Do you feel confused by all the lingo that goes along with your finances?
You aren’t alone.
There’s so much to understand in the realm of personal finances, it’s difficult to get a firm grasp on these things—especially if you don’t have a ton of time to sit down and do a lot of research.
Here are explanations for some of the most popular personal finance terms and jargon.
1. APR
Annual percentage yield, typically just referred to as APR, is one of the most important things you need to understand before using a credit card. The APR of your chosen credit card is going to determine how much interest you’ll have to pay on any leftover balances. While most credit cards will tell you the APR, this is often not a true reflection of what you’ll actually end up paying in interest. This is because most credit cards actually compound interest on a daily rate, which means your effective rate will be even higher than the stated APR. The best plan is to pay your credit card bills in full, so you don’t even have to worry about interest.
2. Available Credit
Available credit is simply how much money you can borrow at the current time. The credit available to you isn’t necessarily your credit limit, which is a term we’ll look at down the list. Available credit is just the amount of credit you can call on right now, which will be lower if you’ve already used a lot of credit in your current billing cycle.
3. Bankruptcy
Everyone knows they don’t want to go through bankruptcy. But not all people are aware of what’s actually involved with this process. Chapter Seven bankruptcy is by far the most common type, which involves a liquidation of assets. We’ll go deeper into what this means later. Chapter 13 is the other most common kind of bankruptcy. No matter how you file, you’re going to take a hit to your credit score, which will make it harder for you to do certain things—such as borrow money.
4. Collateral
Some lenders will want to see that you have potential collateral before they make you a loan. This is essentially a tangible asset that can be easily assessed and transferred in order to pay off a loan.
5. Credit Limit
Credit limit is a bit different from available credit. While available credit is how much you can borrow currently, your credit limit is the total amount of credit you can take on at any given time. For example, you might have a credit limit of $6,000, but only $4,000 in available credit if you already owe some money.
6. Credit Negotiation
People who find themselves in a tricky situation with their finances might want to consider credit negotiation. Working with an organization such as Freedom Debt Relief is sometimes the best way for consumers to get back on their feet after letting their costs get out of hand. Freedom Debt Relief is able to work with creditors in order to reduce the amount a debtor owes.
7. Credit Score
Your credit score is a number assigned to you based on the perceived likelihood that you’ll pay back borrowed money. There are several factors that go into determining your credit score—such as payment history, amount owed, and how long you’ve been borrowing money. People with stronger credit will have an easier time getting a loan and will enjoy lower interest rates.
8. Inflation
Inflation is something that not many people fully understand. However, this important economic force plays a huge role in everyone’s lives. Inflation is essentially the rate at which goods and services increase in price. This can be a huge issue if inflation is going up significantly faster than wage increases. In a situation like this, consumers will have less money to buy the same things—since their currency will have a lower relative value.
9. Liabilities
A liability is basically a fancy way of saying debt. Your liabilities are things that are owed to lenders or other people—typically in the form of money. Taking on too many liabilities at once can set you up for tough times financially.
10. Liquidation
You will face liquidation if you file for Chapter Seven bankruptcy. This is where your lenders repossess your non-exempt assets in an effort to make up for money that you haven’t paid back to them.
No matter where you are in your life, you need to have a firm understanding of the most important financial terminology. These things often aren’t self-explanatory; make sure you take the time to learn the true definition of these concepts.