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July 27, 2023 | By: Myles-Morgan Summers

The Basics of Personal Finance: Essential Concepts and Terms to Know

Budgeting | Financial Literacy | Personal Finance

Navigating the world of personal finance can be tricky. There are terms and concepts those working in the financial industry are familiar with. For the general public, it can be confusing when speaking with lenders, credit card companies or financial advisors.

Below is a short glossary of important terms, which will enable you to confidently navigate the world of personal finance.

Why Learn about Personal Finance?

Why should you study personal finance terms and concepts? One reason is that it helps you when you’re talking to lenders. If you’re familiar with what terms like APR, compounded interest, and principal mean, you’re in a better position to negotiate with them.

Financial service agreements can be loaded with industry jargon that, if you’re unfamiliar, may make it hard to understand exactly what the terms of the agreement mean. This can leave you more prone to entering an agreement that might not be right for your needs.

If you’re considering entering a mortgage or other high-value financial service agreement, we strongly recommend speaking to a financial advisor or a non-profit credit counsellor before taking out a loan or other large debt. Learning these industry terms will enable you to be more confident when reading a financial service agreement.

Key Personal Finance Terms and Concepts

There are a LOT of terms that you may want to be familiar with before you get your first credit card, bank account, or loan. While the following list is far from exhaustive, we hope you’ll find it useful information for your next discussion with a lender or other financial service provider.

Annual Percentage Rate (APR)

This is how much interest is applied to a debt on a yearly basis expressed as a percentage (%) value. For example, if a credit card has a 29% APR and you owe $1,000 on it, then after a year, you would owe $1,290.


Any item, possession, or account with a monetary value. Examples include your bank account(s), your home, and your investment accounts.


A person who receives an asset (typically money) from a bank or other lender with the expectation that they will repay the lender.


An estimate of your income and expenses over a given period of time. Budgeting is helpful for planning your income and expenses so you can determine what you’re spending your money on, how much you can spare for nonessential spending, and manage your overall financial health. A personal budget planner can help you with tracking your income and expenses.


An asset (such as a house, car, or other valuable item) that is used to secure a debt (such as a mortgage). If the borrower doesn’t repay the loan, the lender may claim the asset.

Compound Interest

Compound interest is the term for when the value of previous interest is added to the principal of the account so that future interest calculations are based on the new balance. For example, if you have 25% compounding interest on a credit card balance of $1,000, the interest on the first period would be $250, bringing the balance to $1,250. After the second interest period, the interest would be applied to the balance of $1,250—adding another $312.50 to what is owed.

Compounding can also be applied to certain investments to speed up the investment’s growth over time.


A person who signs a loan or other financial service agreement alongside a borrower. If the borrower defaults on the loan for any reason, the cosigner would then be responsible for repaying the balance.

Credit Limit

A maximum amount of money that can be spent on a credit card. This is set by the credit card company. Credit cards can be used to make purchases up to the credit limit.

Credit Report

This is a summary of your credit activity, loan history, and credit account status that is assembled by one of the credit bureaus (Equifax or TransUnion). Lenders can access this report to assess your suitability for a particular financial product, such as an auto loan or mortgage.

Credit Score

A numerical value assigned by credit bureaus to provide a simplified assessment of your reliability as a borrower based on a variety of factors from your credit report.

Credit Utilization Ratio

An assessment of how much credit is available to you versus how much credit you’ve used. Low utilization ratio is a contributing factor to a good credit score.


A person or an entity who provides loans or credit cards to borrowers.


The money owed to another person or business entity.

Debt Collector

A person in a debt collection agency or other business who is tasked with recovering debts from borrowers on behalf of the agency or the original creditor. Their activities in Canada are regulated on a provincial basis, so it’s important to contact your local government office to ask about what they can or can’t do in your province.

Debt Consolidation

This is a term for when several debts are combined into a single one to simplify debt management and repayment. There are several debt consolidation options to consider, such as:

  • Debt Consolidation Programs (DCPs). Arrangements where a non-profit credit counsellor negotiates with creditors on a borrower’s behalf to turn them into a single, more manageable monthly payment. This may include reducing or even stopping interest accrual on debts for the duration of the program, which ends when the debt is paid off.
  • Debt Consolidation Mortgage. This is when a borrower rolls unsecured debts into their mortgage—leveraging the equity in their home to help simplify debt management.
  • Debt Consolidation Loan. A loan used by a borrower to pay off other debts so they only have to contend with the single loan. This may be a good option for borrowers with high credit scores who don’t want to renegotiate their mortgage.


The difference between the value of a home and the money owed on it. For example, a home worth $800,000 where the owner owes $600,000 on the mortgage would have $200,000 of equity.

Fixed Expenses

Items in a budget that do not change from one budget period to the next and are required for covering basic necessities. Rent, mortgage payments on the home, and some utility bills would be examples of fixed expenses.

Gross Income

The total amount of money a person earns before deducting any taxes or other mandatory expenses.


The increase in the cost of goods and services over time. Inflation can make it harder to pay off debt by increasing the cost of living. Spending strategically to manage increasing costs is key for managing inflation to pay off debt.


An agreement between an insurer and another entity to provide payment to cover certain events. Insurance contracts can provide payments for events such as the death of a person (to help cover funeral costs and the loss of income to the household), damage to a vehicle (to cover repairs or replacement), and more. The parties in an insurance agreement typically include:

  • The Insurer. The company providing insurance coverage over the insured person or property.
  • The Insured. The entity or property covered by the insurance.
  • The Policy Holder. The person who entered the agreement with the insurance company to provide insurance. May or may not be the person insured.

