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Your credit score is what tells potential lenders how likely it is that you will repay any loan you get. The most widely used credit score is the FICO score. It goes from a low of 300 (ouch!) to a high of 850 and is calculated using five components – how well you have handled credit (your credit history), your credit utilization, the credit types you use, the length of your credit history and the number of credit inquiries that have been made on your account. A really good FICO score is 750 and on up though the next one down – 700 to 749 – is considered good. You could get a loan with just a “good” score but to get the lowest interest rate on that loan you will probably need to have an excellent score. Mortgage lenders and credit card companies generally reserve their best rates and largest loans for people that have shown a track record for handling their credit sensibly.
5. How can I see what's on my credit report?
It's important to review your credit reports on a regular basis as this is the only way you can spot errors or fraudulent activity. The three credit reporting bureaus are not required to correct errors on your reports unless you ask them to. You can get all three of your credit reports together on the website www.annualcreditreport.com or individually from the three credit reporting bureaus – Experian, TransUnion and Equifax. One good strategy is to get one of your reports every four months as this represents a kind of "poor man's” way to monitor your credit year-round.
6. What exactly is an APR?
This is an acronym that stands for annual percentage rate and is usually expressed as the interest rate you’re charged on your unpaid balances. The APR on a credit card or loan can vary because it's based on the U.S. Prime rate plus whatever extra your lender adds on. The APR on a credit card can even vary based on the type of transaction. As an example of this, most credit card issuers charge different APR's for cash advances, purchases and balance transfers. A lender may also offer a very low APR to get you to sign up, which then expires after a specific amount of time.
7. How much do you owe and what interest rates are you paying?
If you want to be on top of your money you need to know precisely how much debt you have, which would include the outstanding balances on your credit cards, plus other debts like car loans, mortgages and student loans. You also need to know the rate you're being charged on each debt so that you can calculate how much you're paying in interest charges.
8. What are the differences between bonds and stocks?
Buying a bond is like loaning money to a company. When you buy a bond from the government, a corporation or some other entity you’re lending money that will be paid back to you at a specified time with a specified amount of interest
Bonds are safer than stocks so long as the entity is in business. You can look up any bond to see how it's rated before buying one and ratings of AAA and AA indicate that the bond should be a high-quality investment.
When you buy a stock, you're buying a share of a public company's earnings and assets. The value of that share will go up and down based on how well the company does financially and its shareholders' impression of the company's well-being. In other words, stocks are risky but can be very rewarding.
9. What's a debt consolidation loan and why would you get one?
A debt consolidation loan is either a secured or unsecured loan where you use the money to pay off multiple debts – and most often unsecured debts. Why would you want a debt consolidation loan? Let's say that you have three credit cards at 17%, 15% and 19% and a personal line of credit at 12%. This yields an average interest rate of 15.75%. If you were able to qualify for a low-interest debt consolidation loan at say, 12%, you’d have a lower monthly payment, which should be easier for you to make. Plus, you’d have more time to pay back the money – maybe five years or even longer.
10. How does compounding work?
Compound interest is what happens when your interest earns interest so that your money grows faster than is the case with simple interest (interest added just to the principal). On the other hand, compounding can also be your enemy if you carry balances forward on your credit cards. In this case, instead of earning interest on interest you're paying interest on interest, which is the road to even more debt.
If you'd like to know more about compound interest -- called by some one of the most powerful forces on earth -- here's a video that explains it in detail and provides examples of its power over time.