Glossary

GLOSSARY

Account Number The unique sequence of numbers given to a cardholder’s credit card
account and that is embossed on the face of the credit card.

Account Testing A fraud scam in which criminals verify whether a credit card account
number is valid. The perpetrators submit an authorization request but
not a sales draft. If the account is valid, it is then used for larger
fraudulent transactions. Examiners should be cognizant that the term
“account testing” is also commonly used to refer to transaction testing of
cardholder accounts during the examination process and is separate and
distinct from account testing as used to refer to the fraud perpetration
discussed above.

Acquiring Bank A bank that contracts with merchants to accept, process, and settle
credit card transactions. The acquiring bank is the entity that maintains
the merchant relationships and collects cardholder transaction data from
those merchants (either directly or via a third party). It then initiates that
data into an interchange system, subsequently receives payment from
the issuer, and pays the merchants. Acquiring banks typically provide
charge-back processing and other back-office services and are also
known as acquirers or merchant banks.

Adverse Retention The phenomenon in which the bank inadvertently retains a

disproportionately high number of potentially bad accounts (for example,
unprofitable or overly problematic accounts).

Adverse Selection The phenomenon in which a disproportionately high number of

potentially bad credit risks respond to an offer.

Affinity Cards General purpose credit cards offered by two organizations: one the
lender and the other usually a non-financial group. The issuer often
donates a portion of the fees or charges (sometimes referred to as a
royalty) to the non-financial group. Use of the card often entitles the
cardholder to special discounts or deals from the non-financial group.

Agents Entities that source merchants or cardholders, serve as a gateway, or

provide other services for the bank.

Agent Bank A bank that, by agreement with an acquirer, participates in that

acquirer’s merchant processing program. It may or may not be liable to
the acquirer for losses incurred on its merchant accounts.

Annual Percentage
Rate (APR) The cost of credit at a yearly rate. It is calculated in a standard way,
taking the average compound interest rate over the term of the loan so
borrowers can compare loans. Lenders are required by law to disclose a
card account’s APR.

Applicants People/businesses that respond to an offer for or request credit (they

typically fill out an application).

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Applications Forms filled out by a consumer or business requesting credit. The form
asks for various identifying information as well as credit-related
information on which the lender, in part, bases its credit decision.

Associations The organizations (VISA and MasterCard) that provide rules, advertising,
and settlement services and that promote the card brand for their
member financial institutions. Banks must be a member to offer the
applicable Association’s credit card services. Membership rights and
obligations are specifically defined by the Associations.

Attributes Possible answers to questions asked about the applicant on an

application or items of information taken from the credit bureau report.

Attrition The loss of accounts either involuntarily through charge-offs, or death; or

voluntarily, at the option or request of the cardholder.

Authorization The process of obtaining permission from the issuing bank to accept the
card for payment. Authorization entails assessing the card’s transaction
risk and reserving the specified amount of credit on the cardholder’s
account if approved. If a merchant does not comply with Association
rules regarding authorizations, payment to the merchant may be withheld
or a subsequent charge-back may occur. Authorization processes vary
between merchant types.

Automated Teller
Machine (ATM) An unattended, self-service electronic machine that enables consumers
to withdraw paper money or conduct other banking procedures upon
insertion of an encoded plastic card, such as a debit or credit card, and
entry of a personal identification number (PIN).

Available Credit The amount of unused credit on an account that is accessible for
cardholder transactions. Generally it is the credit line amount less the
outstanding balance less pending authorizations (holds). It is sometimes
referred to as the “open-to-buy.”

Backroom Operations The operational functions that are performed by the acquirer or issuer to
facilitate the day-to-day processing of credit card transactions.

Balance Transfer The process of moving an unpaid credit card debt from one issuer to
another.

Bank Identification
Number (BIN) A series of numbers assigned by Visa to its member financial institutions
to identify each institution for acquiring and issuing processes. The term
ICA is used by MasterCard and is similar to a BIN. VISA BINs start with
4, and MasterCard ICAs start with 5.

Behavior Scores Results of statistical scoring systems that are often used to increase
collection efficiency and decrease collection costs. The system is
usually based on internally-derived information about the consumer’s
behavior, such as payment history, card usage patterns, and so forth.

