credit

Apr

2022

Is Having a Credit Card Good or Bad?

Reading Time: 4 minutes

Have you ever wondered whether having a credit card is good or bad for you? For most newbies in their first jobs, getting a credit card is a sign that they are finally independent! It is a cause for celebration and may cause many to eagerly take the irresponsible first swipe.

Being approved for one might seem like an achievement. It’s like announcement to the world that you can now pay for your own bills. But when you see your first bill or several unpaid bills afterwards; your feelings might change and you might feel less independent and more helpless.

For those already mired in debt, it becomes the object of many negative feelings. They might event want to just get rid of it. The usual advise for newbies is to not acquire one in the first place because it’s a debt trap.

The reality is, you can have a credit card and not be trapped in debt. Many have learned this the hard way and have now learned how to handle this financial tool more responsibly. Here are some reasons and lessons on why and how it can be bad or good for you.

The Bad: How NOT to Use Your Credit Card

Let’s try to get the negative stuff out of the way first. Many of the negative feedback that has accumulated around credit cards is mostly due to a lack of understanding. Not knowing how credit cards work can lead to irresponsible swiping.

To avoid getting into the debt trap, educate yourself. Make sure to read the fine print and ask questions about your credit card before your first swipe. Then, make sure to not do the following:

Charge items that you can’t pay off immediately on your next salary schedule.
Exceed your credit card limit. Please don’t do this especially on your first swipe.
Paying only minimum payments.
Making late payments.
Owning too many credit cards. If you haven’t practiced managing just one, don’t assume you can manage more than one.
Lending it to somebody else.

Sadly, the last one is one of the most foolish things you can do when you get your credit card. Peer pressure is a strong influence and most people just can’t say no to a friend in need. Learn to say NO or you might get yourself trapped in debt that is not even your own. You might even lose a friend in the aftermath.

If you are already having problems; there are ways on how to get out of your credit card debt.

The Good: How to Use Your Credit Card

Now for the good news. Being a responsible credit card user means enjoying its many benefits. You don’t have to be burdened with enormous debt as long as you keep these things in mind:

Pay for your swiped items as soon as you get your salary.
Do not exceed your limit. Try not exceeding 70% of your limit. This gives you some leeway for unaccounted expenses that you need it for.
Pay more than the minimum payment. This will ensure that you lessen the principal amount and not just the interest and charges. If possible, pay your card balance in full every month.
Pay on or before the due date to avoid additional late fees and charges.
Keep yourself to one card and learn how to manage it well.
If a friend needs your credit card, ask them to pay you in cash first, then swipe. Make sure to transfer the cash payment immediately as well.

You should only use your credit card for some else because they need it to complete a transaction. This means that they should already have the cash to pay for the transaction in the first place. It should only be a “way” to facilitate the payment and not the actual payment. If it were to be the actual payment, then they should ask to borrow cash from you instead.

Remember that using your card as the actual payment includes interest fees and charges if not paid on time. So if your friend insists that they will pay for the payment using your credit card; make sure they agree to shoulder additional charges if they fail to pay on the due date.

Why Should You Have a Credit Card?

A credit card can provide you with several benefits if you learn how to use it responsibly. Here are some advantages to having one:

Spread Cost

Credit cards allows you to make purchases that may not be available another time. For example, if you don’t have cash yet, you can use your card to pay for the item. You can then pay your credit card at a later date.

Pay Online

Some online services require credit card payments such as some airline companies and other online shops. It is handy so you can pay for the transaction. You can purchase the item you want which is not available or inconvenient to get hold of offline.

Make Reservations

This also usually occurs online. Some companies require a credit card for you to make a reservation. They do this even if they don’t actually use it to receive the payment from. It just serves as a guarantee or insurance of sorts. It demonstrates to them that you are indeed capable of paying for their services or products.

