Familiarizing yourself with some key credit-related terms can help you make informed decisions when it comes to your finances.
So with that in mind, here’s our glossary of some common credit-related terms:
AER
AER stands for Annual Equivalent Rate. It is used to describe the interest rate on savings accounts and is designed to show the actual interest rate you would earn over a year, taking into account the compounding of interest.
APR
APR stands for Annual Percentage Rate. It’s a standardized way of expressing the cost of borrowing money over a year, including interest and fees. APR helps you compare different loan or credit card offers by providing a single percentage that reflects the total cost.
Balance transfer
A balance transfer involves moving debt from one credit card to another. It’s a strategy that can help you save money and pay off debt faster — if you’re careful about details like fees, interest rates and restrictions on transfer amounts.
Compound interest
When we talk about compound interest in savings, it means the interest you earn on both your balance, and also on the interest that balance has accumulated – so you earn interest on your interest. When it comes to credit products, it means that you could end up paying interest on your interest if it takes too long to pay off your balance.
Debt Consolidation
Debt consolidation involves combining multiple debts into a single balance – usually with a lower interest rate. This can simplify your payments by reducing the number of lenders you deal with and potentially lowering your monthly payments.
Hard Search
A hard search, also known as a hard inquiry, occurs when a lender checks your credit report. This typically happens when you apply for a loan, credit card, or mortgage. Hard searches are recorded on your credit report and can temporarily lower your credit score, as they indicate that you are actively seeking credit. The impact is usually minor and short-lived, but multiple hard searches in a short period can signal financial distress to lenders, potentially making it harder to secure credit.
Interest Rate
The interest rate is the percentage of the principal amount that a lender charges for borrowing money. It is a key factor in determining the cost of a loan or credit card.
Soft Search
A soft search, or soft inquiry, does not affect your credit score. These searches are often made when you check your own credit report or when a lender pre-approves you for an offer. Soft searches are only seen by you and do not leave a lasting mark on your credit history.
Bottom line
Understanding these credit-related terms is important for managing your financial health. Whether you’re applying for a loan, checking your credit score, or looking to save on interest, knowing and understanding these terms can empower you to make better financial decisions.