Understand finance terms: Glossary of personal finance topics
Cut through industry jargon with these financial dictionary definitions.
Getting hung up on confusing terms while making a big financial decision is the worst. Let us demystify personal finance parlance so that you can focus on what’s important: making the right decisions for your situation.
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Account balance. The total amount you owe after factoring in transactions and payments.
Additional cardholder. A person you’ve approved to receive a credit card linked to your own credit account. If your additional cardholder uses the card to make purchases, the transaction will appear on your credit card statement. (And, ultimately, you are responsible for those charges.)
Annual fee. A maintenance fee that is charged to a credit card account once a year. Annual fees typically range from £25 to £50 but are sometimes over £100 for “gold” or “platinum” cards. These premium cards offer a host of benefits (like points and travel perks) that balance the annual fee.
Available credit. Refers to the total amount of unused credit available to a cardholder. Available credit is reached by subtracting the outstanding balance from the amount of credit extended to you.
Average daily balance. This number is determined by adding up all account balances over a billing cycle and then dividing the total sum by the number of days in a given billing cycle (typically a month). Most credit card companies calculate the daily balance based on the APR. For example, if the APR is 12%, the monthly periodic rate would be 1%.
APR. Short for “annual percentage rate,” this is a yearly interest fee you pay for borrowing money. Credit card APRs vary by card and even transaction. For instance, your credit card company could charge you one APR for purchases and another for cash advances or balance transfers. In general, banks and credit providers offer two types of APRs: variable and non-variable (or fixed rate).
- A variable APR allows the credit provider to change your APR when interest rates or other economic indicators, called indexes, change. Most credit card offers include variable rates. Providers must disclose how the rate is determined, which index it uses and the amount (or “margin”) it will add to determine your new rate. You should also know by how much and how often your rate may change.
- A fixed-rate APR is not subject to adjustment. It remains at the rate your provider indicated at the time you opened the account. Even so, credit card companies often include disclosures that allow them to change this rate at any time. The only caveat is that they must provide a written notice at least 15 days prior to the change.
Balance transfer. The process of moving a credit card balance or debt to a different provider, often to take advantage of lower interest rates or to consolidate debt from multiple cards.
Bid. In the context of currency, the price a dealer is willing to buy a base currency at.
Billing cycle. The number of days in your credit card billing period, typically a month. A billing cycle starts the day after the previous cycle’s close date and repeats over the course of the contract. Broker. An intermediary agent (or “middleman”) who charges a commission to buy or sell on behalf of a client.
Business day. Refers to any day other than Saturday or Sunday or a designated public holiday.
Cash advance. Cash withdrawn from the available credit of your card account. Interest on cash advances is charged daily, and there is no grace period. Your provider will often charge a higher APR for cash advances until the card balance is paid in full. It will also charge a transaction fee — either a flat fee or a percentage of the total cash advance.
Cash advance cheque. These cheques work like personal cheques, but the money you advance is charged to your credit card account. You can write cash advance cheques up to your available credit limit to anybody you’d like. Like cash advances, these cheque incur a transaction finance charge.
Closing balance. Usually displayed on the monthly statement, this is the total amount you owe at the end of your billing cycle that will carry to your next billing cycle if not paid. It is the amount of money you have borrowed up until the date of your statement that you will need to pay back.
Closing date. For credit cards, the date that a statement records its last transaction for a billing cycle. Transactions made after the closing date will reflect on the next billing cycle’s statement. For mortgages, this is the date that ownership of a home transfers from the seller to the buyer.
Compound interest. The addition of interest to the principal or deposit and any other accumulated interest. In short, it’s interest on interest over the life of a loan.
Convertible currency. A currency that can be exchanged for other currencies without government authorisation.
Credit Reference Agency. Companies such as Experian, Equifax, and TransUnion (formerly Callcredit), evaluate the credit data and behaviours of people who have obtained any form of credit. They retain files of people’s financial state of affairs. Credit Reference Agencies report your credit history — often in the form of a credit score — to lenders that are considering approving you for credit or a loan.
Credit limit. Also called a line of credit, the maximum amount of credit you can carry as a credit card balance. If you go over your limit, you will be charged a penalty fee.
Credit score. Also called a credit rating, this is a score of your creditworthiness that lenders use to determine their risk in extending you credit. Your credit score is determined by credit reference agencies, each varying somewhat in how it evaluates your history to come up with it.