Billing Cycle The time (number of days) between billing statements. It is the period
between the previous statement date and the current statement date
during which both credit and debit transactions are accumulated for
billing, usually about 30 days.

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Billing Statement The bill (printed record) sent by a card issuer to the customer. It is
usually sent monthly and includes, but is not limited to, itemization of
activity on the account, including balance, purchases, payments, credits,
finance charges, and other account activity.

Blogging Blog is an abbreviated term for weblog, which is an online journal that is
frequently updated for general public consumption.

Bust-Out Scams Cons in which a seemingly legitimate merchant opens a valid account
with an acquirer and, after a brief period of normal sales activity,
deposits a large number or high dollar amount of fraudulent transactions.
Once payment for the transactions is received, the merchant empties its
deposit account and disappears. Merchants in bust-out scams often
make applications to several acquirers at the same time.

Calibration The process by which a model’s output is converted into the actual rate
of the outcome and includes adjusting or modifying for the difference
between the expected rate based on the historical database and the
actual rate observed.

Card Processor A party that provides transaction processing and other services for an
issuing bank or an acquiring bank. It is an Association member, or an
Association-approved non-member acting as the agent of a member,
that provides authorization, clearing, or settlement services for
merchants and members. Some banks act as their own card processors
while other banks use third parties for card processing (there are card-
issuer processors and card-merchant processors, and some third parties
are both).

Card Utility The level of a card’s practical usefulness to consume a commodity,

product, or service.

Cardholder A person to whom a card has been issued.

Cardholder
Agreement A written, legal contract between the issuer and the cardholder. It
contains the terms of the account and a schedule of various fees.

Cash Advances Using a credit card to obtain cash (as compared to making a purchase or
consuming a service), for instance by using an ATM or a bank branch.
There is normally a fee associated with cash advances.

CEBA Bank The term CEBA comes from the enactment of the Competitive Equality
Banking Act of 1987 (CEBA) which established conditions for special-
purpose credit card banks. A CEBA bank is a special kind of issuing
bank. It may only accept time and savings deposits of $100M or more.
It is often affiliated with a retailer and offers private label cards for use at
the affiliated organization. It may, however, issue general purpose VISA
or MasterCard accounts.

Champion/Challenger
Strategies Approaches developed to test alternatives (challengers) against an
existing strategy (champion).

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Characteristics Questions asked on an application, or an informational category on the

consumer’s credit bureau report.

Charge-Backs A transaction that is returned as a financial liability by the issuer and/or

the cardholder to the acquirer and most often to the merchant for
resolution after the sale has been settled. It is generated when a
cardholder disputes a transaction or when the merchant does not follow
proper card acceptance procedures. The issuer and acquirer research
the facts to determine which party is responsible for the transaction, and
strict Association rules must be followed. If the charge-back is upheld
and the merchant cannot or does not cover it, the acquirer must cover it.

Charge Card A card product with a line of credit that does not revolve (that is, the
balance must be paid off each billing period (typically each month)).

Charge-Off The removal of an account from a creditor’s books as an asset. This

usually results from delinquency, death, bankruptcy, or similar
circumstances. While it indicates that the creditor does not expect the
debt to be repaid, it does not mean that the debt no longer exists (that is,
the cardholder still owes the debt) or that there will not be further
attempts to collect it.

Clearance The process of transmitting, reconciling, and, in some cases, confirming

payment orders prior to settlement.

Co-Branded Card A type of card issued through a partnership between a bank and a retail
company, such as a large department store. Usually, the attraction of
the card is special deals with the retailer or rebates. The intent is to
promote the retailer’s product and increase the bank’s receivables.

Consumer Credit
Counseling Service
(CCCS) A non-profit organization with professional financial counselors who help
consumers find a way to repay their debts by using budgeting and funds
management processes.

Consumer Reporting
Agencies Companies that collect and sell vital information about how consumers
handle credit. Each issues a credit report that details how the consumer
manages his or her debts and makes payments, how much untapped
credit the consumer has available, whether the consumer has applied for
any loans, whether any financial matters of public record exist, and so
forth. Reports are made available to the individuals and to creditors who
profess to have a legitimate, permissible purpose to inquire about the
creditworthiness of the consumer. The three major consumer reporting
agencies in the United States are Equifax, Experian, and Trans Union.
Consumer reporting agencies are commonly known as credit bureaus.