Consumer Protection

This is one of the most basic but also the most taken-for-granted benefit of a credit card. Most credit cards alert you to online scammers on their black list. If you use it to make a purchase from a blacklisted seller; your credit card company may decide to cancel your transaction automatically. They may call you to warn you about the seller so you can choose to cancel the transaction immediately.

If you have issues with a transaction, or the goods you received are faulty; you can request for a refund from your credit card provider.

Get Something Back

Good credit card payers and loyal users are often rewarded with cash rebates or freebies. These can include free items when shopping like free tickets to concerts, exclusive invites to hotel buffets, special events, rebates and many more.

Of course, all these benefits can only be enjoyed if you are a responsible user. You should have a lot of time to practice as it takes some time to accumulate points.

So is credit card, good or bad? The answer depends on how responsible you are at using this financial tool. If you are fairly good at managing your card, then you are on your way to financial wellness.

Updated. First published on Pinoy Smart Living on 2019.01.22.

Feature Image: Original Photo by rupixen.com on Unsplash.

Feb

2022

Warning Signs That You are Living Beyond your Means

Reading Time: 5 minutes

To live beyond your means simply means that you are spending more than what you can afford. Statistics show that most people are living from paycheck to paycheck without any kind of financial cushion. This was quite evident on the effect of the recent lockdowns on people’s financial lives. While we all deserve to spend our hard earned income; spending beyond our earnings, not saving enough for emergencies and racking up debt in the process are all recipes for financial disaster. To prevent this from happening, you need to watch out for some warning signs that you are living beyond your means. Even if you were doing fine before the pandemic, you might still need to reassess your finances to check if your current income can still support your previous lifestyle.

It is quite easy to fall prey in this age of consumerism. A wide range of consumer goods are available everywhere in the malls, supermarkets, social media and online stores. With heavy promotion by the media coupled with the support of the banking system through their generous credit to consumers; living beyond your means is so easy to do these days.

The FOMO (fear of missing out) and YOLO (you only live once) mentalities brought about by social media only made matters worse. These mentalities have become the new norm that they have dictated the spending habits of many. While it gives you satisfaction in the present, it gives disservice to your future well-being.

Warning Signs That You Are Living Beyond Your Means

Before it is too late, here are some key indicators that you are living beyond your means. They will serve as warning signs that it is time to scale back on your spending immediately.

1. More than 30% of your Income Goes to your House

Housing is the largest expense of most households. Most people dream of a big nice house thinking that they are buying an asset. However, most people don’t realize that their primary home is no longer considered an asset but rather a liability.

Unless you have a way of lowering your monthly expenses on other parts of your budget, you will find yourself in the poverty cycle if you are spending more than 30% of your income on your house. The allure of a bigger and better house will become a financial problem.

Now, calculate what percentage of your monthly income goes to your housing expenses. Housing expenses include your monthly amortization, real estate property taxes, association dues, house insurance, maintenance costs and utilities. If the amount exceeds more than 30% of your monthly income, you will be much better off finding a less lavish home that will fit your budget.

2. More than 15% of your Income Goes to your Car

If you can purchase your car for personal use in cash, then there is no problem. Problem arises when you borrow money in your auto loan purchase.

Have you heard of the 20/4/10 Rule on Auto Loan? The 20/4/10 Rule keeps your finances in check when it comes to purchasing a car. The rule says if you are going to buy a car, you need to make at least a 20% downpayment. In addition, the terms of payment should not exceed 4 years and that your monthly amortization should not exceed 10% of your monthly earnings. If you cannot follow these rule, it simply means you are buying a car that you cannot afford.

Minimum 20% downpayment
Maximum 4 years term
Monthly payment should not be greater than 10% of income

If you add up all other transportation expenses like fuel, maintenance costs, insurance and your monthly amortization; the total should not exceed more than 15% of your income. If your monthly transportation expense goes beyond that, you are simply living beyond your means.

