Today, many Americans find themselves struggling to make ends meet, even those making well above minimum wage. In fact, according to a recent survey by CareerBuilder, 78% of full-time workers are living paycheck-to-paycheck, and nearly one in 10 of those make more than $100,000 a year. Lenders make it easy to qualify for credit and, before you know it, you’re sliding down that slippery slope of never-ending debt. However, it doesn’t have to be that way. By arming yourself with the right financial knowledge, you can take control of your life, and take the right steps to get out of debt.
Here are a few terms that you should know as you begin the process of taking back your financial life.
1. APR
This is the Annual Percentage Rate charged for borrowing money. It not only includes the basic interest rate, but broker fees and other charges as well.
2. Balance Transfer
A balance transfer is, quite simply, when you move the balance of one credit card onto a different card. It can be a helpful way to get out of debt. Credit cards often offer low or 0% interest on any balance transfers, so it can be a useful tool to save money if you have a high balance on a high rate card. The offers usually come with a fee of approximately 3% of the transferred balance though, so make sure you know exactly how much you’ll save and how much the transfer will cost.
3. Chapter 7 Bankruptcy
This type of bankruptcy is the most common and involves liquidating your assets to pay a portion of your debts. (You may be able to keep some of your property such as your home or vehicle.) Any remaining qualifying debts are discharged, and the bankruptcy remains as a negative reporting on your credit report for 10 years after the bankruptcy is discharged.
4. Chapter 13 Bankruptcy
Unlike Chapter 7, this bankruptcy allows you to keep your assets and make payments to your creditors over a specified period, typically 3 to 5 years. Any remaining balances after that time are discharged. This type of bankruptcy remains on your credit report for 7 years after discharge.
5. Charged-off Status
If you stop making payments on your credit card, after a few months, the credit card company may close the account, consider it a loss, and put it in charged-off status. This will be reported to the credit bureaus and remain on there for 7 years from the charged off date.
6. Debt Consolidation
Many people turn to debt consolidation to get out of debt. This is when you combine your debts into a convenient single monthly payment at a lower rate. A lower rate helps you pay off your debts even faster even while having a more affordable monthly payment.
7. Debt-to-income Ratio
This is a comparison of your monthly payments of your debt with your total monthly income. Lenders use this as a way of determining whether you’ll be able to make your monthly payments if they lend you money. Knowing your own DTI is a good way to make sure you’re not borrowing more than you can afford.
8. Means Test
This required test determines your eligibility to file bankruptcy as well as which type of bankruptcy you qualify for. It’s a comparison of your yearly income to the median income of your state, along with a review of your financial history.
9. Secured Debt
Secured debt is debt backed by collateral such as a house or a car. For example, your mortgage is a secured debt because, if you stop making payments, the financial institution may sell your house to pay for losses.
10. Unsecured Debt
Conversely, unsecured debt has no physical property as collateral, such as student loans, most credit cards, and medical bills. This means that if you’re unable to pay, the creditor cannot seize your property and instead will usually use a collection agency to collect the debt.
Breaking out of the cycle of debt begins with you. You are your own financial adviser, and gaining knowledge of financial terms and procedures is the first step in understanding what you need to do to get out of debt. Of course, once you’re ready to take that step toward being debt free, look at National Debt Relief and consider if debt settlement is right for you.