Convenience Checks Instruments that are used like a personal check but that are linked to the
consumer’s credit card account. They are checks drawn on the issuing
institution for the purpose of transferring account balances from another
financial institution or for transactional purposes.

Convenience Users Cardholders who pay their balance in full on or before each payment due
date. This type of user is often referred to a transactor.

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Credit Bureau A company that collects and sells information about how consumers
handle credit. It issues a credit report that details how the consumer
manages his or her debts and makes payments, how much untapped
credit the consumer has available, whether the consumer has applied for
any loans, whether any financial matters of public record exist, and so
forth. Reports are made available to the individuals and to creditors who
profess to have a legitimate need for the information. The three major
bureaus are Equifax, Experian, and Trans Union. A credit bureau is also
known as a consumer reporting agency.

Credit-Enhancing
Interest-Only Strips On-balance sheet assets that, in form or in substance, (1) represent the
contractual right to receive some or all of the interest due on transferred
assets and (2) expose the bank to credit risk that exceeds its pro-rata
claim on the underlying assets whether through subordination provisions
or other credit-enhancing techniques.

Credit-Enhancing
Representations and
Warranties Contractual obligations that are designed to insulate investors from credit
risk generally through mechanisms other than redirecting internal cash
flows. Examples include guarantees and surety bonds.

Credit Enhancement Various internal and external facilities designed to reduce the credit risk
to the investors with the goals of achieving higher ratings on, and
improving the marketability of, investor certificates.

Credit History A record of a person’s credit profile including debt payments and other
relevant financial information such as collections and public records. It is
a compilation of a consumer’s use and pay-back of credit.

Credit Limits The dollar amount assigned to an account as the ceiling of credit
disclosed to the consumer that the consumer is approved to borrow.

Credit Report A full history of information within a consumer’s credit file at the credit
bureau that includes identification information, current and historical
account performance, collection activity, public records (bankruptcy, tax
liens, and so forth), and records of other credit inquiries.

Credit Score The result of a calculation based on a consumer’s credit history that is
intended to predict future credit performance for that consumer. It is a
numerical estimation of the likelihood that the consumer will meet his or
her debt obligation(s).

Debit Cards Cards issued to pay for goods and services or to make transactions at
an Automated Teller Machine and for which the cardholder is accessing
funds from a personal checking or savings account rather than drawing
on credit. As such, they are a “pay-as-you-go” function (compared to
credit cards, which are a “pay later” function).

Delinquency Bucket A compartment (usually for reporting purposes) that is identified by a

delinquency (past due) stage (for example, 1 to 29 days past due, 30 to
59 days past due, and so forth).

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Direct Credit
Substitutes Direct credit substitutes arise from an arrangement in which a bank
assumes, in form or in substance, credit risk associated with an on- or
off-balance sheet asset or exposure that was not previously owned by
the bank (that is, it was a third-party asset), and the risk assumed
exceeds the pro-rata share of the bank’s interest in the third-party asset.
Examples of direct credit substitutes include purchasing a subordinated
certificate of another bank’s securitization, guaranteeing a mezzanine
certificate of another bank’s securitization, or providing a letter of credit
to an asset-backed commercial paper program.

Discount Rate The fee, as a percent of sales volume, an acquirer charges a merchant
for processing sales transactions. This is also referred to as the
merchant discount. Examiners must be cognizant that the term
“discount rate” is used in banking for other purposes as well (for
instance, when referring to a certain borrowing rate from the Federal
Reserve Bank).

Dual-branding An arrangement in which the payment card offered carries two card
brands (for example, Visa and American Express, MasterCard and
Diners Club, and so forth).

Early Amortization In a securitization, an unplanned liquidation of the assets usually due to

deterioration in the credit quality of the underlying receivables. Another
term for “Wind Down Event.”

Economic Capital Economic capital is a measure of risk, not of capital held, and is
regardless of the existence of assets. Economic capital model results
are expressed as a dollar level.

Electronic Benefits
Transfer (EBT) The electronic delivery of government benefits using plastic cards.

Electronic Data
Capture (EDC) The process when the merchant swipes the credit card through an
electronic card reader or terminal. The information (data) on the card’s
magnetic stripe is entered into (captured in) the processor’s database
electronically, hence the term electronic data capture.