3. Overdue Notices Fill Up your Mailbox

If you have been receiving late payment, overdue and disconnection notices, or worse you find your utilities constantly disconnected; then that’s clear sign that you are living way above your means. Your monthly budget should include payments for bills and utilities. If you can’t pay for them then it is time to reevaluate which ones are necessities and which ones you are better off without like cable subscription for example.

4. You Borrow Money from Others

If you find yourself borrowing money from friends and relatives or take out personal loans to pay your bills then that is a clear sign that you cannot afford your current lifestyle. Ideally, your income should be enough to cover your day-to-day expenses.

5. You Constantly Worry About Money

You are constantly worried about money, even with small expenses to the point that it is already keeping you awake at night. Your health is already affected. You even get into strenuous discussions and arguments with your spouse.

It is normal to worry about your finances every now and then but if you are constantly experiencing these things on a daily basis. Then, it is so obvious that you have money problems.

6. You have No Savings / Emergency Fund

You have no savings or emergency fund. Even if you have it before the pandemic, you have already used it all up. There is no money left from your current income to set aside for future savings.

Savings are needed for future use. An emergency fund is for unexpected and unfortunate events like a pandemic, unemployment, illness, disability or simply for car repair purposes. Ideally, your family should have enough money saved to cover at least six months worth of your living expenses.

7. You have Rising Credit Card Balances

If you are one of those people who only pays the minimum amount due on your credit card balance every month, then that’s a sign that you are living beyond your means.

Ideally, you should only charge what you can pay off at the end of each billing cycle. Unfortunately, many people have severe problems with credit card usage. If you don’t pay the total amount due on or before your due date, your outstanding balance will charge additional interest rates and fees, and these are carried over every month causing your debt to balloon month after month.

8. You Never Set A Budget

If you are ask questions about your budget like how much do you spend on food each month and you have no idea what the answer is, then you have a problem. A written budget is one of the first and most important steps towards financial freedom. How will you know if you are living within your means if you have no idea where your money is going? Having f inancial goals and sticking to your budgeting plan can prevent money leaks and help you live within your means.

9. You Run Out of Money Before your Next Paycheck

Do you find yourself short of cash long before the next payday? If you do, then that is another sure indicator that you need to downgrade your lifestyle. Your paycheck should be enough to cover your expenses for the period.

10. You Shop / Vacation on Credit

Credit is good when used wisely. It is very convenient because you don’t need to pay in cash for the total cost of an item or service right away. It is fine to avail of zero percent installment offers just as long as you are sure that there are no hidden charges. The rule of thumb is that your payment terms should not exceed the total life span of the item that you are buying.

It is a whole different thing for trip purchases. Yes, you can go on that well-deserved vacation only if you have saved enough for it. Make a plan to save money for that dream vacation.

You can use your credit card for protection. Like for example, some credit card offers free travel insurance if you book using their card. All other vacation expenses should be paid in cash. You can also use your credit card during vacation but for emergency purposes only. If you are one of those people who loves taking vacation all on credit, then you are living beyond your means.

If you score at least four and above, then take it as a warning sign that you are living beyond your means. You have two options, either you increase your income or downgrade your lifestyle. But whatever your choice is, it is best that you start learning financial literacy now to avoid finding yourself in the same situation later on.

Edited Version. First Published in Pinoy Smart Living on 10.30.2018

Photo by Artem Beliaikin from Pexels

Oct

2021

What To Do If You Can’t Pay Your Mortgage

Reading Time: 3 minutes

Defaulting on your mortgage is not the same as not being able to pay rent. If you miss your rental payment, you can easily talk to the landlord for an extension. If you really can no longer pay, worse scenario is you pack your things and look for another property to rent that is well within your budget. Not being able to pay your mortgage is much more complicated than that. You will not only be putting your property in jeopardy but also your credit score or standing with the bank (or any other financial institution). Thus, as much as possible refrain from defaulting on your mortgage. So, what to do if you can’t pay your mortgage?

