16 Important financial terms everyone should know, but most people don't understand

Credit can be a dangerous thing if not managed well. Having worked in the banking industry for a few years, it's quite sad to see how people make uninformed financial decisions and how this lack of knowledge can have a negative impact on their lives. The saddest part of this is the fact that I was once one of them. I, however, had the opportunity to gain more knowledge about credit life and there are a few important terms and phrases that I think everyone should know before they are even old enough to obtain credit. Contrary to majority's belief, credit is not bad, however a lack of knowledge and obtaining it recklessly can have terrible consequences.

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Here are some basic terms in finance

Credit Bureaus

They collect information from creditors and lenders about consumer financial behavior. This data is then provided to businesses that want to evaluate how risky it would be to lend money to a potential borrower.

There are currently four main credit bureaus – XDS, TransUnion, Experian & Compuscan

Credit Report

The individual records of consumer financial behavior kept by credit bureaus and provided to businesses when they want to evaluate potential borrowers.

Credit score

A credit score is a 3-digit number based on the information found on your credit reports. A higher credit score indicates a less risky borrower, and a lower credit score indicates a higher risk. You have more than one credit score.

FICO Scores

A specific credit score developed by Fair Isaac Corporation.

5 things that affect your FICO score:

-payment history 35%

-amounts owed 30%

-credit history length 15%

-type of accounts / mix 10%

-new credit 10%

Instalment Credit

Credit where you borrow a fixed amount and agree to pay a monthly installment until it is paid up.

Revolving Credit

Credit where you get a credit limit and make monthly payments based on how much of the credit you use.

Consolidation Loan

A process of combining debts into one loan or repayment plan. You can do this on your own, if you have enough money, via a credit provider or financial institution or a debt councilor.

Administration

If a court order was granted, the debtor's estate will be placed under administration (“administration order”). This means that an Administrator is appointed who will ensure that the debtor pays the amounts due in terms of a judgment or other financial obligations.

Bankruptcy/insolvency

A proceeding that legally releases a person from repaying a portion or all debts owed. Bankruptcy damages your credit for years and should only be considered as a last resort if you cannot repay your debts. There are different types of bankruptcy.

Sequestration

When a person (natural person, partnership, or trust) is no longer able to pay or manage their debt due to circumstances beyond their control, their estate can be surrendered by means of a court order. This can be either voluntary surrender or forced sequestration.

Liquidation

This is almost the same as sequestration, but only for companies or close corporations and the business is legally ended in this process.

“Sequestration”, “bankruptcy” “insolvency” and “liquidation” are all different terms, which in layman’s terms simply mean that a person or business is in such a bad financial state that creditors cannot get paid. The term “liquidation” refers to the bankruptcy of a company or close corporation and certain other legal entities. “The term “sequestration" refers to the bankruptcy of a natural person or a trust. “Surrender of estate” refers to the process where a natural person asks a court to declare him insolvent.

Liquidation experts

Debt review/ debt counselling

This is a debt relief measure that helps over-indebted consumers get out of debt. Instead of consolidating debt, the appointed debt counsellor restructures the consumers' debt so that more affordable terms may be applied.

Asset

An item with economic/ cash value that someone owns.

Liability

A debt amount that someone owes to another person, for example credit card, store card, or loan.

Power of attorney (POA)

A legal document, whereby a principal (person giving the authority to act on his/her behalf) gives authority to an agent (person acting on behalf of the principal) to act on his/her behalf. There are 4 types of POA.

Executor

An executor is the person who administers a deceased person's estate upon their death.

You can also read my blogs on 10 Things I wish I knew before 30 and Simp le steps for people who want financial freedom to enjoy happier & healthier living.

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These terms are quite basic, however, can be quite confusing if you don't know what it means. I hope this information helps you on your road to financial success.

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