Estimated Managed
Assets Average assets on the bank’s general ledger plus all outstanding assets
(in this case, credit card receivables) securitized as of a specific date.

Exceptions Items or occurrences that are outside of the bank’s policy guidelines or
that do not fit the established rules or judgment criteria.

Excess Spread Portfolio yield minus investor coupon, servicing fee, charge-offs (net of
recoveries), and any other securitization trust expenses expresses as a
percentage of the total outstanding receivables securitized (and
allocated to the investor certificates).

Factoring A form of fraud where a merchant creates false sales transactions,

inflates the sales amount, or alters the sales drafts to improperly receive
funds from the issuer. The merchant’s intentions could be to obtain
additional money to cover charge-backs or cash flow problems, or to
cease operations and disappear with the sales proceeds. The acquirer

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is then responsible for any remaining charge-backs.

Fedwire The Federal Reserve Bank’s (FRB) nationwide, real-time gross

settlement electronic funds and securities transfer network. It is a credit
transfer system. Each funds transfer is settled individually against an
institution’s reserve or clearing account on the books of the Federal
Reserve. The issuing bank pays the Associations using Fedwire. To
use Fedwire, a bank must hold an account at the FRB and settlement is
drawn from the account. The issuing bank makes the payment by
sending a message over Fedwire that authorizes the FRB to
electronically debit the bank’s FRB account for the net settlement
amount and transfer the funds to the settlement bank. The transfers are
essentially instantaneous. The settlement bank then pays the merchant
bank using Fedwire.

Finance Charges Charges for using a credit card and that are comprised of interest costs
and other fees.

First Payment
Default When a new cardholder fails to make the first payment due in a timely
manner.

Floor Limit A per-transaction amount above which authorization is required. It is a

dollar amount set by the acquirer, in accordance with Association rules,
above which the merchant must obtain authorization. There are
normally two types of floor limits: (1) a standard floor limit where
transactions above the limit require an authorization request and which
varies by merchant type and (2) zero-floor limits where all transaction
amounts require an authorization request.

Future/Delayed
Delivery Sales transactions associated with conveyance of the products or
services sometime after the date of purchase (that is, in the future).
Examples include airline tickets, concert tickets, and travel/tour
packages.

Grace Period The grace period is the interest-free period of time allowed by a lender.
The standard grace period is usually between 20 and 30 days. If there is
no grace period, finance charges start accruing the moment a purchase
is made with the credit card. Consumers who carry a balance on their
credit cards generally do not have a grace period for those cards
(meaning that finance charges are accrued from the date of the charge,
not from the end of the finance charge grace period).

High-Side Override Declining credit to an applicant that scores above the cut-off score.

Holdback A certain percentage of the merchant’s sales deposits is held-back

(retained) by the acquirer to serve as a reserve against future charge-
back exposure or to cover existing charge-backs.

Impaired Impairment occurs when, based on current information and events, a

bank will likely be unable to collect all amounts (principal and interest)
according to the contractual terms of the original loan agreement.

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Independent Sales
Organization (ISO) An organization or individual that is not an Association member but that
has a bankcard relationship with an Association member that involves
acquiring or issuing functions such as the ISO soliciting merchant
accounts, arranging for terminal purchases or leases, providing customer
service, and soliciting cardholders. An ISO is sometimes referred to as a
Member Service Provider (MSP), although their definitions are not
always synonymous. The acquirer must register all ISO/MSPs with the
applicable Association.

Interchange The exchange of transaction data, information, and money between

acquiring and issuing institutions participating in a payment network and
in accordance with the Associations’ by-laws and rules. It is the
electronic infrastructure that processes financial and non-financial
transactions between financial institutions.

Interchange Fees Fees paid by one bank to another to cover handling costs and credit risk
in a card transaction. Also referred to as the interchange rate, it is
usually a percentage of the transaction amount and is derived from a
formula that takes into account authorization costs, fraud and credit
losses, and the average bank cost of funds. The interchange fee is
typically set by the Associations. It is normally extracted from the
merchant discount by the acquiring bank and paid to the separate
issuing bank to compensate it between the time of settlement with the
acquiring bank and the time of recouping value (payment) from the
cardholder.

