April is Financial Literacy Month – Understand the Cost of Credit

_financial_literacyIf you are reading this series of articles for the first time, April is Financial Literacy Month. The website has a 30 Step Program to help you become more knowledgeable about your finances. I have written a bunch of articles so far that you may want to go back and read.

I can’t think of a subject that people need to learn more about than Step 27: Understanding The Cost of Credit. So many people enter into credit agreements without fully doing their homework. The results – sometimes years of paying for a mistake.

If you have not taken the pledge on the Financial Literacy Month website, keep this next statement close to heart.  You should commit to understanding everything about the credit terms you agree to from this point forward. 

It doesn’t matter if it’s a credit card, a car loan or a mortgage. The following terms addressed on the site are going to pop up. It’s your responsibility to know this stuff. There will be a test later! (a real life test)

Interest rate or APR – This is the interest rate you are paying on the loan or the money borrowed.

Length of the loan – keep in mind the longer the loan, the lower the payment, but you will pay more interest

Finance charge – total cost of the loan stated in dollars

Credit limit – You’ve probably heard this term when you exceed yours, it is the max you can borrow

Minimum monthly payment – this is the smallest payment your creditor will take

Grace period – this is the number of days you have to pay the bill in full before interest is charged

Over the limit and late fees – hope that you never see these, they are the charges you’ll get if your late or go over your limit

I discussed reducing debt in a previous article. If you don’t owe anyone, give yourself a pat on the back. Do your homework before you take on any debt. We’re coming down to the end of the 30 Steps I’ve been discussing. My wish is that you get familiar with the basics and eventually master them.

Next up we’ll discuss assembling your financial team and my thoughts on mandatory financial education in our high schools. Don’t miss it!