Why Your Credit Score Matters

Before we go into that, it is important to understand first why your credit score matters. Your credit score is a rating of your creditworthiness. It indicates whether you are trustworthy enough for the financial institution to pay your debts. It is important because it is a deciding factor each time you borrow money from a bank. The amount of money that you can borrow including the interest rates are affected by your credit score. And the credit score does not only apply to real estate loans but covers all other forms of loans such auto loans, student loans, personal and even credit card loans. Thus, it is important that you take care of your credit reputation by paying your dues on time.

What To Do If Your Capacity to Pay Has Diminished

So what if you are put in a situation wherein you can no longer afford to fulfill your obligation? The first thing that you need to do is to get in touch with the bank long before the due date. Although lenders normally have a grace period for late payments, it is best to get in touch with them before they charge the late payment fee. For record purposes, it is best to put your concern in writing. Indicate your loan reference number. State your reasons or difficulties. And ask them what your options are. There might be programs available to help you.

If your capacity to pay has been diminished, options normally include the following:

1.Forbearance Plan

With this option, the lending institution will agree to temporarily suspend or reduce your monthly mortgage for a brief period of time. It will give you a short term relief to your financial woes until you recover. But once the forbearance period is over, there should be an agreement on how you are going to repay the suspended dues.

2. Debt Restructuring Plan

In a debt restructuring plan, the terms of your loan will be modified. The monthly payments will be lowered but the term will be extended. The purpose is to make your mortgage more affordable.

What To Do If You Already Missed Payments

3. Repayment Plan

A repayment plan is designed to help you pay back your missed payments. In a repayment plan, the lender normally spreads your overdue amount in a specified period of time. The amount is then added to your monthly payment until the overdue amounts are repaid; thereby increasing your monthly payment. Once the said period is over, your monthly payment will then revert back to normal.

What To Do If You Can No Longer Afford to Continue with the Mortgage

5. Short Sale

A short sale is a sale of an asset that a seller does not own. If a property is mortgaged, technically, the seller does not own the property yet. In a short sale, the lender sells the property below the mortgage value. It can forestall the foreclosure but the lender loses all profit from the said property. But the good thing about it is that it does less damage to your credit score than a foreclosure.

6. Voluntary Foreclosure

Voluntary foreclosure is done in the event that you can no longer afford to continue with your mortgage. A voluntary foreclosure is initiated by the borrower who can no longer continue with the monthly payments. It is done to prevent involuntary foreclosure. A deed in lieu of foreclosure is an example of a voluntary foreclosure. It can release you of your obligations. A deed in lieu of foreclosure is an agreement where you surrender the deed to your property to your lender. Although you will lose your property, you can avoid a foreclosure report on your credit rating. Although a voluntary foreclosure is harmful to your credit rating, it is not as harmful as involuntary or forced foreclosure.

Feature Photo by Karolina Grabowska from Pexels

Jul

2021

Understanding Your Credit Card Statement Part 3

Reading Time: 3 minutes

There is a price for borrowing money. Aside from the annual membership fee, one of the most important things that you should consider is the interest. This is how the credit card issuer earns money. Understanding the different credits and debits that go in and out of your credit card statement is one of the skills that you need to be able to use your card wisely. Don’t just swipe, understand how your credit card works. Here is understanding your credit card statement part 3.

9. Interest Rate

The interest rate is the cost of borrowing money. The interest is applied only to your balance. Different cards have different interest rates. Card issuers use different calculations. Some credit cards issuers calculate it based on your average daily balance. Some use the balance on the beginning or the end of the cycle. You will need to read the fine print to understand how your credit card company calculates the interest.

TIP: You can avoid paying interests by paying the total amount due on each billing cycle.

10. Cash Advance Interest Rate

Aside from the cash advance fee, there is a separate interest for your cash advances. This is typically higher than the interest rate of your regular purchases.