Introductory Rates Short-term, temporary interest rates that are also known as a
promotional rates or teaser rates.

Issuers Financial institutions that supply (issue) cards to cardholders for use in
performing transactions. They hold and maintain the cardholder
relationship.

Laundering A form of merchant fraud that occurs when a merchant submits drafts for
another merchant. The merchant account holder typically is
compensated for submitting the unauthorized merchant’s business by
receiving a percentage of their sales volume. Laundering is a federal
offense. In addition, several states’ criminal statutes and Association
operating regulations prohibit laundering.

Layering The inappropriate practice of recording more than one amount for the
same probable loan loss in the allowance.

Lockbox A deposit mechanism used by entities to facilitate their deposit

transaction volume. Typically, commercial firms and businesses direct
customers to send payments directly to a financial institution address or
a post office box controlled by the institution. Financial institution
personnel record the payments received and prepare deposit slips.
Subsequent processing proceeds as with other deposit taking activities.

Loss Contingency An existing condition, situation, or set of circumstances that involves

uncertainty as to possible loss that will be resolved when one or more
future events occur or fail to occur.

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Loss Seasoning
Curves A term used to describe the normal migration of losses on accounts as
they age. This curve assumes losses remain minimal from origination to
a few months after origination, steadily increase in volume, and then
eventually level off. The loss seasoning curve varies between products,
such as between prime and subprime products.

Low-Side Override Approving credit to an applicant that scores below the cut-off score.

MATCH Short name for Member Alert To Control High Risk Merchants. A
national database of merchants and their principals that have been
terminated for cause or that have made multiple applications for
merchant accounts. The file is maintained by the Associations based on
information reported by acquirers.

Member Service
Providers (MSP) In general, entities or individuals that are not Association members but
are registered with the Association to provide card program services to a
member.

Merchants Sellers of goods, services, and/or other information who accept credit
cards as payment for these items. They have signed a merchant
agreement to honor credit cards and display the service mark (logo).

Merchant Category
Codes (MCC) Universal, four-digit numbers that are assigned by the acquiring bank
and identify a merchant by its primary line of business. There are
several hundred MCCs used.

Merchant Processing The routing of electronic transmissions from merchants through the
payment network for clearing and settlement. It is a separate and
distinct business line from credit card issuing. Merchant processing
activity is, for the most part, off-balance sheet and involves gathering
sales information from the merchant, collecting funds from the issuing
bank, and paying the merchant. Various third parties may be involved.

Migration Analysis A common method used by management to evaluate the adequacy of

allowances for loan losses. It segregates the credit card portfolio into
delinquency buckets in order to determine the amount of receivables that
roll through each delinquency bucket and progress to charge-off.

Minimum Payment The smallest amount a cardholder can pay to meet the terms of the
account agreement and keep the account from going into default.

Monoline Credit
Card Banks Banks that mainly focus on the business of credit cards and don’t have
significant other banking operations.

Negative Amortization The phenomena in which the cardholder’s account balance grows
(excluding purchase activity) despite the cardholder making the minimum
payment as agreed to in the cardholder agreement.

Over-Limit When the account’s balance is beyond its credit limit. One or any
combination of purchases, cash advances, fees, and finance charges
could cause an account to become over-limit.

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Override Decisions that are contrary to the decisions recommended by the

scorecard or by the usual, approved judgmental evaluation process.

Paper-Based
Transaction A cardholder transaction for which the merchant imprints the credit card
and submits a paper sales draft to the acquirer for collection. The paper
draft is sent to the processing center where it is processed and
transferred to magnetic tape for transmission through interchange.

Pay-Ahead Programs Programs which allow cardholders to skip a payment or payments based
on the excess of the remitted payment in one month being applied to one
or more future months. They are also known as pre-payment programs.

Payment Hierarchy The order in which the cardholder’s payment will be applied to fees,
purchases, and other charges.

Payment Holiday
Programs Programs which enable cardholders to defer their minimum monthly
payments. These programs are normally used during high purchasing
periods such as holidays or peak vacation periods and are also known
as skip payment programs.

Penalty Pricing Pricing that is higher than a card’s standard rate and that goes into effect
as a result of adverse activity, such as for late payment or for otherwise
not abiding by the cardholder agreement.

