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Credit and Debt Words That Might Fool You

Credit Score, Paying Off Debt, Personal Finance
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Credit and Debt Words That Might Fool You

Credit and debt have their own vocabulary, and it’s not always easy to understand. So when you’re puzzling over a credit card statement or your credit report, don’t feel like a fool: Sometimes those terms conceal as much as they reveal.

In honor of April Fools’ Day, we explain a few terms that can trip people up — and offer tips to protect your finances.

Credit limit

This is how much you can charge on a credit card before a transaction may be rejected as “over limit.” That’s all it is. It’s not:

  • How much you can spend without damaging your credit score
  • A calculation of what you can repay comfortably
  • How much other lenders will think you owe on this particular card

Tip: Experts recommend using no more than 30% of your limit on any one card. The lower your balances, the better it is for your credit score. Most credit card issuers allow you to set up account alerts to warn when your balance creeps up.

Late

What “late” means depends on who uses the word. Your credit card issuer will call a payment late and may charge a fee if it doesn’t arrive by the due date.

But credit reports — which are lists of all your credit-related activity — don’t mark payments as late until they’re 30 days overdue. And not all lates are equal when it comes to credit score damage. Thirty days late is not as bad as 60 or 90.

Tip: Pay on time or remedy a late payment quickly; nothing affects your credit scores more than payment history.

Co-sign

If you can’t get a loan on your own, you may need a co-signer. He or she is not simply vouching for your good character. Your co-signer agrees to be fully responsible for the debt if you don’t pay.

Tip: Understand that co-signing is a giant request, not a little favor. And if someone asks you to co-sign, think carefully before putting your good credit on the line.

Credit inquiry

When you apply for credit — for instance, at checkout to save 10% on your purchases or at a dealership to see what the payments would be on the car you just test-drove — you’re asked to sign a consent to check your credit. Those count as “hard inquiries,” which can nick your credit score. The damage is generally small and temporary, but multiple inquiries can add up.

Tip: Know which inquiries won’t hurt your score. These “soft inquiries” won’t affect your credit:

  • When you check your own credit
  • When a creditor you already owe money to checks it
  • When credit card issuers that want to send you a preapproval offer check your credit

Derogatory marks

They sound like the red marks on a pop quiz, don’t they? Derogatory marks are notes on your credit reports about missteps like late payments, collections and tax liens. If they’re accurate, there’s not much you can do. However, their impact fades with time, and most drop off your reports after seven years. Bankruptcy can stay a little longer, but you can start rehabilitating your credit right away.

Tip: Dilute the effect of a credit misstep by piling up good information. Make all payments on time and keep your balances low.

Preapproved, pre-qualified or prescreened

These words mean that you’re invited to apply for a financial product — and, based on the information a card issuer or lender has, your chances of being approved are good.

Tip: These invitations don’t guarantee approval. Limit your applications for credit, because each one is a hard inquiry.

Payday loans and title loans

Both payday and title loans are considered predatory loans — and for good reason.

A payday loan sounds like a pay advance to just tide you over until your next check. But these come with scary-high interest rates, as high as 390%. And most people end up extending the loan and paying even more.

A title loan puts your vehicle up as collateral and can carry an interest rate of more than 250%. If you can’t pay, you risk repossession.

Tip: Before you get a loan, know all the details: due dates, fees and interest rate. About 36% is generally considered the top of the affordable interest range. Check out payday loan alternatives, such as small-dollar loans offered by some credit unions.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

This article was written by NerdWallet and was originally published by USA Today.