Don't Let These Financial Terms Scare You

October 31, 2019

Have you ever been intimidated by financial terms you’re unsure about? Many people have the same fearful reaction when they hear terms like “credit check,” “home equity loan,” and “line of credit.” Let’s look into the meaning of these terms to better understand their benefits and alleviate fear.

Credit Checks
Credit checks are used by financial institutions, landlords, and insurance companies to determine how likely you are to make payments. There are two types of credit checks: soft pulls and hard pulls.

  • A soft pull occurs when a company reviews your credit to see if you qualify for loans, such as a credit card limit increase or a loan preapproval. Requesting your credit report from each of the credit bureaus is also considered a soft pull. Soft pulls are not considered “hits” to your credit and they do not negatively affect your credit score because you have not applied for a loan.
  • A hard pull occurs when you actually apply for a loan, including a credit card or auto loan. Hard pulls can affect your score, and each time you apply for a loan it’s considered a “hit.” The more “hits” – or inquires – you have, especially in a short timeframe, the greater chance it can negatively affect your score. A good thing to note is that your consent is required for hard pulls to occur.

Home Equity Loan
If you own a house, you should be aware of home equity loans. Home equity is the amount left after you subtract what you owe on your mortgage from the current value of your home. You can borrow against the equity in your home for various things such as home repairs, purchasing a new car or other large purchases. But, like other loans, it must be repaid.

The more equity you have in your home, the more you can borrow. For example, if the total value of your home is $350,000 and your mortgage balance is $185,000 (the amount you still owe), your lender may allow you to borrow up to 80% of your home’s value.

$350,000 x 80% = $280,000 (amount of equity in your home)

$280,000 - $185,000 = $95,000 (possible loan amount)

Line of Credit
A line of credit is a preset amount of money that an institution has agreed to lend you. A credit card is a great example of a line of credit. It can be used to buy items you need, and then you pay back the amount borrowed each month. If you don’t pay your balance off in full each month, you will be charged interest on the balance you owe.

See, that wasn’t so scary! If you want to learn more about financial terms, call us or visit a branch and our financial experts will be happy to help you.

Tags: Learn About Credit, Tips and Tricks, Home Ownership