TIP: Cash advance interest rate is not only higher than normal transactions, it is also automatically charged as soon as you withdraw the cash. Avoid this by using the cash advance feature of your credit card only when absolutely necessary.

11. Previous Balance

The previous balance pertains to your outstanding balance from the previous month’s statement. Interest starts the end of the beginning of the billing cycle if you have a previous balance.

For example if you have a 5,000 outstanding balance from the previous billing and you paid 4,000 last month. You will then have 1,000 balance at the end of the beginning of the current month cycle. This means the interest will be calculated on the 1,000 balance at the start of the billing cycle.

TIP: Always make it a point to have zero balance at the end of the beginning of the billing cycle so you don’t need to pay any interest.

12. Purchases and Advances

This pertains to all your credit card purchases and cash advances that falls within the billing cycle. The billing cycle is the period after the statement date from the previous month to the statement date of the current month.

TIP: Make sure to keep all your credit card receipts so you can verify the transactions in your credit card statement to avoid paying for double entries or purchases that you did not do.

13. Credits

Credits are any amount that the card company owes you. It could be price of something that you returned that you originally purchased using your credit card. It could be wrong entries or items that you did not actually purchase.In addition, it could also be credit card points that you redeemed in exchange for cash credits.

TIP: Be consciously aware of your purchases and if you are expecting credits into your account. Ensure that the correct amount has been credited.

14. Payments

Payments are the amount of money that you pay the credit card for your purchases. Any payment you made will reduce your outstanding balance.

TIP: Double-check all payments credited to your account to make sure it is the correct amount.

15. Interest Charge

This is the total amount of all the interests that were charged to your account. It is the sum total of the interests on purchases, cash advances and balance transfer.

TIP: Although you can avoid paying interests on purchases if you pay within the grace period; you cannot do the same with cash advances and balance transfers because they are automatically charged right after the transaction.

16. Late Charge

Late Charges are the amount that you need to pay as penalty for not paying at least the minimum amount due before the due date.

TIP: Avoid paying late charges by paying your dues on or before the payment due date.

Third Part of a Series. Click here to read Part 1.

First Published in Pinoy Smart Living on 04.06.2019

Feature Image by Alina Kuptsova from Pixabay

Jul

2021

Understanding Your Credit Card Statement Part 2

Reading Time: 2 minutes

Credit cards are a good way to build your credit score standing. Banks and other lending institutions use credit scores to assess and evaluate the potential risk of lending you some money. That’s why it is important that you use your credit card wisely. The only way to achieve this is by understanding your credit card statement and how it works. In this second part of the series, let’s focus on the credit limit. Below is a list of additional terms and description in understanding your credit card statement part 2.

Understanding Your Credit Card Statement Part 2

Credit card issuers put credit limits on your credit card for a good reason. The limits are there to benefit both you and the credit card issuer. The amount is based on a computation that it is easy for both parties to manage the credit. Your limits are normally based on your capacity to pay. Being consciously aware of these limits will help you be able to utilize your credit card well.

5. Credit Limit

Your credit limit is the maximum amount that you can borrow on your credit card every cycle. The amount is decided by the credit card issuer based on certain factors such as your monthly income, credit score and account history.

TIP: Keep your credit limit in check. Going over your credit limit will result to hefty penalties and affect your credit rating.

6. Overlimit Amount

Any amount in excess of your credit limit is the overlimit amount. The overlimit amount is subject to penalties. It is also added up to your minimum amount due.

TIP: Avoid the embarrassment of an unapproved or declined transactions by making purchases above your credit limit. In addition, do bear in mind that there are penalties when you go above your credit limit. And besides, going above your credit limit means your credit card usage is already more than your capacity to pay.

7. Available Credit Limit

This is the amount available for you to spend. It is actually your credit limit minus your total amount due less any other pending transactions.

TIP: It is advisable to always have an available credit in your credit card for emergency purposes. In addition, having a lot of available credit limit at any given time is good for your credit score.