Podcasts Sound-bites that are downloadable from a website and that can be
played on an iPod.

Point-of-Sale
Transactions Face-to-face transactions in which the cardholder uses the physical card
at a merchant’s physical place of business.

Pre-Payment
Programs Programs which allow cardholders to skip a payment or payments based
on the excess of the remitted payment in one month being applied to one
or more future months. They are also known as pay-ahead programs.

Processing Generally refers to activities that do not involve customer contact or risk
management. For example, transaction authorization and cardholder
billing are considered part of processing. Activities that generally involve
customer contact and risk management (such as customer service and
credit review) are considered servicing, not processing. Processing is
commonly labeled as front-end processing and back-end processing.
Transaction authorization and routing transactions from the point-of-sale
to the network are examples of front-end processing while handling the
information and payment flows needed to convert the electronic
transaction record into cash for the merchant are examples of back-end
processing.

Promises Kept The amount of payments made by cardholders as compared to the

amount of payments promised by those cardholders. This could also be
measured by number of payments made compared to number of
payments promised.

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Promises to Pay The amount of payments that cardholders promise to pay as a result of
the bank’s collection activities. This can also be measured as a count
(compared to a dollar volume).

Promotional Rate A short-term, temporary interest rate. It is also known as an introductory

rate or teaser rate.

Purification The practice of reversing uncollectible accrued fees and finance charges
against earnings rather than accounting for them as charge-offs against
the ALLL. Purification results in lower charge-off ratios when the
accrued and unpaid fees and finance charges are included in the
outstanding principal balance (denominator) yet the charged-off
uncollectible accrued fees and finance charges are not included in the
charge-off number (numerator).

Qualified Special
Purpose Entity
(QSPE) In a two-step securitization structure, the QSPE is the entity that issues
the certificates (the second step). QSPEs are designed to operate with
limited decision-making authority. Whether or not the securitization
vehicle is a QSPE is very important for determining whether or not the
assets and liabilities of the QSPE should be consolidated. The goal is to
avoid consolidation. In accordance with FAS 140, there are three
qualifying conditions: i) legal isolation, ii) the ability of the transferee to
pledge or exchange the transferred assets, and iii) surrender effective
control.

Re-aging Returning a delinquent, open-end account to current status without

collecting the total amount of principal, interest, and fees that are
contractually due. Certain requirements must be met to be able to re-
age an account, as discussed in the Portfolio Management chapter.

Recourse Recourse arises from an arrangement in which a bank retains, in form or

in substance, the credit risk in connection with an asset sale in
accordance with GAAP, if the credit risk exceeds a pro-rata share of the
banks claim on the assets. Examples of recourse include off-balance
sheet contractual agreement to repurchase assets, spread accounts,
cash collateral accounts, retained subordinated certificates, and retained
subordinated IO strips.

Recoveries Monies collected on an account after it has been charged-off. Recovery

usually results from action taken by the collection department and may
include legal action or agency referrals.

Refreshed Credit
Scores Credit scores that have been updated (after origination) to reflect
changes in the consumer’s profile that may have occurred since the
original credit score was recorded.

Reissue The process of preparing and distributing new credit cards to

cardholders whose cards have expired or will soon expire (if the bank
has determined that it will renew the relationship). It also encompasses
supplying replacement cards to cardholders for lost or stolen cards.

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Reject Inferencing Specific inferences made by management about rejected applicants in

order to determine if the applicants would have been a good or bad
credit risk.

Residual Interests Residual interest refers to any on-balance sheet asset that represents an
interest (including a beneficial interest) created by a transfer that
qualifies as a sale (in accordance with GAAP) of financial assets,
whether through a securitization or otherwise, and that exposes a bank
to any credit risk directly or indirectly associated with the transferred
asset that exceeds a pro-rata share of that bank’s claim on the assets,
whether through subordination provisions or other credit enhancement
techniques. Residual interests do not include interests purchased from a
third-party, except for credit-enhancing IO strips.

Retrieval Requests Requests for a copy of the original sales draft from the merchant.
Issuers request a copy of the sales draft to verify features of the
transactions such as a signature, no imprint, cardholder inquiry, or fraud
analysis. Retrieval requests usually precede a charge-back. Failure by
a merchant to follow through with the retrieval request may, in and of
itself, result in a charge-back. Retrieval requests are also known as
inquiries.

