Using credit and paying off your debt can be confusing. At times, it can become so confusing that you begin to ignore the importance of maintaining good credit. However, it’s essential to understand credit terminology in order to prevent debt problems. Continue reading to learn more about the terms used when people talk about credit.
How credit affects us all
Last year, then-Senator Barack Obama addressed America’s credit crunch. Watch this clip to see what he had to say about it.
What is personal debt?
Personal debt, also commonly referred to as consumer debt, is the debt you take on as the result of making purchases as opposed to making investments. Quite simply, personal debt is money that you owe to one or more creditors. Credit card debt is a common form of personal debt.
What is revolving debt?
Revolving debt is a common term for people who use a credit card. Every month, they receive a statement that lists their credit card balance and the amount of money they still owe for purchases made. However, they are not required to pay the full amount in order to stay in good standing with their creditor. Rather, they are allowed to keep a certain amount of debt, known as revolving debt, on their statement. It is called revolving debt because it sticks around for another month.
What is debt consolidation?
Debt consolidation is a form of debt relief. By consolidating debt, you are taking several different forms of debt and rolling them into one easy-to-manage debt balance. For instance, you can consolidate several different credit card < http://www.federalreserve.gov/Pubs/shop/> debts into one larger debt. It is effective for people who struggle with high interest rates on debts.
What is debt negotiation?
Like debt consolidation, debt negotiation is a form of debt relief. It allows you to speak directly with your creditors about paying off a debt for significantly less than the balance of the debt. For instance, you may only need to pay $200 to pay off $1000 worth of debt. However, negotiation is typically reserved for those in dire straits when it comes to debt. But it can be very useful for those looking to get out of debt.
What are credit counseling services and what do they offer?
Credit counseling services are usually non-profit. They are agencies that offer to help you budget your money, pay off your debt and attend workshops that will teach you about saving money and steering clear of debt. Not all credit counseling agencies are free, though, and some are not entirely necessary. But they can be effective for people who cannot manage to control their debt on their own.
What are debt management programs?
If you see a credit counselor, chances are you’ve heard about debt management programs. For those struggling to pay down their debt, credit counselors will employ a debt management program (DMP) for them. A DMP is a payment schedule that a credit counselor sets up with your creditors. You then pay your credit counseling service directly and they pay off your debts systematically. A DMP can help lower your interest rates. Over a set amount of time, you will be freed from debt.
What is a FICO score and what does it consist of?
A FICO score is another term for a credit score that is used to determine how likely someone in debt is to pay off their bills. A number of factors are considered when your FICO score is calculated. These factors include the timeliness of your debt payments, the amount of time you’ve had credit, the amount of credit you have available and any negative credit information on your credit report. The only way to increase your FICO score is to pay bills on time over time and maintain a healthy level of debt.
What is amortization?
Amortization is a systematic way of paying off a specific debt through a structured payment plan. A mortgage is one example of amortization. These are not to be confused with interest-only payments, which simply pay off the interest accrued on a debt every month.
What is an APR?
APR, or annual percentage rate, is the amount of money you will pay per year in interest charges on debt. You need to keep this in mind when shopping around for a credit card as it could make a big difference in the amount of money you shell out to pay down debt.
What is bankruptcy?
Bankruptcy is a lot like what it sounds like. By declaring yourself bankrupt, you are legally stating that you cannot afford to pay off debt. It should only be used as a last resort and is designed to help consumers pay off debt or eliminate it altogether. However, it will hinder your chances of getting credit for at least seven years. There are also two main types of bankruptcy. Chapter 7 bankruptcy calls for you to sell off property in order to pay back debt. Chapter 13 bankruptcy allows you to keep your property but requires you to fulfill a three to five year payment plan for your debt.
What is liquidation?
Liquidation is the process by which you sell off property in order to “liquidate” your assets and have money to pay off debt.
What is the different between secured and unsecured loans?
When applying for a loan, you may have the option of obtaining a secured or unsecured loan. Secured loans are made to consumers by creditors who are under the assumption that they will be repaid at some point. These types of debt are usually harder to obtain. Unsecured loans are given in good faith by creditors. However, they typically come with higher interest rates attached and more people tend to default on them. Make sure you know the difference when applying for one or the other.
Learning about America’s current credit crisis
It’s important to continue to learn more about credit and debt because America is struggling with the largest credit problems in years. Watch this tutorial to learn more about how America landed in the current state of affairs.
Get educated about credit today
The best way to avoid struggling with debt later is to learn about credit today. Learn how the different types of debt work and manage them accordingly. By doing so, you’ll be able to live debt-free well into the future and prevent any problems you may encounter.
Related posts:
- Identifying the different types of debt
- What is a credit score?
- What Is a Hard Money Loan?
- What is a credit score?
- Recovering After Filing for Bankruptcy
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