Financial terminology is unnecessarily complex. This confusion often leads to consumers making the wrong choices in debt management.
Here are the 10 things you absolutely must know for better debt management:
-
APR: The Annual Percentage Rate is just a wonky way to say interest rate or “the effective annual cost to you the borrower.” This is the charge you'll pay on credit taken over a year - expressed as a percentage of the total borrowed - including any monthly, annual or up-front charges.
-
Balance transfer: When you move (or transfer) the money you owe (the balance) on one card or loan to another credit card. Many providers offer attractive introductory rates to move your money to their card with a handling fee, expressed as a percentage of the total.
-
Credit score: A number that many lenders use to assess your ability to repay a loan and manage your debt. Find out your credit score here.
-
Debt consolidation: Combining multiple loans into one single loan for easier debt management.
-
Debt Optimizer (or “Roboadvisor for Debt”): A user-interactive tool that provides recommendations for how users should (or shouldn't) change their debt profile in order to save money, by taking your credit profile and shopping and applying for refinancing and consolidation loans across multiple lenders and loan products.
-
Debt-to-income (DTI) ratio: A Debt-to-income ratio compares your core monthly expenses versus how much income you make. It is expressed as a percentage. Use our calculator to find out your DTI for great debt management.
-
Interest: Typically a percentage of the purchase price or balance of credit that is charged to the borrower for use of loan (money).
-
Minimum payment: The lowest amount you need to pay on, e.g. your credit card balance, each month - often a percentage of the total. Most cards incur an interest rate on the debt amount you choose not to pay. If you pay less than the minimum (or nothing at all), you're likely to be charged a late fee. Missing repeated minimum payments can damage your credit rating or even result in legal action.
-
Refinancing: The process of replacing a current loan with a new loan under different terms as a form of debt management. See which of your loans should be refinanced with the Debt Optimizer.
-
Statement Balance: This is what shows on your statement for a debt, most importantly credit cards. A really important thing to know: while this is not what you pay interest on, it is the balance that impacts your credit score. So if you’re someone that uses credit cards but pays them off each month and used to taking advantage of free money by waiting until you get a statement to pay off the statement balance, but are wondering why your credit score isn’t higher, then try paying off what you owe just before getting a statement! This will immediately improve your credit score. Strange but true - just a way that standard FICO-like credit scores were first built that we haven’t moved away from.
Want to learn more about key debt management terms? Check out the Solve Finance plain English guide. Or if you’re looking to better manage your debt, try out Solve’s Debt Optimizer and leave the complexity to us.