The Crash Course on Credit

Some helpful things to know

By: Eric R. Niederhelman & John W. Budig

You can hardly get through two minutes on the TV, the radio, or the internet without being bombarded by advertisements to purchase a car with zero percent APR financing, or to refinance your mortgage at a super-low fixed annual rate, but do you really know what they are talking about?

It probably seems that these companies are just trying to get in your pocketbooks, and there is probably a lot of truth to that belief.  You should at least have an idea of what they are saying so that you can use your money wisely.  They might actually have a good deal to offer.

Some basic terminology to know:

Principal

Principal is the initial amount of any loan or debt that you take out.  If you take at a car loan for $20,000 or owe $2,500 on your credit card, those two values are the principal amounts.  Principal is also the outstanding balance of any loan that you have, less interest and any other charges that may exist.

Annual Percentage Rate (APR)

Annual Percentage Rate or APR is the rate at which you will be charged on the principle amount of any debt.  If you are lucky enough to take out a car loan with a fixed 0% APR then you will not be charged any interest; you will just be making payments on the principal.

Minimum Payment

The minimum payment is the smallest dollar amount that you are required to pay on your credit card bill at the end of each month.  Although you want to avoid making minimum payments, minimum payments are better than making no payment at all, because your credit score will not be hurt as much.

Grace Period

The period of time that you are given before you are required to make a payment on your credit card purchases is known as the grace period.

Collateral

Collateral is any sort of property or other item of value that might be required by a lender as security for a loan.  If you do not pay your debts, the lender may seize your collateral.

This list is certainly not exhaustive, but it should give you a solid foundation to build your financial knowledge upon.  It is advisable to read and learn as much as you can about where and how to utilize credit.