Financial Glossary

Amortization splits a debt into fixed payments over the loan's full term, with a schedule showing how much of each payment goes to principal versus interest.

On an amortizing loan the monthly payment stays fixed, but the portions of principal and interest flip over the term. The early payments are mostly interest, because interest is charged on a balance that is still large. This makes the balance fall slowly at first and quickly near the end. This is why the first years of a mortgage can feel like they go nowhere, why selling or refinancing a mortgage early leaves you with little equity, and why an extra principal payment saves the most when it is made early. The schedule is fixed the day the loan is written, so you can see the whole path in advance.

Reviewed 2026-09-26

APR is the yearly cost of borrowing, shown as a percentage that folds the lender's required fees in with the interest rate.

APR exists so you can compare loans that are packaged differently, because a low rate with high fees can cost more than a higher rate with none. The catch is that the calculation assumes you hold the loan for its full term, and that assumption cuts two ways. Stretch the same fee across more years and the APR shrinks, even when the loan costs you more in total. Pay the loan off early and the opposite happens, because the up front fee cannot be recovered, so the yearly rate you effectively paid ends up higher than the APR you were quoted.

Reviewed 2026-08-08

APY is the total percentage your money grows in a savings account over a year, including the effect of interest earning interest.

APY is the number that lets you compare two savings accounts honestly. It already folds in how often the interest compounds and normalizes everything to a full year, and every bank has to calculate it the same way, so two APYs are genuinely apples to apples. The catch is that a savings APY is not locked. Banks can change the rate after your money is already there, and promotional rates often carry balance minimums or an expiry date. Even so, the spread is worth chasing, because large banks commonly pay a fraction of a percent while online banks pay several percent on the same federally insured deposit.

Reviewed 2026-08-08

A balance transfer pays off a credit card balance by moving it to another card, usually one offering a lower or 0% rate for a set number of months.

A balance transfer does not make debt smaller. It makes it cheaper for a while, which only helps if you use those months to pay it down. It also only helps if the old card stays paid off. Spend it back up and you have two balances instead of one. Card companies are allowed to charge a balance transfer fee even on a 0% offer. It is usually a percentage of the amount moved, and it is added to your new balance on day one. The real test is what is left when the promotional rate ends, because that remainder is charged the card's regular APR.

Reviewed 2026-10-16

Compound interest is interest that earns interest, because each period's interest is added to your balance and the next period is calculated on the larger number.

Compound interest works in both directions, which is what makes it so important to understand. On savings, each period's interest joins your balance, so the next period earns on a slightly larger number, and the growth curve starts nearly flat before it steepens. On debt, the same mechanic runs in reverse, adding unpaid interest to what you owe so it starts charging interest of its own. This is how a balance can grow even in a month when you made a payment. The deciding factor is the rate, not how often it compounds. At savings rates, compounding takes decades to become obvious. At credit card rates, it shows up in months.

Reviewed 2026-08-17

A credit score is a number, usually from 300 to 850, built from your credit reports, that lenders use to judge how likely you are to repay what you borrow.

The higher your score, the more likely you are to be approved for a loan and the lower the rate you are offered, so a low score costs real money in interest for years. In the FICO model, payment history makes up 35% of the score and amounts owed makes up 30%, which includes how much of your available credit you are using. Carrying a balance helps neither one. Paying every card in full each month builds a strong score at $0 in interest. And as your score improves, refinancing a loan you took out at a worse rate can start to save you money.

Reviewed 2026-10-17

An emergency fund is money kept in a savings account for unexpected expenses, so that a surprise does not turn into debt.

The point of an emergency fund is not the return it earns. It is that the alternative to having cash on hand is usually a credit card charging 20 percent or more. An emergency fund is best understood as insurance against expensive borrowing, and its real return is the interest you never pay. Common guidance is three to six months of essential expenses, but the right number depends on how stable your income is and how many people depend on it.

Reviewed 2026-08-07

FDIC insurance is a federal government guarantee that protects the money in your bank account if the bank fails.

