Financial Glossary
Financial jargon in plain English. Look up any term you hit while comparing loans, cards, or insurance.
A
APR (Annual Percentage Rate)
The true yearly cost of borrowing money, expressed as a percentage. APR folds in interest and fees, which gives you a more honest number than the interest rate by itself. When you're comparing loans or credit cards, this is the number to look at.
Amortization
How a loan gets paid down over time through equal payments. Each payment chips away at both interest and principal, but the split changes: early payments go mostly toward interest, later payments mostly toward principal. Your monthly bill stays the same.
B
Balance Transfer
Moving credit card debt from one card to another -- usually to grab a lower interest rate or a 0% promotional period. You pay a fee (typically 3-5% of the amount moved), but the interest savings often make it worth it if you pay off the balance before the promo ends.
C
Compound Interest
Interest that earns interest. Your bank calculates interest on your original deposit plus all the interest it has already paid you. In a savings account, this works in your favor -- your money grows faster over time. On debt, it works against you.
Credit Utilization Ratio
How much of your available credit you are actually using. If you have $10,000 in credit limits and carry $3,000 in balances, your utilization is 30%. Credit scoring models penalize you above 30%, and below 10% is ideal. This single number accounts for about 30% of your FICO score.
D
Debt-to-Income Ratio (DTI)
Your total monthly debt payments divided by your gross monthly income. A DTI of 36% or lower is what most lenders want to see. Above 43% and you will struggle to get approved for a mortgage. This is one of the first numbers a lender checks.
E
Escrow
A neutral holding account managed by a third party during a transaction. In real estate, your lender may collect extra with each mortgage payment and hold it in escrow to cover property taxes and homeowner's insurance when they come due. It prevents you from falling behind on those bills.
F
Fiduciary
Someone legally bound to put your financial interests ahead of their own. Not all financial advisors qualify. Many work on commission and can steer you toward products that pay them more, even when cheaper options exist. Before you hire anyone, ask point blank: "Are you a fiduciary?"
H
HELOC
A Home Equity Line of Credit. Think of it as a revolving credit line backed by the equity in your house. You draw from it when you need to, pay interest only on what you use, and the rates tend to beat credit cards and personal loans. But your home is on the line. Fall behind, and you could lose it.
I
Index Fund
A mutual fund or ETF that mirrors a market index like the S&P 500 instead of trying to beat it. Because no one is actively picking stocks, fees are rock-bottom (often under 0.10% per year). Over 20-year periods, index funds outperform about 90% of actively managed funds.
P
Prime Rate
The interest rate banks charge their most creditworthy customers. It moves in lockstep with the Federal Reserve's benchmark rate. Most credit cards, HELOCs, and adjustable-rate loans are priced as "prime plus" a margin -- so when the prime rate rises, your variable interest rates rise too.
Principal
The actual amount you borrowed, before interest. On a $200,000 mortgage, the principal is $200,000. When you make a payment, part goes to interest and part reduces the principal. The faster you pay down principal, the less total interest you pay.