Friday, August 23, 2013
Say what? Financial terms decoded
Let's face it. The financial world can be a complicated, mysterious place.
So it's understandable that eyes might glaze over at the sound of an unfamiliar financial term.
But there are some words we should all understand to stay money ahead in life.
The staff at Dupaco shared some of the commonly misunderstood financial terms they often help decode for members.
"Education is a big part of what Dupaco is about," says Aaron Plein, vice president, branch manager/service delivery at Dupaco's First Avenue branch in Cedar Rapids, Iowa. "We want to teach our members to be wise consumers."
Here's a simplified look at four commonly misunderstood terms:
- Power of attorney: When you have power of attorney, you are granting a designated individual, or attorney-in-fact, the legal authority to make decisions and transactions on your behalf in certain situations. For example, if you were hospitalized and unable to manage your bills, your attorney-in-fact could make transactions on your accounts for you. HOWEVER, your power of attorney is no longer valid upon your death. "A lot of people think their power of attorney can take care of things after they die, and that's not the case," says Tami Rechtenbach, vice president of member services at Dupaco. "People should always have a plan on their accounts for what's going to happen after they die."
- Account card: When you set up a trust account, you must retitle your financial accounts. Otherwise, the trust is worthless. "Just because you have the document drawn up doesn't mean the accounts are in that trust. A lot of people don’t realize the account card trumps the will," Rechtenbach says. If you set up a trust account, you need to bring your trust agreement to your financial institution to make sure your financial accounts are in your trust. "We have to see their trust document to do that," Rechtenbach says.
- Flipped: In today's world, many car owners are upside-down, or flipped, on their car loans. In other words, they owe more than what their vehicle is worth. "You see so many applications for loans out there where the new vehicle is only worth $30,000, but they have to borrow $35,000 because they have to pay the negative equity off in their trade," says Bob Nicks, indirect senior lending consultant at Dupaco. If you find yourself in this predicament, Nicks recommends trying to keep the vehicle for another year to continue paying down the loan. Or, if you can afford a higher monthly payment, pay more each month to eliminate the negative equity. Car owners can help prevent becoming flipped by staying within their means and sticking with a shorter loan term. "People are stretching out their payments longer so they can afford the payment, but they're trading too soon," Nicks says.
- Capacity: Taking care of your credit score is an integral part of a healthy financial life. And your capacity – how much credit you have at your disposal versus how much credit you are using – makes up 30 percent of that score. "When we talk to members about their credit score, everyone knows they're supposed to pay their bills and debts on time," Plein says. "But a lot of consumers don't understand the importance of keeping their balances down on their credit card." Capacity works in your favor when you stay below 20 to 30 percent of your available line of credit.
By Emily Kittle