Daily periodic rate. The rate determined by dividing your APR by either 360 or 365, depending on the credit card company. The daily periodic rate is used to calculate interest owed at the end of each day.
Exchange rate depreciation. Currency that loses value when compared to one or more other currencies.
Exchange rate risk. The potential for loss from adverse movement in exchange rates.
Finance charge. The cost of borrowing money on your credit card. It comprises interest and other fees.
Fixed exchange rate. Sometimes called a pegged exchange rate, this exchange rate is tied to another country’s currency or sometimes gold. The fixed exchange rate is set by the government or central bank of a country controlling that particular currency.
Floating exchange rate. An exchange rate that determines the value of currency through supply and demand.
Foreign transaction fee. A fee assessed when you use your credit card for a purchase outside of the United Kingdom. A card’s foreign transaction fee is typically between 1% and 3% of the transaction amount in US dollars.
Forex. This is simply an abbreviation of ‘foreign exchange’ and refers to the market in which currency is traded.
Forward contract. Also called a forward outright, an agreement between you and a broker to buy currency at a specified price by a certain date in the future.
Grace period. Also called a free period, this is the period in which you can pay your balance in full before the due date, avoiding any finance charges. Knowing whether your credit card offers a grace period is especially important if you plan to pay your account in full each month. Without a grace period, the card provider may impose a finance charge from the date you use your card or from the date each transaction is posted to your account.
Hedging. When discussing currency, a strategy that protects an asset or liability from fluctuation in exchange rates.
Initial margin. The deposit required to transact a forward order.
Interbank rates. Rates of interest that are charged between large international banks.
Interest rate risk. The potential for loss from movements in interest rates.
Intro APR. A temporary interest rate a credit card provider offers to a new customer. After the intro APR ends, it reverts to the ongoing APR.
Late fee. A fee charged by a lender when you fail to submit a payment on a loan or credit card by the due date.
Limit order. In the context of currency, this is a restricted order that sets a price at which it can be executed if and when the prevailing market price reaches that set price.
Margin. Cash collateral deposited in case of losses due to foreign exchange trades.
Margin call. A broker’s demand for additional funds to be deposited.
Maturity date. The predetermined and agreed-on date on which a loan or policy becomes due for settlement.
Mid-market rate. What your money is actually worth compared to another currency. It refers to the midpoint between worldwide supply and demand for that currency.
No-fee balance transfer card. A card for which you’re not charged fees when you move debt to it. Sometimes this perk is for a temporary period. Other card providers may offer no-balance transfer fees indefinitely.
Offer. In the context of currency, the rate at which a dealer is willing to sell a base currency.
Ongoing APR. Also known as the revert rate, this is the interest rate you’ll pay after your intro APR period ends. Typically, the ongoing APR is much higher than the intro APR.
Outright rate. The spot price plus or minus the difference in interest rates between two currencies.
Over-the-credit-limit fee. A penalty fee charged to you for exceeding your credit limit.
Penalty rate. Also called the default rate, this is a high interest rate charged when you violate the terms of your cardholder agreement. The penalty rate is usually assessed if you’re late on a monthly payment.
Rollover. In the context of currencies, the process of extending the settlement date.
Recurring payments. If you have the need to send regular transfers overseas — for instance, weekly, monthly or quarterly payments to the same recipient — many services will allow you to lock in even better rates with lower fees.
Secured credit card. A type of credit card that is secured by the cardholder with a savings account or cash collateral. This deposit protects the lender from default. This type of credit is used by people who are building their creditworthiness or are new to the credit system.
Settlement date. In the context of currency, when the actual exchange of one currency for another takes place.
Spot contract. A settlement date that is two business days forward.
Spot transfers. These transfers allow you to lock in a spot rate and then make your transfer within two days. Ideal for single international transfers, you select a competitive rate and make a transfer when you’re ready.
Spread. For currencies, the difference between the bid and offer prices.
Statement period. The time period in which a list of transactions are reported on your credit card statement. A credit card statement period typically is 30 days but may differ depending on the provider.
Stop-loss order. A restricted sell order that has a set price at which it can be executed by a broker if and when the prevailing market price reaches the set price.
Transaction fees and other charges. Fees that cover costs associated with a credit card. Some issuers charge a fee if you use the card for a cash advance, make a late payment or exceed your credit limit. Others may charge a monthly fee whether or not you use the card.
Unsecured credit card. A credit card that is not secured with collateral. If you have good credit and strong finances, you may qualify for an unsecured card.
Volatility. A statistical metric for price fluctuations.
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