The wonderful world of finance is a somewhat mystifying place at times. Do you know what credit scoring is and how it relates to you, for example? Or do you understand what credit card APR actually means and how it relates to your repayments? If you received a phishing email, would you know how to recognise it and how to report it to your email provider?
The truth of the matter is that it is very easy to find yourself saddled with debt problems, often unintentionally or at least without fully understanding the implications of the credit you have been granted by a credit card company, bank or building society. The first step towards tackling any problem is to understand what the problem is in the first place.
Let us take a look at some commonly asked questions regarding credit and the terminology used to describe it and answer these enquiries in a little more detail.
What is credit score/scoring?
A credit score, or credit scoring, is simply a means by which a bank or other financial institution considering giving you credit makes a judgement on how great a risk you are to be offered funds. If you are a person with a history of debt problems, late payments on existing or past credit agreements, arrears or county court judgements (commonly referred to as CCJs) against your name, then this will affect your credit score quite markedly. Institutions will see you as a far greater risk and adjust your score accordingly. Thus, your credit score worsens with the more debt problems you have.
In contrast, if you service your level of debt well, keep up to date on payments and ensure that you do not run up too many forms of credit, then you can look forward to improving your credit score. Your rating can also be boosted in several other simple and practical ways; ensuring you are on the electoral roll, not applying for lots of credit at once and cancelling any credit cards you do not use.
A credit score can range anywhere between 300 and 850. A rating below 500 is considered to be risky by financial institutions. A credit score of above 700 is preferable as it often means you can apply for the best interest rates on offer for loans.
What does the APR on a credit card mean?
Credit card APR stands for annual percentage rate and basically means how much the credit card company will charge you for the level of debt you have with them over the course of the year.
For example, if you have a credit card debt of £10,000 and an APR of 24 per cent, this means that over the course of 12 months you would pay a monthly APR of two per cent on that debt. This means that on a credit card debt of £10,000 you would be paying £200 a month in interest alone and a total of £2,400 a year on interest repayments. This is without taking into account any repayments made over and above that £200 monthly amount to reduce the amount you owe.
So, for example, say in the case above the minimum monthly repayment was £250. This would mean that of that payment each month £200 would be paid straight to the credit card company in interest repayments alone and £50 used to reduce your balance, bringing it down to £9,950.
It is also worth noting that the APR is calculated on the level of outstanding debt, not on the credit facility that was offered to you. So if you have a credit card with £6,000 available but have only spent £2,000 of that, you will only be charged interest on the £2,000 of credit you have used.
Dealing with debt problems, what is the best way?
The key to dealing with this issue is to recognise the signs of problems as soon as possible and to deal with the solution practically. Ignoring the issue will not make it go away and can often make a problem worse.
The first step to take is to call the companies that you have debt with and ask for their advice. They may be able to provide you with the help and information you need to take positive action and put you in touch with professional organisations that are there to help people who are having problems making repayments or are making late payments.
Companies and advisory bodies are there to help people with debt problems achieve workable, affordable and manageable solutions to the problem, which is often to the benefit of everybody. So remember if you have a debt problem, it is action - not inaction - that will lead to it being resolved.
Are credit cards really safe to use online?
Many people are now using the power of the Internet to order a great many items, from the latest television to their weekly shop. However, fraudsters and con men can and do attempt to fraudulently obtain credit card details by deception. Phishing emails are one such example, where a supposedly real email from a company or bank arrives asking you for sensitive information for some important sounding purpose. Once they have this information, the fraudster then uses it to access your account. This can result in something merely annoying, such as sending spam emails to considerably worrying, such as using your credit cards or bank details fraudulently.
Fortunately, a number of safeguards are in place allowing customers to use their credit cards online in a secure and safe manner. Many websites display a locked padlock to show they are secure and have the prefix ‘https’. If you are in any doubt that a site is not genuine, then do not give your details out and use strong anti-virus software. It really can be as simple as that to prevent online credit card fraud.
Avoiding problems with debt can be achieved by gaining a greater understanding of credit and what it actually means to you and your situation. Making credit clearer is the best way to achieve this and the first step in gaining total control over your finances.