FDIC insurance is the reason chasing a higher APY at an unfamiliar online bank is not the risk most people assume it is. An online bank you have never heard of carries the same federal guarantee as the largest bank in the country, provided it is FDIC insured. Credit unions have an equivalent through the NCUA. Coverage applies per depositor, per insured bank, per ownership category, which is how a couple with both individual and joint accounts can be covered well beyond the headline limit at a single bank.

Reviewed 2026-08-17

A grace period is the time between your statement closing and the payment due date, and paying the full statement balance by then means your purchases are not charged interest.

The grace period is the whole reason a credit card can cost $0 in interest. Pay the full statement balance by the due date and every purchase on that statement was an interest free loan. No law requires a card to offer a grace period, though most do on purchases. What the law does require is that your bill arrive at least 21 days before the payment is due. The protection only lasts while you pay in full. If you only pay part of the balance, you usually lose it, meaning all new purchases start charging interest from the day you make them until you pay in full again, which can take a cycle or two. Cash advances generally never get a grace period.

Reviewed 2026-10-16

Interest is the cost of borrowing money, paid by the borrower to the lender and generally calculated as a percentage of the amount owed.

Interest is rent on money. When you borrow, you pay it. When you save, the bank is borrowing from you, so it pays you. The interest rate is the price of the money alone. APR is the fuller number. It includes any fees the lender requires, such as an origination fee on a personal loan, which is why a loan's APR can be higher than its interest rate. On a credit card the two are usually the same, because there is no upfront fee to fold in. Interest is charged on whatever you still owe, so paying the balance down faster is the main way to pay less of it.

Reviewed 2026-10-18

An introductory APR is a temporary low or 0% interest rate a card offers for a set number of months, after which the regular, higher APR takes over.

An intro APR is useful when you treat the end date as a deadline. By law the rate has to last at least six months, unless you fall more than 60 days behind on a payment, and the card has to tell you up front how long the intro APR lasts and what rate replaces it. Read the wording, because two offers that sound alike work very differently. "0% intro APR for 12 months" is a true intro rate, so interest only starts on whatever is left after the promo ends. "No interest if paid in full within 12 months" is deferred interest, common on store cards. Interest builds up in the background the whole time, and if any of the balance remains at the deadline, all of it is charged at once.

Reviewed 2026-10-16

The minimum payment is the smallest amount you can pay on a credit card or loan in a given month without the account being reported late.

What counts as the minimum payment depends on the kind of debt, and the difference matters. On a term loan such as a mortgage, car loan, or student loan, the minimum is just the fixed monthly payment the lender scheduled. It is built to pay the loan off over its full term, so making it on time every month pays off the debt as planned. This is the sense used in payoff strategies like the snowball and avalanche, where you keep every loan current with its minimum and send every extra dollar at the one debt you are attacking. For a credit card, the minimum payment is recalculated each month as a small slice of the card balance, often around 2 percent or a fixed floor such as 25 dollars, whichever is larger. Most of it covers the interest charged that month, so very little reduces what you owe, and because the payment shrinks as the balance falls, paying only the minimum can stretch a card balance out for years.

Reviewed 2026-09-26

PMI is an extra monthly charge required when a mortgage starts above 80% of the home's value, and it protects the lender rather than you.

This is the term people misunderstand most often. PMI is insurance that you pay for to protect your lender if you default. You receive nothing from it except the ability to buy sooner with less cash down. It typically costs a few tenths of a percent of the loan balance each year, and it is not permanent. On a conventional loan the servicer must cancel it automatically once the balance reaches 78% of the original value, and you can usually request cancellation at 80%. FHA loans work differently, and their equivalent charge often lasts the life of the loan.

Reviewed 2026-08-17

Principal is the dollar amount you borrowed and still owe, separate from the interest and fees charged on top of it.

Every loan payment is split between principal and interest. The interest portion is the cost of borrowing, and the principal portion reduces the total amount you owe. Large principal balances result in large interest payments, which can make the principal portion of a monthly payment small. That is why extra payments are so powerful when they are applied to principal directly. A dollar of extra principal removes that dollar from every future interest calculation for the life of the loan. Principal is the number that has to reach zero for the debt to be gone.

Reviewed 2026-09-26