8. Cash Advance Limit

The cash advance limit is the maximum amount that you are allowed to withdraw in cash. Some credit cards have the same credit limit and cash advance limit while others set a separate amount for cash advance.

TIP: Never use the cash advance feature of credit card unless you really need to or there is urgency in the situation. Although it is a convenient way to get cash fast, the interest rate for cash advance is much higher compared to personal loans.

First Published in Pinoy Smart Living on 28.06.2019

Feature Photo by Andrea Piacquadio from Pexels

Jul

2021

Understanding Your Credit Card Statement

Reading Time: 3 minutes

Many people have the bad habit of not reading their credit card statements. For those who do read, how many really understand what it all means? It is because of this that many people found themselves in credit card debts that have already escalated beyond their control. Don’t be one of these people. Understanding your credit card statement is crucial to your journey towards financial freedom. Use credit cards to your advantage. Learn how credit cards work.

To truly understand how a credit card can be good for you, you need to first be able to read and decipher your credit card statement. The small pieces of information in your credit card bill are all equally important. They can aid you with proper use of your credit card.

If learning about all those terms in your credit card statement all at once is too much for you to handle, at least start with the four most important ones:

1. Statement Date

This is the date that your billing statement is prepared. The date is important simply because it is the cut-off date. All transactions made after the previous month’s statement date to the date indicated are included in the statement.

TIP: If you think you have already reached the limit of your monthly expense budget, wait until after the statement date to make your purchase. In this way, you will have more than a month of grace period before you need to pay for that particular purchase. For example; if your statement is generated every 5th of the month, items that you bought before the 5th will be billed this month. Purchases after the statement date are for next month.

2. Payment Due Date

The payment due date is the last day for you to make your monthly payments. As long as you have a balance in your credit card, you are obliged to pay every month on or before this date. Although some credit card companies accept payments on the next banking day after a weekend or a holiday; some no longer do so because of the presence of automated online payments or phone banking.

Take note however that the payment due date varies. Rather than a specific date of each month, it is normally set at 21 days after the statement date.

TIP: Make sure to pay on time so as to avoid penalties and late charges. You can opt to pay early but make sure you do it after the statement date otherwise, that payment would be counted on the previous month’s billing cycle. Also, always take note of the due date because it varies every month.

3. Total Amount Due

This pertains to the total amount that you have used in your credit card that you are liable to pay the card issuer. It is your outstanding balance.

TIP: Although you are not required to pay the full amount on the payment due date; it is in your best interest that you do so. Any outstanding balance will begin to incur high interest charges.

4. Minimum Amount Due

The minimum amount due is the lowest amount that you are required to pay on or before the payment due date. It is typically a small percentage of your outstanding balance. This is directly proportional to your total amount due. The higher your outstanding balance, the higher your minimum amount due and vice versa.

TIP: Never miss paying your minimum amount due on or before the payment due date. You will not only be subjected to late charges, it will also affect your credit rating. Missed payments will affect your standing with credit institutions and might ultimately affect your capability in acquiring loans in the future. In addition, even if you pay the minimum amount, if you continue to make purchases each month, your balance will continue to grow. This is the fastest way to put yourself in heavy debt. Thus, a word of warning; if you don’t want the power of compound interest working against you, then, refrain from paying just the minimum amount due each month.

First of three parts, click here for Part 2.

First Published in Pinoy Smart Living on 21.05.2019

Feature Image by lcb from Pixabay

Mar

2021

Money Lessons You Wish You Learned in School Part 2

Reading Time: 4 minutes

How are you doing with your finances? Do you consider yourself financially stable? If you do, then good for you. If not, you are not alone. Most people are having problems with money because only a few are financially literate. Most of us have to learn financial lessons the hard way. Just imagine all the things that you could have done differently if only you know a thing or two on personal finance. Here are some more money lessons you wish you had learned in school Part 2 (click here to read part 1 ):

1. Basic Investing Skills

A lot of people are scared of investing. This is just natural; after all, who would not be scared of losing their hard-earned money. You probably heard stories of people losing all their money through bad investments.

