What They Mean and Why You Should Know Them
A person may want to improve his financial health to avoid the consequences that debt brings. Yet, he can’t clean up his finances if he does not understand these 11 words to get out of debt.
1. APR
APR means annual percentage rate. This refers to the percentage of fees and interest imposed on a debt every year. By law, the APR must be divulged by loan issuers and credit card companies to customers for them to easily understand the applicable actual rates to their agreements. Credit card companies are mandated to present the APR before the signing of the agreement by the customers. In terms of loans, the APR can either be a fixed or variable one. On a loan with fixed APR, the interest rate will not change within the agreed period of loan repayment. Meanwhile, on a variable APR, the interest may be changed anytime.
2. Annual Fee
An annual fee is usually applied on credit card transactions. This is the amount charged per annum to keep the credit card active. Some companies may offer specific perks to rationalize the fee but these may not be enough to make up for the cost. Annual fees are commonly charged to cards with poor credits, travel credit cards, cards with luxury perks, and rewards credit cards.
3. Variable Rate
Also called an adjustable rate or floating rate, a variable rate change over time. It is an interest rate charged on a loan or collateral that goes up or down periodically with the rest of the market or an index. It gives the borrower an advantage because when the index or interest rate falls, so does the interest payments of the borrower. Variable rates can be applied to car loans, credit cards, mortgages, swap contracts, corporate bond issues, and other securities.
4. Origination Fee
The origination fee is another word from the 11 words to get out of debt that one should clearly understand. An origination fee is a charge by lenders to process a loan or mortgage. This is included when the APR is calculated. It is an upfront payment that serves as remuneration for the party that assisted in setting up the loan which can be mortgage officers or loan officers. The origination fee depends on the credit status of the borrower, the size of the mortgage, and how complex the loan is. One with poor credit will likely pay higher than a borrower with decent credit.
5. Introductory Rate
Credit cards and some loan issuers may offer a low introductory rate to convince customers to do a balance transfer or consolidate debt. The interest rate can be as low as 0% and may apply for a few months from opening a credit card. This usually offered to credit card applicants who have good to excellent credit scores. The introductory rate can be applied to either balance transfers or purchases, or both. However, introductory rates on an average last for only six months which means, regular interest rates will commence after expiration.
6. Minimum Payment
This is typically applicable to accounts with revolving lines of credit. One known type is credit cards. Credit cards demand a monthly minimum payment from the users to keep on using the cards and avoid penalties. However, the minimum payment only covers the interest and will not pay down the consumer’s balance. If he wants to get out of debt, he needs to pay much more.
7. Credit Score
Lenders utilize credit scores to assess the financial capability of an applicant to pay his loan monthly. It is also used to calculate the interest rate that lenders may offer. The most well-known credit score providers are VantageScore and FICO who both use a scoring system that ranges from 300 to 850. Many banks, credit cards, and websites provide free credit score calculators to consumers but they might be different from what some lenders use.
A credit score or credit rating shows the level of risk credit card companies and loan issuers in lending to a particular applicant. The higher the credit score, the higher the probability of being granted a loan or a credit card and getting the best rates. A person’s credit score can influence his application for car financing, property rentals, mortgages, loans, credit cards, insurance, mobile phone contracts, and other contracts.
8. Credit Bureau
Credit bureaus are agencies that collect and incorporate the credit score of an individual and gives them to lending institutions. The credit reports are then used by lenders to decide on whether to approve or not a certain person’s application for credit card or loan. The major credit bureaus are Equifax, Experian and TransUnion yet there are smaller companies that also offer the same services. Credit bureaus cater to banks, credit card companies, mortgage lenders, other financing companies, and even consumers who want to acquire information on their credit history.
9. Debt Utilization Ratio
The debt utilization ratio shows the person’s usage of his available credit. If one already maxed out his credit card limit, his debt utilization ratio is 100%. Meanwhile, a person who has no outstanding debt in his credit card has a debt utilization ratio of zero. This is one factor being considered in calculating credit scores.
10. Debt Settlement
Debt consolidation companies employ the debt settlement tactic to negotiate payment of the debt to lenders. It is an amount that is smaller than the actual debt to which the lender agrees to receive. A consumer can also negotiate his settlement if he wants to.
However, a debt settlement listed on one’s credit report might drag down his credit score than improve it. There’s also the risk of paying more after a settlement to remove it from the credit report.
11. Debt Consolidation Company
Debt consolidation company is the last of the 11 words to get out of debt that should be understood and remembered. People into debt seek out the help of a debt consolidation company to negotiate with their lenders. These companies advertised that people can save more time and money if they will hire the services of debt consolidation companies. However, debt consolidation companies operate differently which is why consumers should review carefully their business practices before procuring their services.
A debt consolidation company offer four kinds of legitimate plans: debt negotiation, debt management, debt relief, and debt settlement. All of them are designed for debt removal yet they work differently from each other. A debtor looking for assistance from a debt consolidation company should review each method to determine which is the appropriate solution to his problem.
Final Thoughts
Falling into debt is a bad situation that a person can find himself into. It is difficult to get out of and it greatly affects one’s health and finances. Someone who has no idea what the 11 words to get out of debt mean opens himself to the attacks of disreputable debt collectors and scam artists. By learning these terms that are commonly thrown all over on debt negotiations, a person will be able to remove the vulnerability of ignorance and raise his chances of negotiating down his debt with his lenders.