Glossary

Money terms in plain English

Short, clear definitions of the words you meet when dealing with debt, credit, mortgages, insurance and pensions.

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50/30/20 rule: The 50/30/20 rule is a budgeting guideline that splits take-home pay into 50% needs, 30% wants and 20% savings and debt repayment.

A

Annuity: An annuity is a product that exchanges some or all of your pension pot for a guaranteed income, for life or a set period.
APR: APR, or annual percentage rate, is the yearly cost of borrowing, including interest and mandatory fees, shown as a percentage.
Arrears: Arrears are payments that were due but have not been made, such as missed rent, mortgage, council tax or loan instalments.
Auto-enrolment: Auto-enrolment is the law requiring employers to enrol eligible workers into a workplace pension and contribute to it.

B

Bailiff: A bailiff, now formally called an enforcement agent, is a person authorised to collect certain debts by taking control of goods or collecting payment.
Balance transfer: A balance transfer moves debt from one credit card to another, usually to benefit from a low or 0% interest rate for a set period.
Bankruptcy: Bankruptcy is a formal legal process, usually lasting 12 months, that writes off many unsecured debts for people who cannot repay them.
Breathing space: Breathing space is a government scheme in England and Wales that gives you up to 60 days of legal protection from creditors while you get debt advice.
Budget: A budget is a plan that compares your income with your spending, so you can decide where your money should go.
Buildings insurance: Buildings insurance covers the structure of your home, such as walls, roof, floors and fixtures, against events like fire, flood and storms.

C

Charging order: A charging order is a court order that secures a debt against your property, so the creditor may be paid when the property is sold.
Compound interest: Compound interest is interest earned on both your original money and the interest it has already earned.
Contents insurance: Contents insurance covers your belongings, such as furniture, clothes and electronics, if they are stolen or damaged.
Conveyancing: Conveyancing is the legal process of transferring ownership of a property from the seller to the buyer.
Council tax arrears: Council tax arrears are unpaid council tax bills, which are a priority debt because councils have strong powers to collect them.
County Court Judgment (CCJ): A County Court Judgment (CCJ) is a court order, made in England, Wales or Northern Ireland, saying you owe money and must repay it.
Credit limit: A credit limit is the maximum amount a lender allows you to borrow on a credit card or similar account.
Credit reference agency: A credit reference agency is a company that collects information about people's borrowing and sells it to lenders. The main UK agencies are Experian, Equifax and TransUnion.
Credit report: A credit report is a record of your borrowing and repayment history, held by credit reference agencies and used by lenders to assess you.
Credit score: A credit score is a number produced by a credit reference agency to summarise how risky you look as a borrower.
Critical illness cover: Critical illness cover pays a tax-free lump sum if you are diagnosed with a serious illness listed in the policy.

D

Debt collection agency: A debt collection agency is a firm that contacts people to recover debts, either on behalf of the original creditor or after buying the debt.
Debt management plan (DMP): A debt management plan is an informal agreement to repay your unsecured debts in affordable monthly amounts, usually arranged through a debt adviser.
Debt Relief Order (DRO): A Debt Relief Order is a formal option in England and Wales for people with low debts, low surplus income and few assets, which freezes debts for 12 months and may then write them off.
Default: A default is a record on your credit file showing that you have seriously fallen behind on an agreement, usually after several months of missed payments.
Defined benefit pension: A defined benefit pension promises a retirement income based on your salary and length of service, and the employer carries the investment risk.
Defined contribution pension: A defined contribution pension builds up a pot from contributions and investment growth, and the amount you receive at retirement depends on the pot's value.
Deposit: A deposit is the part of a property's price that you pay from your own money, rather than borrowing it with a mortgage.
Direct debit: A Direct Debit is an instruction to your bank to let a company collect varying amounts from your account on agreed dates.
Disposable income: Disposable income is what you have left after paying tax and essential living costs, which you can use for debts, savings or optional spending.
Diversification: Diversification means spreading your investments across different assets, sectors and countries to reduce the effect of any single one doing badly.

E

Early repayment charge (ERC): An early repayment charge is a fee you pay if you repay or switch your mortgage before the end of its deal period.
Emergency fund: An emergency fund is money set aside in an easy-access account to cover unexpected costs or a loss of income.
Excess: An excess is the amount you pay towards each insurance claim before the insurer pays the rest.

