Anyone who has ever purchased anything on credit and has read the “terms and conditions”, knows that there’s a lot of legalese related to debt - some of which can be hard to understand. In this article, I’ll be breaking down “debt lingo” - giving clear definitions on the most common debt terms because some of them don’t mean what you might think.
Ready? Here we go:
APR: APR stands for “annual percentage rate”. You may think it’s the same as an interest rate, but it’s not. APR is the interest PLUS FEES. Who knew, right?
BANKRUPTCY: This is the legal process of telling a judge you can’t pay off your debt. If the court agrees after a thorough examination, they’ll erase some of your debt - but this comes with after effects on your credit report.
Here in America, there are two types of bankruptcy you can file: Chapter 7 - which stays on your credit report for 10 years, and Chapter 13, which will fall off your credit report after 7 years.
BALANCE: First, allow me to say: If you’ve never owned a credit card, you’ll never owe on it, but how much you owe on a debt is called the “balance”. If you pay off the balance in full, you no longer owe on the balance. If you “carry the balance”, this means you aren’t paying off the full amount and you will be charged interest on it - each month.
COLLECTIONS: If you stop paying on your debt, it will go to “collections”, but to be fair, if you borrowed or racked up the debt, the lend does have the right to get their money back. But the lender - or any collections companies they might hire - should follow the guidelines and laws set up to keep them from straight-up harrassing the borrower. *More on this when you get to the “Zombie Debt.”
CREDIT LIMIT: This is the MAX amount you can borrow or charge. This is often baded on income, credit score and other factors. In one of the previous articles, I told you that sometimes, creditors will raise your credit limit and remember I told you that you don’t always have to accept it. You can simply call and tell them to keep your credit limit right where it is.
CREDIT REPORT: Credit reports are very detailed and can go back years about your past and present credit activity. On it you most likely find every place you’ve ever lived, particularly if you’re a renter, along with any credit activities that you’ve incurred. It is a very important that you check your credit report each year for any mistakes and even fraud. You are entitled to one FREE credit report every year from the three credit reporting agencies (Transunion, Experian, Equifax).
CREDIT SCORE: Your credit score is a number based on your credit history that most lenders will use to decided if you appear reliable enough to pay back what you borrow/charge. It does NOT consider your actual “wealth” - just how good you are at juggling your money and how much debt you actual use. You will find that your scores are different across the three credit reporting agencies and can vary wildly from day-to-day.
But do know this - you are NEVER shown your “true score”. For some reason the Big Three like to keep this a real secret, but you can expect that whatever number you see, it is - in actually - usually 50 points higher than what you’re being shown. So keep that in mind when you look up your score. To get any type of credit consideration, your score should be at least 650.
CREDIT WORTHINESS: This refers to how reliable a lender thinks you’ll be in payin off our debt and this is usually based on how “reliable” you’ve been in the past.
DEBT - This is owing anybody money - for any reason.
DEBT CONSOLIDATION: This is the process of combining several debts into one monthly bill - on a streamlined payoff plan. Be warned however, this usually keeps the borrower in debt even LONGER and usually will come with higher fees and interest rates.
DELIQUENT: The moment you miss a payment, the loan becomes deliquent. If the non-payment goes past 90 days, you can be assured that it’ll be reported to a collections agency and goes on your credit report.
DEFAULT - If you go too long without making payments, your loan moves from deliquency to default. This happens to a lot with people who have student debt from loans and let me tell you, if you default on a federal student loan you won’t be able to buy a single stick of gum on credit.
There are steps you can take to avoid default on federal student loans - things like hardship deferment or economic forebearance. You’ll have to jump through the hoops of applying for it, proving why you need the hardship deferment/forebearance, but it can be done. Simply go to the US Department of Education website, and search the terms. Deferment is NOT the same as Debt Forgiveness, nor is it the same as Forbearance.
If you borrowed funds for education from a bank - I have no knowledge of how to handle this. Sorry.
FICO: This is the big term we hear when it comes to credit. FICO is one kind of credit score, but not all credit scores are FICO. Here’s what it is:
FICO is calculated like this: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
FICO is really about your relationship to debt - NOT your responsibilty with money. It’s an algorithm and again, the Big Three like to keep the “real” number from you.
INTEREST RATE: This is a percentage that the lender charges you for borrowing money. Remember - it’s different from APR.
LENDERS: The folks loaning the money are the “lenders” and this can include private companies, banks, credit unions, friends, family and even the government can act as a lender.
LOAN TERM: This is the amount of time you have to pay back the loan/monies.
MINIMUM PAYMENT: This is usually where most folks get caught up. Your “minimum payment” is the smallest amount you’re allowed to pay on your revolving debt and if you’re just paying this each month, you’re getting charged interest on the remaining balance and it’s like never paying the debt down at all.
