We use these words all the time. But when we were going through our debt management program, we discovered that what we thought these words meant, wasn’t always accurate. You probably know all these already, but sometimes it is good to have a second look.
Credit limit – The amount of money someone will loan you.
Credit Score – This is a number that represents your credit worth. In other words, how much of a risk it is to a lender to loan you money. Your credit score is based on a statistical analysis of your credit history, and tells a lender how likely you are to default on a loan. Your credit score will determine how much money you’ll qualify for and the interest rate you’ll pay.
Secured debt – A debt that is ‘founded’ on something physical, like a home or a car. If you have a secured debt, the company that holds the note can take back whatever it is you borrowed money to buy if you default.
Unsecured debt – A debt that is not ‘grounded’ by something physical. Examples include personal loans or loans for something like Lasik eye surgery. If you default on that kind of loan, the issuing company has nothing they can take from you to make up for their loss. That won’t stop them from getting their money back, however!
Revolving debt – Credit that does not have a fixed number of payments, and the payments are based on the amount of credit used. Revolving debt may be used as needed, up to the credit limit, and may be paid off at any time. Store credit cards and gas credit cards are two examples.
Debt management/Credit Counseling – Using all available resources to pay off your current debt, without borrowing more money. This often includes a budget, a repayment plan and negotiations with your creditors.
Debt consolidation – Debt consolidation occurs when you ‘consolidate’ all your current debts into one loan to make a single payment. Generally, you borrow against your house. The single payment covers all your debts, plus finance charges and interest to the lending agency. It is borrowing more money to pay off the debts you already have.
Home equity loan - Equity is when your house is worth more than you owe. If your house is worth $100,000 and you owe $25,000, you have $75,000 worth of equity. Usually a bank will loan you a percentage of that amount. A home equity loan allows you to borrow some of that money. Most people use home equity loans to finance big purchases or needs, like home repairs or college tuition.
Home equity line of credit – Sort of like a home equity loan, only you just use the equity money you need, not one lump sum. Usually, the issuing company will give you a special check book, or credit card. You can use the money as you need it, up to the credit limit set by the issuing agency.
Ponzi Scheme – Remember when this was in the news every night? It is an operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned. The Ponzi scheme will offer returns that are either abnormally high or unusually consistent. They succeed because the initial investors, who usually see high returns, generally re-invest their earnings in the hope of continuing to make more money. It’s one of those ‘if it sounds too good to be true, it usually is’ things.
This is just a drop in the bucket on financial terms, but we had to start somewhere!
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