In order to walk the walk, you need to talk the talk. Therefore, before you get your finances in order, you may need to understand some financial terms. That way you will know the rules-of-the-road to get where you want to be. Understanding what an offer includes is critical to your financial well-being. Misunderstandings can be disasterous. So, to drive you in the right direction, I provide the following definitions:
Creating a budget is often the first step to financial stability. A budget is the calculation of take-home pay and all other sources of income versus expenses that can to be paid from that income. Expenses should be prioritized with amounts for necessities such as housing, food, health care and transportation generally receiving the highest consideration. The budget then determines what other expenses, including debts, you can afford if money is left over. It should also be used to determine what expenses can be reduced to free up money for other uses or to determine limits for necessary and optional spending. It should further be used to save for any larger expenses anticipated in the future to avoid interest charges.
Credit score terms
- Credit bureau
- Credit bureaus collect data from your creditors and use this data to report your financial behavior to other lenders. This report is used by lenders to determine how risky a loan or extension of credit to you would be. The largest credit bureaus are Equifax, Experian and Trans Union.
- Credit history
- Just like your social media posts follow you for an extended period of time, you cannot erase your credit history without some passage of time. Your credit history reflects your record of repaying your current and past creditors. Generally, any installment paid within 30 days of the due date is considered “current.” Payments after that period are delinquent based on the number of months the payment is late.
- Credit report
- A summary of your credit history used by creditors to determine your ability to repay a loan. Since a credit report is a history, a problem remains on your report even after it is repaired along with the updated status.
- Credit Score
- The numerical evaluation, usually between 300 and 850, used in part to predict your ability to repay a loan. The higher the credit score, the better. Several different scores are calculated based on the purpose. For instance, a credit score for a home purchase will likely be different for the purchase of a vehicle. Your Credit Boost® score is probably different than a bank personal loan score.
Obtaining Credit Terms
- Annual fee
- A charge imposed by a creditor to maintain the account. This fee is often associated with credit cards offering rewards whereby the account holder anticipates that the rewards earned will exceed the annual fee.
- Balance transfer
- The act of transferring a balance on one account to another account. A balance transfer is often offered by credit cards with enticing interest rates. However, the offer usually includes a transfer fee based on a percentage of the amount transferred.
- A person or entity that takes equal responsibility with you for the payment of a debt. A co-signer is often required by a lender as someone with a better credit risk than the applicant. Parents often are asked to be co-signers for their child’s requested loan as an additional source of collection.
- Debt consolidation
- The re-financing of several debts into one debt. Debt consolidation is often used to reduce the interest rate due on individual loans or to bring current a group of delinquent loans.
- Late fee
- The charge assessed by creditors for payments made after the due date. A late fee is usually a flat fee or a percentage of the payment that is added to the loan amount due.
- Over limit fee
- The charge assessed by a creditor if a line of credit exceeds its established limit. The other option is for the creditor to refuse a request that exceeds the limit. For example, if your credit card has a $1,000 limit and a charge would bring your balance to $1,005, the card issuer would either accept the charge but charge you a over limit fee or refuse the charge completely.
With a working knowledge of these terms, you should be able to put the hammer down on your financial future. Next time we will explore terms associated with a mortgage.
If you are drowning in a pool of debt and do not know how you can get out, contact us. We give second chances on Second Street.