However, savings alone are never enough. You need to invest your money too. This is where your knowledge on Investment Basics will come in handy.

True, investing involves risk but it is also a great way to increase your wealth. You can minimize investment risks through financial literacy. Familiarize yourself with the different investment vehicles available out there. For beginners, you can learn about bonds, funds and stocks. Depending on our risk tolerance, you can try for the more advance type of investing such as cryptocurrencies, foreign exchange and stock options trading. It is only through Investing will you be able to slowly build your passive income.

2. The Power of Compound Interest

Out of all the items listed here, compound interest is one topic that was surely discussed in school. Unfortunately, since a lot of people hate math, compound interest is nothing more than a numerical value calculated from a math problem. You probably forgot the formula on how to compute it by now. Big mistake!

Compound interest is probably the most important concept of personal finance. If used to your advantage, it can give you vast wealth. However, it is a double-edged sword. It can either make you or break you. If it works against you, it can lead to your financial downfall. Do you know of people who are buried in credit card debt? That is a clear example of compound interest working against them.

Compound interest is the eighth wonder of the world. He who understand it, earns it…He who doesn’t pays it.
– Albert Einstein

3. Time Value of Money

The time value of money is one the most important concept for investors. It simply state that the value of your money today is worth more than your money tomorrow. To put it simply, it means it is better to have your money with you now than at a later date.

This concept involves time. Time is literally money. The sooner you earn or have money in your hand, the faster you can have money work for you. If this concept was discussed in school, making decisions in life would have been a lot easier.

For example, a buyer wants to buy your property at the prevailing market price. You declined the offer hoping that somebody else with a bigger offer will approach you later on. There is no assurance when the next buyer will come. What if the next buyer comes after a year or two? Is it still worth the wait?

Another example is let’s say the luxury bag that you have always wanted to have is on sale. You decided to buy it to take advantage of the sale. You use your credit card for the purchase. Unfortunately, you were only able to fully pay the item after a few months. With the interests incurred during those amounts, you ended up paying more for the bag.

The time value of money is also at work in investing. The younger you start investing, the more money you will have in the future. This also applies to other things such as your health. Choosing the right food and exercising today will keep you healthy. This will save you money on medical expenses later in your life. In practical terms, don’t put off what you can do today for tomorrow.

4. Building Good Credit

Do you pay your bills on time? Establishing a good credit is probably one of the most important things that you can do in your life. A good credit history will make your life a lot easier. Whether you are buying a house or a car, applying for a loan or a credit card or even getting a job; a good credit score will come in handy.

A credit report is an explanation of your credit history. It shows if you have an existing loan, if you are applying for one and your balance. It also shows your capacity to pay and whether or not you are paying your bills on time.

This is very important in your financial life. A good credit history will make it easier for you to get a loan. It can also qualify you for a higher credit limit and lower interest rates.

5. How Credit Card and Interest Rates Work

Do you understand how credit card and interest rates work? Do you even know how to read your credit card statement? So many people do not understand how credit card and other consumer loans work. As a result, they end up with an enormous credit card debt.

Credit card can be good or bad depending on how you use them. Credit card is a financial tool that you can use as leverage. However, it is never a good idea to use credit cards to purchase goods that you cannot afford in the first place.

The bottom line is that financial literacy can help us make better monetary decisions in our lives. It will help us achieve financial freedom and avoid bad debts.

Teaching personal finance in school can help our children have a better future.

First published in Pinoy Smart Living on 09.18.2019

Photo by Julia M Cameron from Pexels

Jun

2020

10 Basic Terms About Personal Finance

Reading Time: 3 minutes

Understanding basic money terms should be your first step towards financial literacy. It would be very difficult to start learning financial literacy, much more overhaul your financial life without understanding the basics. Just like reading for example, you won’t be able to learn how to read without knowing the alphabet. In the same way, you will never truly be able to handle your money if you are not familiar with some basic terms about personal finance.