F

Financial association: A financial association is a link on your credit file between you and another person, usually created by a joint account or loan.
Financial Ombudsman Service (FOS): The Financial Ombudsman Service is a free, independent service that resolves complaints between consumers and financial firms.
Financial Services Compensation Scheme (FSCS): The FSCS is the UK's compensation scheme that protects eligible customers if an authorised financial firm fails.
Fixed-rate mortgage: A fixed-rate mortgage has an interest rate that stays the same for an agreed period, so your monthly payments do not change during that time.

H

Hard credit search: A hard credit search is a check made by a lender when you apply for credit, which is recorded on your credit file and visible to other lenders.

I

Income protection: Income protection pays a regular income if you cannot work because of illness or injury, usually until you return to work or the policy ends.
Individual Voluntary Arrangement (IVA): An IVA is a formal, legally binding agreement to repay part of your debts over a fixed period, set up and supervised by an insolvency practitioner.
Inflation: Inflation is the rate at which prices rise over time, reducing what each pound can buy.
Interest-only mortgage: An interest-only mortgage is one where you pay only the interest each month and still owe the full loan at the end of the term.
ISA: An ISA, or Individual Savings Account, is a tax-efficient account in which interest, dividends and gains are free of UK income tax and capital gains tax.

L

Lifetime ISA (LISA): A Lifetime ISA is an account for people aged 18 to 39 that earns a government bonus on savings used for a first home or retirement.
Loan-to-value (LTV): Loan-to-value, or LTV, is the size of your mortgage as a percentage of the property's value.

M

Mortgage: A mortgage is a loan used to buy a property, secured against that property, so the lender can repossess it if you do not keep up the repayments.

N

National Insurance: National Insurance is a tax on earnings that builds entitlement to benefits such as the State Pension.
Negative equity: Negative equity means your property is worth less than the mortgage you owe on it.
No-claims discount: A no-claims discount reduces your insurance premium for each year you go without making a claim.
Non-priority debt: A non-priority debt is a debt where the consequences of non-payment are less immediate, such as credit cards, personal loans, overdrafts and catalogue debts.

O

Overdraft: An overdraft is borrowing from your bank that lets you spend more than you have in your current account, up to an agreed limit.

P

Pension drawdown: Drawdown lets you keep your pension invested and take an income or lump sums from it as you need.
Pension tax relief: Pension tax relief means that part of the money you would have paid in income tax goes into your pension instead.
Premium: A premium is the amount you pay for an insurance policy, either as a lump sum or in instalments.
Priority debt: A priority debt is a debt where the consequences of not paying are most serious, such as losing your home, having your energy cut off or going to prison.

R

Remortgage: Remortgaging means replacing your existing mortgage with a new one, either with your current lender or a different one.
Repayment mortgage: A repayment mortgage is one where each payment covers both interest and part of the loan, so the debt is fully repaid by the end of the term.

S

Section 75: Section 75 of the Consumer Credit Act 1974 makes a credit card company jointly liable with the retailer for goods and services costing between £100 and £30,000.
Secured debt: A secured debt is borrowing that is tied to an asset, usually your home, which the lender can sell if you do not keep up the repayments.
Shared ownership: Shared ownership is a scheme that lets you buy a share of a home, usually between 10% and 75%, and pay rent on the rest to a housing association.
Sinking fund: A sinking fund is money you put aside regularly for a known future expense, such as car repairs, Christmas or an annual insurance bill.
SIPP: A SIPP, or self-invested personal pension, is a type of personal pension that lets you choose your own investments from a wide range.
Soft credit search: A soft credit search is a check on your credit file that is not visible to other lenders and does not affect your credit score.
Stamp duty: Stamp duty is a tax paid when you buy property. In England and Northern Ireland it is called Stamp Duty Land Tax; Scotland and Wales have their own taxes.
Standard variable rate (SVR): The standard variable rate is a lender's default mortgage rate, which it can change at its discretion and which usually applies when a deal ends.
Standing order: A standing order is an instruction to your bank to pay a fixed amount to a particular account on a regular schedule.
State Pension: The State Pension is a regular payment from the government that you can claim when you reach State Pension age, based on your National Insurance record.
Statute-barred debt: A statute-barred debt is one that is too old for the creditor to enforce through the courts, because the limitation period has expired.

T

Take-home pay: Take-home pay is the amount that reaches your bank account after tax, National Insurance and other deductions such as pension and student loan payments.
Tracker mortgage: A tracker mortgage has an interest rate that follows another rate, usually the Bank of England base rate, plus a set margin.

U

Unsecured debt: An unsecured debt is borrowing that is not tied to an asset, so the lender cannot automatically take your home or car if you do not repay.