Personal finance is an important but complicated topic. Experts like Dan Schatt say consumers must understand the basics of money management. With that in mind, here are ten personal finance terms you should know and understand:
The annual percentage rate (APR) is the amount of interest you will be charged if you have any debt such as a credit card, loan, or mortgage. Your APR is probably the single most important piece of information for consumers because it tells you how much you will be charged in interest fees and what those costs might be over time. For example, if you have $10,000 in debt and an annual percentage rate (APR) that’s 8%, you will be charged $800 in interest fees annually. You can determine your APR by calling the customer service number on the back of any credit card you own or use.
2) Balance Transfers
Balance transfers are when you transfer debt from one account to another, usually to take advantage of a lower APR than what is offered with your current account. For example, you have credit card debt with an APR of 8% but decide to transfer the balance to a different card with a lower APR, say 4%. By doing this, your new interest rate would be $400 annually instead of the original $800 – a savings of 50%. You can find out if other cards offer better rates than what you currently have by checking the Internet.
3) Bill Consolidation
Bill consolidation involves taking out a new loan or opening up a line of credit to pay off your current credit card and other unsecured accounts. The benefit is that instead of having several monthly payments, you will now only have one. For example, if you consolidated all of your $15,000 in debt into one personal loan with an APR of 10% and a five-year term, you would save $737 annually or $35/month instead of paying separate payments for each account.
4) Carrying a Balance (On Your Credit Card)
This usually refers to paying just the minimum amount due on your credit cards each month. Doing so can put you in debt, and if you pay your bill late or not at all, it will result in a higher APR. Not to mention, the finance charges associated with carrying a balance can add up quickly. In some cases, carrying a balance is good for consumers – for example, if you have an 18% APR but can carry a $2,000 balance from month to month without incurring interest fees. However, most people cannot afford to carry a balance and would be better off paying their statement balance in full each month.
5) Consumer Credit
Consumer credit is any loan or line of credit used by an individual for personal reasons such as going back to school, buying a home, or purchasing a vehicle. Consumer credit may be secured or unsecured. When you have “good” consumer credit, lenders will be more likely to give you loans at lower interest rates. Because of that, it can be beneficial to have good consumer credit when trying to finance something expensive.