35 Money Questions You Should Be Able to Answer By 35
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Credit

1. What’s a credit score?
A credit score is a three-digit indication to potential lenders of your ability to repay money you borrow. The FICO score is the most widely used, ranges from 300 (womp) to 850 (rock star) and is calculated based on five factors: payment history, credit-utilization ratio, length of credit history, the mix of credit types in use and number of credit inquiries.

2. What’s a good credit score, and why is it important?
An excellent FICO score includes anything from 750 up, and the next rung down—700 to 749—is considered good. However, credit pro John Ulzheimer, formerly of FICO and Equifax, points out, the best score is the one that “gets you approved for the best deal the lender is offering.”

You may qualify for a loan with a good score, but you may need an excellent score to qualify for the lowest interest rates on that loan. Credit card companies and mortgage lenders typically reserve their lowest rates and largest loans for people who have exhibited a quality track record when handling credit.

3. How can I improve my score?
Payment history accounts for the biggest portion of your FICO score—35 percent—so submitting on-time payments is the best way to boost your score. Clearing credit card debt, thereby decreasing your utilization ratio (the amount of debt you owe compared to your total credit limit), is another way to raise your score.

“If you’re able to pay off or pay down your credit card debt, you could see a significant improvement in less than one month,” Ulzheimer says.

4. How can I see what’s on my credit report?
Keeping tabs on your credit report helps to prevent errors and fraudulent activity from going unnoticed and sinking your score. “The only way you’ll find errors on your credit reports is to actually review them,” Ulzheimer says. “The credit reporting agencies don’t have any obligation to correct errors unless you ask them to do so.”

Visit AnnualCreditReport.com to order a free report once every 12 months from each of the major credit bureaus: Equifax, Experian and Transunion. Be sure to review each one, as they may include different information.

Debt

1. What’s an APR?
This acronym stands for annual percentage rate—as in the interest rate credit cards charge on unpaid balances.

Your APR can vary, as it’s based on the U.S. prime rate (set by the Federal Reserve) and whatever additional margin your lender tacks on. APR may also differ depending on transaction: For example, most cards charge different APRs for purchases, cash advances and balance transfers. Your lender may also offer low intro APRs that expire after a specified time period and higher penalty APRs for missed payments.

2. What do you owe, and how much interest are you paying?
To be in control of your money, you need to know exactly how much you owe, including outstanding credit card balances, as well as other debt like student loans, car loans and mortgages.

Not only that, but keep in mind what rate each debt charges, so you can calculate how much you’re paying in interest. (Note: If you pay off your credit card bill each month, you’re not paying interest at all—score!—but you are building credit.)

3. When will you be debt-free?
Knowing your numbers is only half the battle. You also need a solid repayment plan with an end date.

Schedules for repaying mortgages, student loans and auto loans are usually well laid out. If you have low rates, you may not need to bother paying them faster.

Credit cards are another matter. If you only pay the minimums, you’re wasting a lot of money on interest and likely not making a big dent in your principal. Check out a calculator from Bankrate, Credit Karma or MagnifyMoney to see how the timeline changes when you commit to paying more.

4. What’s the difference between debit, prepaid, credit and charge cards?
Drawing funds directly from your checking account with each swipe, “a debit card is essentially a plastic check,” Ulzheimer explains. “A prepaid debit card is cash in plastic form.” Load up the latter with funds and use it until you draw it down to zero.

On the other hand, money tied to credit and charge cards belongs to the bank, and you’re just borrowing it. With the former, the lender allows you to carry a balance—and profits from that graciousness. Charge cards must be paid in full by the due date or you risk incurring serious penalties.

This page has been updated to clarify the formula for calculating an asset’s net worth.

March 9, 2016

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