, independent and confidential advice over the phone and online.
Telephone: 0800 138 1111
- National Debtline
Telephone: 0808 808 4000
For help working out the true cost of borrowing money, visit the Money Advice Service website. For more information about how to get help with debt read our article or take a look at our money guide to learn more about managing your debts.