These terms will serves as building blocks in the world of finance. Hence, a deeper understanding of the many terms of concepts of the financial world is crucial in making good personal financial decisions.

Learning and understanding some basic personal finance vocabulary is your first step towards financial freedom.

There are many important personal finance terms. But to make it easier, we have narrowed down the list to ten terms that will help you understand the basics of personal finance.

Here are 10 basic terms that you should know about personal finance:

1. Assets

Assets are any resources with economic value. Sample assets include certificates of deposits, bonds, funds, stocks, real estate or business.

A new definition was introduced by Robert Kiyosaki, author of Rich Dad, Poor Dad. He redefined assets as economic sources that you own that generate income for you. A

An asset is something that puts money in your pocket.

2. Credit

Credit is an agreement where the borrower receives something usually money or any other product or service with value with a promise to pay in the future within a specific time frame, usually with interest. In short, credit pertains to agreement between borrower and lender. Examples of credits are home loans, car loans, consumer and personal loans and credit cards.

3. Compound Interest

Compound interest is the addition of interest on the principal amount of your loan, savings or investments. In short, it is interest on interest. Thus, it has the capability to grow at an increasing amount. Use this concept to your advantage and your wealth will increase. However, this concept can also work against you especially if you have credit card debts. This is how credit card companies earn. Protect yourself and understand this concept so as not to end up a victim of enormous credit card debt.

4. Depreciation

Depreciation is the lowering of the value of an asset over time, usually because of wear and tear. Depreciable assets in your home include your cars, cellphone, appliances and furnitures. For example, if you bought a car worth million a year ago, you can no longer sell that car for the same price today because the value of the car already went down. That is depreciation. Buying depreciable assets on credit is not recommended.

5. Inflation

Inflation is a finance concept that everyone should know because it affects everybody. When the value of your money declines, that is inflation. It simply means that the same amount of money that you are holding now can purchase less goods compared to last year. So, if you have money placed in a regular savings or current account, you are loosing money every year even if you are not actually withdrawing money from your account because of inflation.

6. Financial Freedom

Financial Freedom is the state wherein you are already living your ideal lifestyle without having to work for money. You can be enjoying yourself somewhere in the Bahamas and yet continue to receive money regularly.

Financial Freedom is achieved when your passive income is greater than your monthly expenses.

7. Liabilities

Liabilities are amount that you owe somebody, a company or the bank. They are your debts and financial obligations. Your liabilities include your bills, home loan, car loan, credit card debts and other consumer and personal loans.

8. Mortgage

A mortgage is a loan in which a property or real estate is used as collateral. A collateral serves as security for the loan. Ownership of the real estate is conditional until all obligations and monthly payments are met. This is your typical housing loan.

You are not the owner of your real estate until you have fully paid your mortgage.

9. Net Worth

Your net worth is the monetary equivalent of all your assets added together minus all your liabilities. In short, your net worth is the value of everything you own minus your debts. It is a gauge to measure your financial well-being or how wealthy you are.

NET WORTH = ASSETS - LIABILITIES

High income does not necessarily mean high net worth. A janitor without debt can be considered more wealthy than a company president whose liabilities are greater than his assets.

10. Passive Income

Passive income is money that you receive on a regular basis with minimal work requirement or without you having to work. This income is generated through your investments or assets.

Examples of passive income are:

rental payments from your real estate properties
dividends and capital appreciation from stocks and funds
interests payments on bonds
royalties
income from investments
retirement income

This is the opposite of earned income wherein you need to work or exchange your time, skills and expertise to earn income. Example of earned income is your salary.

First Published in Pinoy Smart Living on 11.13.2018

Image Credit: Gerd Altmann from Pixabay Images