Avalanche method: When you prioritize paying off your debt with the highest interest first while making minimum payments on the rest of your debts. Once the first debt has been repaid, move on to the next highest interest debt. Repeat this process until all your debts are paid off. This method allows you to save money on interest payments and pay your debts more efficiently.
Balance transfer: A method of shifting debt from one credit card to another. Many people use balance transfers to make use of a card with a significantly lower promotional interest rate. It’s done by simply opening a new credit card account designed for the best balance credit. It’s important to keep in mind that a balance transfer fee is charged when you move your existing balance to a new credit card. Credit card companies can apply this fee even if you get a zero-percent rate offer.
Credit card: A physical or virtual payment card issued by a financial institution, primarily a bank or credit union, that provides the cardholder with access to a line of credit. It is a common example of revolving debt, which distinguishes it from installment loans like a mortgage or auto loan.
Credit score: A three-digit number that lenders use to determine how likely you are to repay what you borrow. Three leading credit score companies provide this number, so it’s common to hear it referred to as a TransUnion, Equifax, or Experian credit score. The score is determined based on your credit report, a complete record of how you have managed debt throughout your history.
Credit utilization: How much credit you typically use compared to your credit limits.
Credit variety: The types of credit accounts you hold and the length of time you’ve had them.
Debit card: A payment card that draws funds directly from the cardholder’s linked checking account in real-time. Unlike a credit card, which accesses a pre-approved line of credit, a debit card uses money the cardholder already has, providing a more immediate form of payment that does not create debt. For this reason, it is often described as a digital check or an electronic funds transfer at the point of sale.
Debt lawsuit: A legal action initiated by a creditor or a debt collector to recover money they allege you owe. This typically occurs after a period of missed payments and unsuccessful attempts to collect the debt through calls and letters.
Debt Management Program (DMP): A structured repayment plan established by a non-profit credit counseling agency to help individuals pay off unsecured debts, usually at lower interest rates and with a single monthly payment.
Debt settlement: A for-profit company negotiates to settle debts for less than owed, often instructing you to stop payments while saving funds in a separate account. This approach may harm your credit, invite collection actions, and lead to tax liabilities on forgiven debt. It is a last-resort option for those unable to make even minimum payments. Settlement may appear cheaper in the short term, but it carries long-term financial and legal risks.
Debt-to-asset ratio: Also referred to as the total debt-to-total assets ratio, is a solvency ratio that measures the proportion of a company’s total assets financed by debt. Simply stated, it shows how much of what a company owns is funded by creditors.
Debt validation letter: A debt validation letter is a document that debt collectors are required to provide by law, detailing: the amount of debt, the creditor to whom the debt is owed, and your rights regarding the dispute over this debt. To keep it simple: A debt validation letter is what a debt collector sends to validate a debt.
Debt verification letter: After receiving a debt validation letter that needs to be disputed, send one back. With any debt validation letter comes a debt verification letter/dispute letter. It is important to manage and dispute debts you are unaware of or believe to be inaccurately reported. To keep it simple: A debt verification letter is what you send in return to verify or formally dispute the information in the letter.
Disbursement: The release of money from a fund. This can cover everyday expenses like rent, loan interest, and cash payouts to shareholders. Governments, organizations, or even individuals can make disbursements to cover expenses, pay employees, or fund projects. Disbursement ensures your money goes to where it needs to.
Depression: A more extreme and prolonged version of a recession, characterized by years of economic hardship, mass unemployment, and a collapse in economic output.
Financial wellness: A holistic approach that combines physical, mental, and financial health. It involves managing your money effectively while maintaining balance with other aspects of your life. Utilize resources and tools to support you on your financial wellness journey.
Inquiries for new credit: How often you apply for new lines of credit or loans.
Partial loan: Given in installments, where the loan is paid out in smaller amounts spread out over time, like a monthly payment plan.
Recession: A significant decline in economic activity spread across the economy, typically lasting from a few months to a couple of years.
Snowball method: A repayment strategy where you focus on paying your smallest debt first while making minimum payments on larger debts. Once that debt is paid, roll over that amount to pay the next smallest debt. Keep repeating this process until you have repaid all your debts. This method will work for you if you prefer small wins.
Total loan: A lump sum where you receive the entire loan amount at once.