Interest Rate

A fee charged by lenders to cover their expenses for providing money or other liquid assets to a borrower. Typically expressed as a percentage of the money owed ($X% of $Y value).


A financial product or asset acquired with the expectation of growing in value over time and providing a positive return.


A person or organization that provides money to borrowers with the expectation of repayment.


An obligation or debt owed to another party in an agreement.


A way of expressing how easily an asset can be converted into accessible funds. For example, money in your chequing account or cash would be considered highly liquid (as it can be used to purchase goods and services directly). Meanwhile, a Guaranteed Investment Certificate (GIC) with a bank would be illiquid since it cannot be withdrawn easily without penalty.


This is a claim against property used to satisfy a debt. A creditor’s legal agreement or a court judgment could establish a lien against a borrower’s property—allowing the creditor to claim that asset to satisfy the debt. In secured loans, liens may be applied to the collateral of the loan.

Maturity Date

This is the date when an investment is to be paid back to the investor, along with any interest garnered or guaranteed by the investment agreement. GICs are one example of investments with a set maturity date.


A specific type of loan that is used to buy a home. Can be subdivided into different types, such as:

  • Fixed-Rate Mortgages. Mortgages where the interest rate remains consistent regardless of market conditions.
  • Variable-Rate Mortgages. Mortgages where the interest rate may change in accordance with the Bank of Canada’s prime rate.
  • Consolidation Mortgages. A type of mortgage agreement that leverages equity in your home to consolidate other debts into the mortgage. Can be applied to both new mortgages or during a mortgage renewal.

Mutual Fund

A company or organization that pools resources from multiple people to use for the acquisition of stocks, bonds, and other investments. Investors can buy shares in the mutual fund to represent their partial ownership of the fund.

Net Income

The amount of money a person receives from their paycheques or investments after taxes and other deductions have been removed. This is also known as “take-home” pay because it’s what they take home out of what they’ve earned.


This is when there isn’t enough money in an account to cover a given transaction. If the lending institution allows the transaction to complete, they may assess an overdraft fee to cover the expense.

Prepaid Card

An alternative to traditional credit cards where the spending limit is the amount of money loaded into the card. This is different from debit cards (as the card isn’t linked to your chequing account) and credit cards (as the card holder isn’t able to carry a balance to repay on the card). Sometimes useful for those who want to control their spending or who are unable to qualify for a traditional credit card because of a low credit score.

Prime Lending Rate

This is the interest rate that banks charge on loans to their best customers. This is used as the basis for the interest rate on variable-rate mortgages.


This term can mean two things depending on the context.

  • In Loans. This is the amount of money loaned to a borrower at the outset of a loan. Can be added to with compound/capitalized interest.
  • In Investments. The amount of money contributed towards the investment by the investor.

Rate of Return

The profit (or loss) on an investment expressed as a percentage value. For example, an investment of $100 that grows to $110 would have a 10% rate of return. If it instead shrank to $90, that would be a -10% rate of return.

Registered Retirement Savings Plan (RRSP)

This is a tax-advantaged account that is registered with the federal government where you can accrue money without having to pay tax to the Canada Revenue Agency (CRA) on the earnings each year. Contributions to an RRSP are tax deductible and you only pay taxes when you withdraw from the fund.


This is the term for when a borrower makes payments towards a debt or other obligation.

Savings Account

An account with a bank or credit union where the account holder sets aside money. Some financial institutions may incentivize leaving money in savings accounts by offering interest on stored funds.

Secured Credit Card

A credit card that requires a security deposit to act as collateral on the card account. However, unlike with a prepaid card, a secured credit card does allow the card holder to borrow against the account and pay later—similar to a regular credit card. Additionally, unlike with a prepaid card, a secured credit card helps the card holder build their credit history.

Tax Credit/Benefit

A reduction in tax liability for a person filing taxes that can be deducted from their taxes owed.

Tax-Free Savings Account (TFSA)

An investment option for Canadians where the income earned is not subject to taxes. However, unlike an RRSP, contributions to a TFSA are not deductible. But, there is no tax penalty when you withdraw funds from a TFSA (unlike an RRSP, where you incur taxes at the time of withdrawal).

Unsecured Loan

A loan provided without the use of collateral that the lender can claim to guarantee the loan. These loans tend to have higher interest rates to help offset the risk to the lender. Credit cards are a common example of an unsecured loan.

Variable Expenses

These are expenses in your budget that may change from one period of time to the next. Items like food, gas, and entertainment are all examples of variable expenses.


A promise from a company about their goods and services that offers some form of compensation for a breach of that promise. Typically refers to manufactured goods. In finance, this may be enforced by a contract term that specifies a monetary repayment for a breach.


A written document that specifies the writer’s wishes for how their assets will be distributed upon their death.

Need Help Managing Money to Stay Out of Debt?

The above list is far from comprehensive. There are a lot of terms that you might come across in a loan or credit card agreement outside of the ones in this post. So, before entering into a credit card agreement or a loan, it’s a good idea to reach out to a financial expert or a credit counsellor to get some information and advice.

Credit Canada’s certified credit counsellors have years of experience in helping Canadians get out of debt and stay debt-free. From setting up debt consolidation programs to providing information and coaching on money management issues, our team is here to help you.

Reach out today to talk to a credit counsellor.

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