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JARGON BUSTER FOR STUDENTS WITH DEBT

If you are a student, and have debt, inevitable you will come across jargon. This is a guide to debt jargon.


APR:
APR stands for Annual Percentage Rate. This is the amount of you pay each year, described as a percentage of each pound of debt you have. So if you have £100 in debt and the APR is 22%, you will pay £22 each year. Credit cards have enormous APRs, so you should avoid these like the plague.

When looking a credit card or a loan, always check the APR as this is the amount you will pay in interest.

Charge Cards:
These include cards such as. American Express or Diners Club. With this type of card, you are expected to pay the whole balance each month - so you are not able to accumulate debt on them (unlike credit cards and store cards).

Compound Interest:
Compound interest is the way interest is added to your debt. Say you have a debt of £100 on your credit card which charges 15.9% APR. In the first month you will be charged £1.33 interest (the annual charge is 15.9% or £15.90 per year - divide this by 12 to get your monthly interest charge). This will be added to your debt, so your new balance will be £101.33. The catch is that in the second month, your interest charge will be £1.54 because the interest is compounded. What that actually means is that you will be charged interest on your interest - a fantastic way for credit card companies to make more money.

Credit Cards and Store cards:
These are the dangerous ones. When you apply for a card, you normally have a credit limit set by card provider. You can spend any amount up to your credit limit. Every month you are sent a statement showing your debt. If you pay off the debt, then no interest is charged. The statement will identify the minimum payment you have to make. If you decide to pay the minimum payment only, or just part of the balance, you will be charged interest (the APR) on the outstanding balance.

Credit Sale Agreement:
If you want to buy an expensive items such as a computer, or electrical equipment, a method of funding this type of purchase is a Credit Sale Agreement. The shop will arrange a loan with a finance company. Your credit history will be checked, and assuming it is okay, you will be given a loan and can get the goods straight away. Normally you pay off the loan by monthly installments. Always check the APR for the loan before you take out a Credit Sale Agreement.

Credit Scoring/Credit History:
When you apply for any loan, credit card or store care, the lender will check your financial history with a credit reference agency. If all the checks are satisfactory, you will be given the loan. If you fail any of the checks, you loan may be refused. These checks are called credit scoring checks.

A loan refusal may be because you have a poor credit score. This can be for a variety of reasons such as late or non payment of current loans or other regular financial commitments such as mortgages or hire purchase agreements. You will also be scored negatively if you have a County Court Judgments against you in the past, if a property owned by you has been repossessed or your credit card or a store card has been cancelled by the finance provider.

Hire Purchase (HP):
Hire Purchase agreements are common for large purchases such as cars. The Hire Purchase company will buy the goods on your behalf, and charge you monthly fee. It's important to note that the Hire Purchase company retains ownership of the item until you have paid off all the installments. Hire purchase agreements are useful as it is sometimes an uphill challenge to save enough money to pay for a car. But you should remember that the item can be repossessed if you do not keep up with the repayments. Non-payment will also negatively affect your credit score and could affect you ability to secure loans or mortgages in the future.

Interest free credit - buy now, pay later
Interest free credit deals allow you to buy items and pay for them in installments at the cash price. For example, you could buy a computer with an interest free credit deal that allows you to pay the cash price of the computer in installments spread out over two years. Sometimes the deal will allow you to defer payment for a period of time, such as 9 or 12 months. With an interest free credit deal, you will have date when the full payment is due. If you do not pay the outstanding balance by the payment due date, then you may be charged interest on the balance.

Individual Voluntary Agreement - IVA:

An Individual Voluntary Agreement is a legally binding agreement between a person in debt and and the people he or she owes money to (creditors) to pay off the debt in full over an agreed period of time - usually a 3 - 5 year period.

Late Payments:
Serial late payments on credit cards or loans can not only lead to legal action in extreme case but can also affect your credit rating. Missing one or two payments often won't be noted on your credit reference files, but numerous late payments will adversely affected your rating, which might take months to rectify. Why not consider setting up a Direct Debit, which your card bank will be more than happier to set up in order to make the minimum payments on your card every month to ensure you don't forget.

Loans Sharks:
Loan sharks are companies who will who will lend you money, no questions asked, at huge high rate of interest. AVOID THESE AT ALL COSTS - YOU WILL FALL EVEN MORE INTO DEBT. Look for professional and reputable companies who will lend you money in a professional way.

Minimum Payment:
If you have a credit card debt, the provider will specify a minimum payment that you have to make each month. The minimum payments is calculated as a percentage of your balance. The higher your balance, the higher your minimum payment. The lower you balance, the lower your minimum payment. However, it is very important to remember that if you decide to pay the minimum payment each month then, in effect, you are only repaying the interest charge. This means your balance is not being reduced and your debt remains.

Payment Protection:
Taking on a loan is a huge financial responsibility. You may be able to pay the installments when you take on the loan, but what happens if you are unable to meet your required loan payments due to an accident, illness or redundancy? To cover this possibility, many loan companies offer payment protection schemes - a sort of insurance that ensures the loan will be paid if you are unable to make the payments. These schemes mean that the repayments will be higher, but at least you will have peace of mind that you will always be able to make repayments.

Personal loans from a bank or building society:
These type of loans usually have a lower APR than that offered by credit cards or store cards. So if you have a debt on you credit card, it is usually worth taking to bank or building society to see if you can convert it into a loan.

Reward Cards:
If you pay off your the full balance every month on your credit card or store card, then it would be worth investigating a card that offers rewards if you do this. There are many cards on the market that offer rewards (eg American Express Nectar Card) such as Nectar points or Air Miles, Nectar points can be redeemed on gifts and travel deals. Air Miles allow you to save points that can be redeemed on air travel.

Travel Protection:
The purchase of travel products such as flights or holidays (over £100) is covered by the Consumer Credit Act if you make the purchase with your credit card. If the airline or tour company go bust, you will receive a refund.

Unsecured loans and. Secured loans:
A secured loan has the value of your property set against the amount borrowed. The huge drawback of this type of loan it that your risk of repossession if you fail to make the repayments. Unsecured loans, such as loans from a bank, are not secured on a property. However, if you miss payments, it could affect your credit score and you will have difficulty securing loans or mortgages in the future.

 

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