Budgeting_ Wise Use of Credit_Understanding Your Credit Report and Score

Budgeting 101

www.credit.org

Promoting Financial Literacy

Presented by: Lori Lamb - Credit Education Supervisor

Introduction

• Surveys show that only 12% of high school seniors learn about money management in school.

• Historically, it has been up to parents to teach their children the skills needed.

• Most of us learn these lessons the hard way after we’ve moved out on our own and made some mistakes.

Everything Begins with a Budget!

What is a Budget?

A budget (spending plan) is a plan to figure out

where your money goes before you get it.

Where to Begin When Creating a Budget:

– How much do you earn?

– How much do you spend?

• Your Job• Spouse’s job• Part time job• Rental, room & board received • Commission/bonuses• Tax refund div. by 12 mos.• Investments • Government benefits• Unemployment insurance • Child support/alimony• Support from family• Other

Track All Your Sources of Income

Track Your Spending!

• Track ALL spending for at least 90 days (Then make it a habit to track spending ALWAYS)

• Write down even the smallest expenditure

• Transfer expenses to a monthly tracking sheet to summarize and view by category

• Fill in your Net income for each week at the top.

• List what you are spending for each of the categories:– Housing– Food (both categories)– Insurance– Medical– Auto– Child Support– Taxes– Personal– Savings - Emergency

(10 – 15% of your Net monthly income)

Tracking Sheet for Monthly Expenses

List your income and expenses in

the week they are due

Total your expenses for each week,

then subtract

from income

Necessary Expenses

• Housing (include utilities, taxes, insurance)

• Food - groceries• Insurance (medical/dental/life)• Medical (co-pays, prescriptions)• Transportation (include car

insurance, gas, oil, maintenance)• Child care, alimony, child support• Taxes – monthly payments from

the prior year• Savings (3 – 6 months of your

total monthly expenses saved in your emergency savings fund) PAY YOURSELF FIRST!

Discretionary Expenses

• Personal care, clothing, jewelry• Entertainment (include cable TV!)• Miscellaneous

– Pet care– Gifts– Fast food– Magazine subscriptions – Hair/nail salons– Cell phone– Cigarettes/Alcohol– Charitable giving– Internet access

Periodic Expenses

• Insurance premiums

• Taxes

• DMV registration

• Gift giving

Debt Payments

• Credit Card Payments

• Personal Loans • Student Loans• Any Other Debt • Payments (e.g.

medical bills or collections)

Adding It All Up

• Now it’s time to put everything together and see whether your budget will work.

• If you are saving for a goal, you should include your short, mid and long term goals with your expenses in your budget as well!

Total Necessary Expenses

+ Total Discretionary Expenses + Total Debt Payments = Total Monthly Expenses

Now Let’s See if Your Budget Balances

Total Monthly Net Income

- Total Monthly Expenses

= Surplus (+) or Deficit (-)

If Your Expenses Exceed Your Income

• Work to find solutions – self managed plan.• Credit counseling can help if you have high debt

payments that are upsetting your budget. • Whatever you do, don’t cut into the 10% - 15% you

should be saving; you need to save up to three – six total month’s of expenses to get through an emergency

• Re-evaluate your budget periodically, especially when your income or needs change.

Self Managed Debt Repayment Plan

• For credit cards, don’t just send the minimum monthly payment; if you do, you’ll be paying toward that debt for the next 30 years on the creditors plan!– For example, say you owe:

$6000 Divide by 48 months = $125 per month• Debt free in 4 years!• If that amount is too large for your budget, you can

adjust the payoff term to something longer, like 5 years. (Then you’d only have to pay $100 per month.)

– Whatever you do, though, don’t stretch out the payoff term so much that you’re just making minimum payments again. The key is to not charge any more on the existing debt and stick to Your plan!

Self Managed Debt Repayment Plan Strategies

• Choose what best motivates and fits your goals:– Strategy 1: To see quick progress, pay off a small balance

account and snowball payment into the next credit card; e.g. moving from owing five creditors to only four creditors is a good motivator.

– Strategy 2: Trying to improve your credit scores. You’ll want to first pay down accounts with balances closest to their credit limits. That will improve your utilization ratio.(30% of your FICO score)

– Strategy 3: Pay higher interest rates cards first to see less of your hard-earned money going towards finance charges.

• Look for what fits and motivates you the most and then get going!

CARD LIMIT BALANCE APR PMT

Store Card 1 $1,800 $890 29% $18

Store Card 2 $1,500 $1,547 19% $31

MasterCard $3,000 $1,728 22% $35

Visa $5,000 $3,022 12% $60

CARD LIMIT BALANCE APR PMT UTIL

Store Card 2 $1,500 $1,547 19% $31 100%

Visa $5,000 $3,022 12% $60 60%

MasterCard $3,000 $1,728 22% $35 58%

Store Card 1 $1,800 $890 29% $18 50%

CARD LIMIT BALANCE APR PMT

Store Card 1 $1,800 $890 29% $18

MasterCard $3,000 $1,728 22% $35

Store Card 2 $1,500 $1,547 19% $31

Visa $5,000 $3,022 12% $60

Strategy 2 = Rank by highest utilization

Strategy 3 = Rank by highest APR

Strategy 1 = Rank by lowest balance.

