How does any bank decide on whether (or not) to lend you a personal loan? They look at your credit score. Ranging between 300 and 850, your credit score simply indicates your current financial position and your ability to repay your loans or bills (example, your credit card bill). The higher the number, the better is your credit score.
How is credit score determined? By using multiple factors including payment history, outstanding loan amounts, and current income.
If you have been struggling to pay your bills on time, you could be having a low credit score. Don’t start to worry – simply make your due payments on time and your credit score will improve.
2. Student loan
As the name suggests, a student loan is a form of financial assistance given to high school or college students to pay for any education-related expenses like tuition fees, stationery expenses, or any living expenses.Unlike other loans, student loans are offered at relatively low interest rates. As a student servicing this loan, you are not expected to make any loan repayments for a fixed grace period or until you have completed your education.
3. Debt to Income (or DTI) Ratio
What percentage of your income are you currently spending? Your Debt to Income Ratio is a good measure of that. To calculate it, you need to divide your current monthly expenses – including bill payments, shopping bills, house rent, and everything else – by your monthly income (or take-home salary). The lower your DTI, the better is your financial position.
4. Life insurance
In simple language, life insurance is a form of insurance that pays out an assured sum of money on maturity or following the insured person’s death. There are namely two types of life insurances – Term and Whole Life. Which is better for you? Term insurance is a “pure” insurance in the sense that it can be claimed only on the death of the insurer – it has no investment value. On the plus side, you pay a lower premium for term insurance – if you start early in life.
5. Stock market
When you own a company stock, you are a shareholder in that company. What is a stock market? A trading place where you can buy or sell stocks of listed companies. If a company is performing well, its stock price would typically increase at the stock market – and the reverse when the company is not doing so well in business.
6. Return on Investment (ROI)
ROI is used to measure whether you have made a “profitable” or “loss-making” investment. You can calculate it by dividing the returns you have earned on any investment by the overall cost of the investment. For example, if you have invested Rs. 1000/- on any asset and earned back Rs. 1500/-, you have made an ROI of 50%.
7. Compound interest
Compound interest – or the principle of compounding – is how you can increase your net worth.
How does it work? If you are earning a nominal interest of 5% on your investment of Rs. 1000/- each year, compounding reinvests your interest amount (in this case, 50/-) and adds it to the principal amount (increasing it to 1050/-) before calculating the paid interest for the following year (in this case, 5% interest is paid on Rs. 1050/- instead of 1000/-).
These are just seven of the basic financial terms that you should be aware of – as you start planning for a healthy financial future. Don’t stop at these – keep learning about more finance-related terms like liquidity, dividends, mutual funds, diversification, and so on. Learn more and start investing early in life – so that you can reap the rich financial benefits later on.