The ABC’s of credit

FORT KNOX, Ky. — The holidays are behind us, and many of us had the opportunity to spend time with family and friends. Now, the fun begins — that is, paying back the debt we incurred from using credit.

It is no secret when credit is used our intention is to pay our debt down quickly, but often our plans change because of something unforeseen. It is easy to talk about what we should know and what we should do, but putting our thoughts into action can be another thing.

Let’s explore some ABC’s of credit that may help you repay your debt and re-build your credit standing:

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Annual Percentage Rate (APR). This is the TRUE COST when borrowing. It includes ALL interest and fees. If you borrowed $5000 on a credit card with 17% APR and wanted to pay off the debt in one year, you would have to make a payment of $456 a month and would pay $472 in interest per Motley Fool.com.

Benefits. This might refer to reward points for travel airline miles, free hotel stays, cash back, rental car services or travel insurance.

Credit score. A numeric value that defines your credit history – payment history, how much you owe, length of credit history, type of credit and new credit inquires. The score ranges from 300 to 850. The higher your credit score the better interest rates and insurance offers you will receive.

Default. When you fail to pay your creditor the debt you agreed to, it is considered to be in default. Defaulted debt reflects against your credit score and indicates that payments have been made late, paid sporadically or have not been made. The delinquent payment will stay on your credit report for seven years.

Equal Credit Opportunity Act (ECOA) – federal legislation that prohibits creditors from discriminating against applicants based on sex, marital status, race, color, religion age or receipt of public assistance.

FICO is a tool created by the Fair Isaac Corporation. According to the Consumer Financial Protection Bureau, “FICO was a pioneer in developing the method for calculating credit scores based on information collected by credit reporting agencies.” There are many agencies that have developed their own scoring method (for example, the Advantage Score).

Grace period. The time you have between the end of a credit cycle and when your payment is due. As long as you pay the minimum payment by the due date, your credit report will not reflect you as being delinquent.

History. Your score is determined by a number of factors – your payment history (how you pay), credit utilization (how much you owe versus credit limits), length of credit history (how long you have used credit), new accounts (new accounts you have opened or actively applied for credit) and credit mix (mortgage, vehicle loans, credit cards, personal loans, student loans).

Identity theft. An “imposter” steals your personal information such as: social security number, driver’s license, bank account information, or credit card number(s) and impersonates you to obtain credit or merchandise using false credentials. According to the Federal Trade Commission, Military families are at double the rate of the civilian world.

Joint account. Where more than one person is listed on an account with each being LEGALLY responsible. If one person on the account charges up a high balance and the other did not purchase anything, both are responsible for repayment.

Keep an eye on your accounts. You should actively review your accounts monthly for inaccurate or fraudulent changes.

Late fees. A late fee is charged after the due date per the CARD Act. Fees range from $15 to $39; it’s based on the account balance, and reflects on your monthly statement.

Minimum due. The minimum required amount you must pay on a credit card in order to be reported as “paid on time.” Not making the minimum payment could result in your creditor charging additional fees, raising your interest rate and reporting late payments to the credit bureaus.

Negotiations. In a financial hardship, a customer can contact a creditor to negotiate repayment terms or debt settlement. If debt settlement is negotiated, the reduction is reflected on your credit report.

Over the limit. Over-limit-fees is charged when your balance exceeds your credit limit. Federal law limits when over-limit-fees can be charged and how much it will cost you. This is defined in your credit card agreement.

Personal credit cards, and home equity lines of credit are revolving credit where funds are borrowed as needed. Payments are made according to the amount borrowed.

Qualifying ratio equals your debt-to-income ratio. Monthly expenses should not exceed a percentage of your income.

Revolving credit. A creditor’s agreement to allow a consumer to carry a balance from one month to the next or pay the balance in full.

Soft inquiry. When you or someone you authorize (such as an employer) checks your credit report, or creditors preapprove you for offers

Transfer. A balance transfer is the movement of a debt balance from one creditor to another. A balance transfer fee of 3-5% of the total amount transferred is charged.

Unsecured loan. If a debt is not paid back, the creditor could get a judgment, and the court could seize assets or garnish wages.

Variable interest rate. Interest fluctuates based on the market rate changes.

Wage garnishment. A court ordered repayment of an unpaid debt can be initiated by the IRS, federal or state tax agencies, and non-tax government agencies.

X-ray vision. Use it when reviewing your credit statements and credit reports. The sooner you notice something is inaccurate, the easier it is to resolve.

You are responsible for your credit; whether your card or your credit report. Paying someone to “clean” it up (i.e. credit repair) is not the answer. Why pay someone when you can use that money to fix your own credit?

Zombie debt. A debt that is past the legal statute of limitations for consumer credit reporting. However, according to military regulations to maintain security clearance all debts must be satisfied —

The ACS Financial Readiness Program has financial specialists available to assist you in improving, repairing and rebuilding your credit. To schedule an appointment, contact 502-624-5989/8391.