Other Debts Issues

• Utility Bills - Work out a payment plan or ask for utility assistance program with your local Community Action Partnership.

• Student Loans – Look into deferment, flexible repayment options, consolidation loans, rehabilitation loans, Volunteer, and loan forgiveness.

• The IRS - You can apply to pay them over time; speak to a tax advocate.

• Child Support & Alimony - Go to court. Document that you can't pay.

• Secured Debt – Home or car – forbearance, repayment plan, voluntary repossession, or sell to pay off loan.

• For all debt, the key is communication. It's real important to call and say, 'I can't make this payment. I'd like to work something out.”

Increasing Income and Reducing Expenses Tips

Make sure you control your money, not the other way around. Rework your budget as needs, priorities, income, and expenses change.

• Try some of these tips to reduce expenses for – You and Your home– Your phone– Your transportation– When grocery shopping

The WISE USE of CREDIT

www.credit.org

Promoting Financial Literacy

Consumers owe more than $793.1 billion in revolving credit card debt, according to the latestFederal Reserve Statistical Release. So knowing the costs of credit card terms andconditions AND how to use credit cards wiselyare more important than ever!

http://www.federalreserve.gov/releases/g19/Current/

IntroductionIntroduction

The Cost of Credit Some of the most common terms and conditions you will find in a credit card agreement or offer: 

– Annual Fee - $15 - $300– Annual Percentage Rate (APR)– Balance Transfer Fee– Cash Advance Fee– Default Purchase Rate– Finance Charge– Grace Period– Insurance/Protection– Late Fee– Notice of Reaffirmed Debt– Overlimit Fee – since the Credit CARD Act of

2009, • customers must “opt in” to be able to go over

their limit– Reward Program Fee– Transaction Fee

The Cost of Using Credit

Based on these next average daily balance examples,

here is the interest you’ll pay each year. If you pay

only the minimum payment each month!

(This is only an estimate, not taking into consideration of any new

purchases or and other fees that may change the amount of your balance)

APR $1,000 $3,000 $5,000

9.0% $90 $270 $450

16.0% $160 $480 $800

24.9% $249 $747 $1,245

Annual Percentage Rate APRLet’s say the credit card has a 21% APR or interest rate

– Divide the 21% APR by 365 days in the year = .0575%• This is the daily rate the creditor will charge you each day that you carry a

balance on your purchases.– Example $500 balance x .0575% = $2.87– Day 1 $500 + 2.87 = new balance of $502.87– Day 2 $502.87 x .0575% = $2.89 $505.76– Day 3 $505.76 x .0575% = $2.90 $508.66– Day 4 $508.66 x .0575% = $2.92 $511.58– Day 5 $511.58 x .0575% = $2.94 $514.52– Day 6 $514.52 x .0575% = $2.96 $517.48– Day 7 $517.48 x .0575% = $2.98 $520.46– Day 8 $520.46 x .0575% = $2.99 $523.45

• Each day for 28 or 30 days this goes on…

– If you do not pay your entire (purchases) balance off before grace period (usually 20 days from billing) you will have to pay all this interest!

Types of Credit Card Ownership – Individual – only

person liable for debt• Reports to credit

report – Joint/Co-applicant –

both liable for debt• Reports to both credit

reports– Authorized

User/Buyer – not liable for debt• Reports to credit

report – is used in the scoring

Institution Credit

Card Type

Purchase APR

Fixed or Variable

Annual Fee

Purchase Late/ Overlimit

Fee

Purchase Grace Days

Cash Advance

APR Fixed or Variable

Cash Advance

Fee

Rewards Program

Rewards Program

Fee

Example: Bankcard

Visa18.24% Variable

$0 $39

$3520 days

from billing28.24% Variable

3%/$10 min

Yes $20

Example: Bankcard Mastercard

9.00% Fixed $0

$39 $35

20 days from billing

28.24% Variable 3% No $0

Example: Bankcard Mastercard

0% for 1Year 12.99% Fixed $0

$39 $35

20 days from billing

22.99% Variable

3%/$10 min Yes $0

Comparing Costs Comparing Costs

How Much Debt Can You Handle?

Experts say to keep your monthly consumer debt payments down to

around 10 – 15% of your total net monthly income.

The absolute maximum is 20%.

This includes payments due on credit cards, personal, school, and car

loans, but not first mortgages, home equity loans or rent.

