Taking charge of your financial health is an intimidating prospect for many people. Learning the ends and outs of credit can seem overwhelming, but it’s much easier than some people think. Let’s take a quick look at some credit and financial terms that every adult should know.
Know Your Credit Score
When it comes to understanding your credit score, there are a few things to keep in mind. A credit score is a number that is used to determine creditworthiness. In the U.S., a credit reporting agency, also known as a credit bureau, collects consumers’ credit information and issues the three-digit credit score number that lenders use to make credit decisions.
There are currently three different agencies that collect and maintain this information Equifax, Experian, and Transunion. Not all merchants report financial information to all three bureaus or use the information provided by all the bureaus. For these reasons, the credit score provided by each agency can vary a bit. But generally, the scores across all three agencies will be in the same basic range.
Achieving and maintaining a credit score in the excellent range is the common goal for most consumers. People with excellent credit are much more likely to be offered the best terms when applying for financing of any type. This kind of financial standing is beneficial when shopping around for a car loan or a home mortgage. The credit score will significantly determine how much the credit (and monthly payments) will cost in the form of the interest rate.
Understanding how interest works can be a little tricky. Interest is the amount of money that a lender will charge a consumer to use the lenders’ money to pay for things. The higher the consumers’ credit score, the less they will be charged, and those with the best scores are charged a prime interest rate. Prime Interest rates are the level of interest that banks charge each other to secure funding and use to determine the rate for consumer lending.
Income, Assets, Liabilities, and Net Worth
An understanding of your income, assets, liabilities, and net worth can go a long way toward understanding your long-term financial health. Your income is, of course, the amount of money coming in with each paycheck. Assets are cash or anything that can be turned into cash, like real estate or precious metals. A liability, on the other hand, is something that is owed to someone else.
As an example, let’s say you have $10,000 in cash, and that $10,000 is an asset. If you decide to take that $10,000 and use it as a down payment to purchase a vehicle, the difference between the $10,000 you used and the total price now owed on the car is a liability.
A person’s net worth is determined by adding up all of their assets and then subtracting their liabilities. Healthy net worth is when there are more assets than liabilities and is a strong indicator of financial health.
Setting up and following a realistic budget is a good way to track expenses and control spending. Budgets are also great tools to help in saving money for long-term financial goals.
Learning how to manage credit properly is a skill that will serve you well and learning your credit score is the first step toward gaining that skill.