PAYDAY LOANS: These types of loans are the most predatory out there. A payday loan is a way for you to borrow money before your next paycheck. Payday lenders then take their cut once you’re paid (plus LOTS of interest). While quick money “solutions”, once you’ve paid back what you owed along with the super high interest fees, you’ll most likely have to take out another payday loan to make it to your next paycheck. Avoid these at all costs.
PRINCIPAL: The principal of a loan is the total amount that was borrowed - this does NOT include interest.
STUDENT LOAN CONSOLIDATION: This is the process of rolling all your fedral student loans into one single loan with only one monthy payment. It’s “debt consolidation” for student loands. And it’s the only kind of debt that is “okay”- IF there are NO FEES charged to consolidate.
Consolidating your student loans can get you a lower, fixed interest rate, but the downside is that your repayment period is shorter. So yes, this one is okay, but you’ll need to stay motivated and dedicated to your new payment and repayment period. Screw this one up and you don’t get another chance to get a handle on your student debt.
VALIDATION LETTER: A very detailed letter that debt collectors send to prove that you owe them money.
ZOMBIE DEBT: This is the old debt that comes back to haunt you. So if this happens to you, watch your back as most likely it’s no longer a valid debt. They’re just after your wallet or it could even be identity theft or a scam.
If this happens to you:
Don’t answer any questions or discuss the “debt” over the phone. Get the name of the company and their address and write down the time of the phone call, then ask how much do they SAY you owe and to whom? It is very important to watch what you say as most times, they record the phone calls. DO NOT ADMIT THAT YOU OWE ANYTHING TO ANYONE. Just ask them what’s the amount and to whom do THEY SAY you owe.
EX: “What’s the name of your company? And you say you have been instructed to collect how much and for what bill/company?” Write it all down. Say thank you. Then HANG UP. Also, make sure that you keep a running tally of how many times they called - keep your phone logs because if they harrass you, your friends, family by excessively calling/texting - you can sue. And they are in sure violation if they call your job or call you while you’re on your job.
Sit down and type up a Request for Validation letter with your name, address, date of birth and reference the phone call you received (this is why it’s important to get the time the call came in). What you are aksing them to do is send the letter that verifies when the amount was owed (how long ago), how much was owed and to what company it was owed. Also put in the letter that they are to communicate with you with by mail only - no phone calls, emails, texts, etc.
Send this letter to the collections company by certified mail.
Use that tracking number of the certified mail to know when it arrived/was signed for. Then wait.
What will happen next is that normally, the collections company cannot prove that you owe such an old debt - thereby rendering the debt invalid. And what you will find is that whatever information they send back in their “validation letter”, its spotty, incomplete and they have no proof you still owe.
Once you receive this, you will then need to forward copies of their “validation letter” to the Big Three so that your credit report can be fixed and annotated properly. The collections companies that do Zombie Debt most often have purchased old customer lists/old debt and then use it to make money by telling you have to pay or dinging up your credit report. DON’T FALL FOR IT.
This does not apply if your debt is recent - say within the 90 day period, but this can vary. What typically happens is - if what you owe is over 90 days or longer, the company you owe it to will “write of the debt” and then sell the debt to collections agencies.
To be sure that you don’t owe, it is always best to contact the entity/person that you owe the money and find out if they still have it listed on their books. If so, you can usually negotiate payment in a smaller amount that what is owed to clear it up. If you call and they say they “have no record” - this means they wrote it off and sold it to a collection agency.
These past three articles are designed to get you to think differently about credit - how and when you should use it - but also to get you rethink your relationship with it and money.
Debt has disadvantages and the main problem with debt is that your income is the greatest wealth-building tool that you have. But debt is really
all about paying off the past - putting this month’s income to something you bought last week, last month, last year or even longer. And this means, you can’t move forward.
Debt holds your income hostage and holds your future hostage. But you can take your income back - all of it. How?
Coming up: The Credit Snowball Method (Part Four)
Until then.
Be Good To Yourselves.
Tara, xx
Hey Mercedes!
Years ago may have saved you a lot of grief but then whatever lessons you needed to learn would not have been taught. Now you know and can move forward into the future with better knowledge and options. You can also share what you’ve learned with your family & friends.
Pay it forward.
Yolanda.
Here in America they don’t teach us about finance, credit or wealth building. Hell, they don’t even teach Civics anymore. Most of the time our parents don’t know either and if you come from a family of color or a poor family, most times they’re not in a position to even think about credit & finances because they’re too busy just trying to survive - pay the bills and eat.
I’ve had some very bad financial difficulties in my lifetime so much of what I’ve learned was earned through the school of hard knocks.
But we’re never too old to learn a better way. And when you know better, you can do better.
:)