• If you are single: 20%• If you and your spouse work: 20%• If you have children: 15%• If you are retired and on fixed income: 10%

• To calculate your monthly payments use Springboard’s financial tools http://www.credit.org/resources/Financial-Tools-Worksheets-Calculators/how_much_do_you_owe

High Cost of Ignoring Your Bills

– Your creditors will charge late fees of $39 or less per month

– Finance charges will continue on the balances of your accounts

– The creditors will likely raise your annual percentage rate (APR) to approximately 33% because you have not honored your contract.

– Once your balances exceed your credit limit, if you have not opted out, you will be charged an over the limit fee of $29 or more each month, and all that adds up.

How to Reduce Credit Card Debt

– Find out how much you owe– Pay more than the minimum– Send your payment in as soon

as bill arrives– Refuse your card issuer’s offer

of a minimum payment of zero– Refuse your card issuer’s offer

to skip a payment for a month– Consolidate your cards –

between existing cards– Refinance your high rate card –

ask your card issuer if they can lower your interest rate

Before You Swipe!!!

Ask yourself these important questions:

1. Can I pay the entire purchase off in full when I get home? (online or over the phone) If the answer is NO you may

go to question 22. Can you pay the entire purchase

off in full before your grace period ends (20 days from your billing date) If the answer is no Don’t swipe the card!!!

Understanding Your Credit Report & Score

www.credit.org

Promoting Financial Literacy

Introduction

Our credit reports determine our accessto:

– Housing (Buying or Renting)– Unsecured credit lines (Credit Cards)– Insurance (for Home or Car)– Cable– Utility and Cell phone services– Employment

Credit History is Your Financial DNA

The importance of good credit– More employers are reviewing credit reports of

prospective employees: Employment fields, such as financial services, gaming, military and law enforcement, continually monitor their employees’ credit reports.

– Insurance companies review your credit report when you apply to insure you home and/or car.

– Without good credit, it is very difficult to obtain a credit card, which is helpful if an emergency arises.

– Many businesses prefer the use of credit cards.

Credit Reports

• What information is contained in my credit report?– Identifying Information– Public Record – Credit Information– Inquiries– Your Rights– How to Dispute

Inaccuracies

Your Free Credit Report

• You should review your credit reports at least once a year.

• You are entitled to one free report from each bureau every 12 months from:

www.annualcreditreport.com

877-322-8228• Scores are not free!

What Affects Your FICO Score?

Simple Ways to Improve Your Credit Score

• Review credit reports regularly• Make your payments on time/pay • Set-up Payment reminders or

automatic payments• Pay off unpaid debts -collections• Keep balances below 50% of line

of credit or less (Lenders prefer 25% or less)

• Keep old credit active – use the card at least once or twice a year to keep active

• Demonstrate a mixture of credit: Revolving, installment, mortgage

• Limit inquiries

Disputing Errors

What can you dispute?

Anything that is not yours (reported to the wrong credit report or id theft)

Anything that is reported inaccurately

Anything that is past the statute of limitations for reporting

DateYour NameYour AddressYour City, State, Zip Code Complaint DepartmentName of Credit BureauAddressCity, State, Zip Code Dear Sir or Madam:I am writing to dispute the following information in my file. The items I dispute also are encircled on the attached copy of the report I received.This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.Sincerely,Your nameEnclosures: (List what you are enclosing)

Statute on Limitations for Reporting– Chapter 7, 11 or 12 bankruptcies 10 years from the date

filed

– Chapter 13 bankruptcy filings 7 years from date paid

– Chapter 13 bankruptcy that is not completed 10 years

– Bankruptcies voluntarily dismissed 7 years

– Civil judgments 7 years from the date filed

– Unpaid tax liens Indefinite

– Paid tax liens 7 years from date paid

– Collections paid or unpaid 7 years from date of the initial missed payment

– Charge off accounts 7 years from date of the initial missed payment

– Credit accounts 7 years from the date of initial missed payment

– Inquiries 2 years

Basics of sending dispute letters

Some disputes may be done online, if unable

to, then follow these steps in writing:

1. Provide a copy of your photo id, social security card, and proof of address (such as a utility bill, pay stub or bank statement)

2. Provide copies of any documentation supporting your dispute

3. Keep originals send copies 4. Send all letters certified mail or return

receipt5. Keep a separate file for each of the credit

reporting agencies6. Respond quickly7. Know your rights

Resources

– http://www.myfico.com/CreditEducation/ - FICO’s credit education center.

– http://www.channelone.com/life/credit/ - play the credit card simulator game, or take credit 101 quiz.

– www.whatsmyscore.org – everything you need to know about credit: buying a car, credit 101, FICO score estimator.

– www.ftc.gov – your rights, identity theft resources or to file a complaint

– http://www.credit.org/resources/Tools - Springboard’s financial tools.

Thank You!

Springboard Nonprofit Consumer

Credit Management

800-449-9818

www.credit.org

Lori.Lamb@credit.org