Revolvers Cardholders who roll over part of the outstanding balance to the next
month instead of paying the balance in full.

Risk-Based Pricing The practice of charging different rates on the same type of loan to
different consumers, depending on each consumer’s credit score and
other factors which are believed to influence the likelihood of repayment.
In risk-based pricing, consumers who are more likely to default are
priced higher (with the intention that they would then be helping to pay
for costs they cause the company), while consumers who have better
repayment records get lower interest rates because they are not
anticipated to create as many costs to defray.

Roll-Rate The percentage of balances or accounts (units) that move from one
delinquency stage to the next delinquency stage. They measure the rate
that accounts (units) or balances move (roll) to the next level of
delinquency and are used in migration analysis.

Scoring The assignment of points to specific items of information to predict an

outcome. The information is normally drawn from the application,
internal performance, or a credit report. Scoring usually involves
statistical modeling and is intended to help creditors accurately establish
business and financial objectives and control levels of risk.

Securitizing The process of packaging a good or product, such as credit card

receivables, and transforming it into securities.

Segmentation The process of parceling or stratifying the portfolio into various

homogenous groups for closer analysis.

Settlement As the card sales transaction value moves from merchant to acquiring
bank to issuer, each party buys and sells the sales ticket. Settlement is
what occurs when the acquiring bank and the issuer exchange funds
during that process. On more technical terms, it is the final, irrevocable
transfer of funds between parties in a payment system. (This should not

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be confused with the term settlement as used to refer to a debt

forgiveness situation.)

Skip Payment
Programs Programs which enable cardholders to defer their minimum monthly
payments. Normally these programs are instituted by management
during high purchasing periods such as holidays or peak vacation
periods. They are also known as payment holiday programs.

Split Sales Drafts The process by which a merchant uses two or more sales drafts for a
single transaction to avoid authorization limits. This differs from split
tender sales which involve two or more forms of payment (for example,
cash and credit card).

Spread Accounts In a securitization, the governing documents may require that if specific
performance indicators fall below certain thresholds, any excess spread
will be “trapped” into an account (the spread account) for the benefit of
the certificate holders as a form of credit enhancements against future
credit losses. The performance indicators are usually based on the
performance of the underlying receivables, rating agencies’ actions, or
excess spread falling below a specified threshold.

Subprime Exhibiting characteristics that indicate a significantly higher risk of default

than traditional bank lending customers. Risk of default may be
measured by traditional credit risk measures (credit history, debt to
income levels, and so forth) or by alternative measures such as credit
score.

Teaser Rate An initial offering of an interest rate lower than the normal stated rate
charged to a cardholder. The issuer’s strategy is to attract an interest-
sensitive borrower and run up the borrower’s balance quickly by offering
easy transfer of existing credit card balance from other institutions. A
teaser rate is also known as an introductory rate or promotional rate.

Total Assets
Under Management The total of on-balance-sheet assets plus securitized assets. This term
is synonymous with managed assets.

Unexpected Losses The potential for actual loss to exceed the expected loss and is a
measure of the uncertainty inherent in the loss estimate. It is this
possibility for unexpected losses to occur that necessitates the holding of
capital protection.

Universal Default When a lender changes the terms of a loan from the original terms to the
default terms when it is informed that its borrower has defaulted with
another lender.

Usury Interest charged in excess of the legal rate established by state law.

Utilization The portion of the credit limit that is being used. For example, if a card
has a credit limit of $1,000 and its balance is $300, utilization is 30
percent.

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Valuation
Allowance In general, an account established against a specific asset category or to
recognize a specific liability, with the intent of absorbing some element of
estimated loss. Such allowances are created by charges to expense in
the Report of Income, and those established against asset accounts are
netted from the accounts to which they related for presentation in the
Report of Condition.

Vintage The date (time period) a cardholder’s account originated.

Warehouse Facility The borrowing of funds by a retail lender on a short-term, revolving basis
using the loans as collateral. This form of interim financing is used to
raise funds to make the loans and carry the loans until they are
securitized (packaged and sold out of the warehouse to the investor).
Proceeds from the sale are then used to reduce the warehouse loan.

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