A Brief Insight On Credit Definition And Its Consequences In Financial Health

Though there are reforms and regulations such as the “Credit Cardholders’ Bill of Rights” in place to provide protection to credit cardholders, it does not mean that you will be ignorant about the money lending, borrowing, and repayment system.

Therefore, it is paramount that you start with a proper review of your credit report on a frequent basis, and if it is bad work towards improving it to have a loan prospect in the future. If there are any errors in it you must take immediate steps to rectify it as per your right.

The best way to be safe when you borrow money from the market is to know about the definition of credit, its works, and the consequences if anything goes wrong. To do this you must compare the APR charged by different lending and credit issuing companies before you sign up for a credit.

Know about all the terms of the agreement which must be in accordance with the guidelines formulated and designed by The Consumer Financial Protection Bureau.

The unique nature of compound interest

In school, you may have learned about the two types of interest calculation on money lent out. One is the simple rate of interest, in which you were an expert and always get the right answer using the simple process of multiplying the Principal, Time, and rate percentage.

Things got tougher for you when you had to calculate compound interest on a loan amount. However, it was easy for a couple or three years but it really got hard when you had to use the complicated formula of P{1+R/100}N.

Does it ring any bell? Well, if things were tougher for you than when you just had to make a few hypothetical calculations imagine how tough it will be when it comes to real life when you take a loan. You must know that all loans given out are calculated at compound interest and that too on a daily basis considering the fluctuations of the reserve points as issued by the government.

Works for the lender

When you visit sites such as libertylending you may come to know that this compound interest factor is beneficial for the lender and not for you. The lender earns more and more like days of the loan tenure pass by and you repay more and more.

In the end, you will see that you have repaid much, much more than you borrowed originally. That is the magic of compound interest in the lending market.

This is due to the fact that the interest accrued gets added to the original borrowed amount and further interest is calculated on the new principal amount. This carries on with each passing day and is even more profound when you skip a payment. Interest charged on interest adds up quickly and will soon reach an unmanageable limit if you default payments any further.

However, the good news is that if you continue to make payments regularly and on time your balance will decrease. Therefore, it is important that you know what the lender is charging you and for what period.

Paying the minimum amount

Sometimes, debtors make minimum payments just to make sure that their credit score and history are not affected. However, this too has its own consequences. You will end up repaying more as your loan will be stretched for a longer period.

If you want to know how much you are paying in excess in such a process and for how long you will have to pay you can follow a simple calculation process.

  • Get the figures such as your loan outstanding amount, minimum payment percentage, and APR.
  • See how long it will take to pay off the entire debt if you pay only the minimum amount each month.
  • Calculate the amount you can afford to pay depending on your monthly budget.

The consequences

You may find general instructions on the consequences of not paying your loan on time when you read the terms and conditions, but you will hardly come to know what really goes into your loan amount due to such defaults or late payments. It will have serious effects.

The consequences of any delinquent account usually start with simple late fees but later on with time, it becomes long-term problems. These may include all or any one of the following:

  • Potential damage to the credit history and score to make your borrowing low and tough in future
  • Loans will be more expensive
  • Chances are high that your loan applications will be denied
  • Existing loan accounts can be sent to collections to make your life more miserable
  • You may have your wages garnished
  • Your asset can be repossessed in case the creditor finds that you cannot repay your debt and
  • It will add to your stress, take away your sleep, and result in the decline of your overall well-being.

The most simple solution to prevent all these is to borrow only that much you can afford to repay on time and postpone your future requirements once you clear your existing debts.

Know the borrowing terms

Even if you stay well within your affordable limit of borrowing, you must know the terms and conditions well before you sign the loan agreement with the creditor. The elements to look for include:

  • Interest – This is the responsibility shared for payment and is legally liable.
  • Fees – These are the additional charges that you must pay for balance transfers, cash advances, and penalties for any late payments.
  • Finance Charges – These are charges levied on someone using the credit of another person but are not legally liable to pay the balance due.
  • Loan – This is the total amount you borrow and repay including the interest and any fees applicable thereof.
  • Rate of interest – You must know the model in which your rate of interest will be calculated. It can be either fixed or variable where both have significant characteristic features, pros, and cons.

A little effort now will help you to retain your financial health.

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