DEBT MANAGEMENTDEBT MANAGEMENT

Melissa WiseMelissa Wise

First Citizens National BankFirst Citizens National Bank

DEBT MANAGEMENT TOPICSDEBT MANAGEMENT TOPICS

CreditCredit Credit ScoresCredit Scores Using Credit WiselyUsing Credit Wisely Credit CardsCredit Cards Debt to Income RatioDebt to Income Ratio BudgetsBudgets Debt Management ProgramsDebt Management Programs

According to Citibank, “There are According to Citibank, “There are presently 5 to 7 million Americans presently 5 to 7 million Americans who are financially overextended.”who are financially overextended.”

WHAT IS CREDIT?WHAT IS CREDIT?

Credit is when goods, Credit is when goods, services, or money is services, or money is received in exchange received in exchange for a promise to pay a for a promise to pay a definite sum of money definite sum of money at a future date.at a future date.

CREDIT CREDIT ADVANTAGESADVANTAGES

ConvenientConvenient Useful for emergenciesUseful for emergencies Often required to hold a Often required to hold a

reservationreservation Ability to purchase Ability to purchase

expensive items soonerexpensive items sooner Eliminates the need to Eliminates the need to

carry large amounts of carry large amounts of cashcash

DISADVANTAGESDISADVANTAGES Paying interestPaying interest Additional fees are Additional fees are

commoncommon Temptation to Temptation to

overspendoverspend Can cause large Can cause large

amounts of debtamounts of debt Identity theftIdentity theft

CREDIT SCORESCREDIT SCORES

What is a credit score or FICOWhat is a credit score or FICO®® score? score? A prediction of how likely you are to pay your A prediction of how likely you are to pay your

billsbills A number between 300 and 850 derived from A number between 300 and 850 derived from

many different factorsmany different factors A number that drives the approval of credit A number that drives the approval of credit

extensions and the interest rate you pay on extensions and the interest rate you pay on those extensionsthose extensions

CREDIT SCORE KEY FACTORSCREDIT SCORE KEY FACTORS

The FICOThe FICO® ® scoring model looks at more scoring model looks at more than 20 factors in five categories.than 20 factors in five categories. How you pay your bills (35%)How you pay your bills (35%) Amount of money you owe and the Amount of money you owe and the

amount of available credit (30%)amount of available credit (30%) Length of credit history (15%)Length of credit history (15%) Mix of credit (10%)Mix of credit (10%) New credit applications (10%)New credit applications (10%)

RANGE OF CREDIT SCORESRANGE OF CREDIT SCORES

The following are some basic guidelines The following are some basic guidelines for interpreting a credit score:for interpreting a credit score: 620 and below – Poor credit620 and below – Poor credit 621-690 – Fair credit621-690 – Fair credit 691-720 – Good credit691-720 – Good credit 721-750 – Good to excellent credit721-750 – Good to excellent credit 751-800 – Excellent credit751-800 – Excellent credit 801 and above – Nearly perfect credit801 and above – Nearly perfect credit

Fair Isaac reports that the American Fair Isaac reports that the American public’s credit scores break out along public’s credit scores break out along these lines:these lines:

CREDIT SCORE PERCENTAGE

499 and below 2 percent

500-549 5 percent

550-599 8 percent

600-649 12 percent

650-699 15 percent

700-749 18 percent

750-799 27 percent

800 and above 13 percent

THINK OF YOUR CREDIT REPORT THINK OF YOUR CREDIT REPORT AS A SECOND RESUME!AS A SECOND RESUME!

A credit report contains information about where A credit report contains information about where you work, live, how you pay your bills, whether or you work, live, how you pay your bills, whether or not you have filed bankruptcy and even if you not you have filed bankruptcy and even if you have ever been arrested or sued.have ever been arrested or sued.

You can check your credit score for free up to three times You can check your credit score for free up to three times annually at http://wwwannualcreditreport.com!! annually at http://wwwannualcreditreport.com!!

USING CREDIT WISELYUSING CREDIT WISELY

For decades, society has promoted the idea For decades, society has promoted the idea of “BUY NOW, PAY LATER.”of “BUY NOW, PAY LATER.”

This is a good concept for some types ofThis is a good concept for some types of

purchases and a bad concept for many purchases and a bad concept for many

other types of purchases.other types of purchases.

USING CREDIT WISELYUSING CREDIT WISELY

Good Credit PurchasesGood Credit Purchases Buying a house on credit is a smart move as Buying a house on credit is a smart move as

home values rise quickly and you can gain home values rise quickly and you can gain equity through appreciation.equity through appreciation.

Financing an education is a good investment Financing an education is a good investment in the future. Your earning potential will in the future. Your earning potential will eventually outweigh the cost of tuition, and eventually outweigh the cost of tuition, and educational loans are usually at a very low educational loans are usually at a very low interest rate.interest rate.

Buying a car can also be a good credit Buying a car can also be a good credit purchase. It is important to not get caught up purchase. It is important to not get caught up in buying a car for more than you can afford.in buying a car for more than you can afford.

USING CREDIT WISELYUSING CREDIT WISELY

Bad Credit PurchasesBad Credit Purchases Credit card debt and other consumer debt is Credit card debt and other consumer debt is

the worst type of debt. Interest rates and fees the worst type of debt. Interest rates and fees on borrowing money this way will be the on borrowing money this way will be the highest of all, mostly because there is rarely a highest of all, mostly because there is rarely a tangible item as collateral.tangible item as collateral.

Financing a car for longer than the life of the Financing a car for longer than the life of the vehicle can also be an unwise credit decision. vehicle can also be an unwise credit decision.

CREDIT CARDSCREDIT CARDS

Credit cards are a great concept, but Credit cards are a great concept, but they end up bringing financial ruin to they end up bringing financial ruin to many people who do not use them many people who do not use them properly.properly.

TIPS WHEN USING CREDIT CARDSTIPS WHEN USING CREDIT CARDS

Never use credit cards as extra money. Never use credit cards as extra money. Always allocate money from your current Always allocate money from your current funds or monthly income in order to funds or monthly income in order to immediately payoff whatever you finance.immediately payoff whatever you finance.

Read the fine print on the agreement to Read the fine print on the agreement to make sure you are getting the best terms make sure you are getting the best terms available.available.

American consumers ages 20-29 carry an American consumers ages 20-29 carry an average of $5,781 in revolving debt.average of $5,781 in revolving debt.

This would take 11 years and 4 months to This would take 11 years and 4 months to pay off assuming an average interest rate pay off assuming an average interest rate of 13% and that minimum payments are of 13% and that minimum payments are made.made.

A credit card is a responsibility. The choicesA credit card is a responsibility. The choices

you make now will affect how much you payyou make now will affect how much you pay

for a car, your home, and any other loans orfor a car, your home, and any other loans or

credit cards you apply for.credit cards you apply for.

DEBT TO INCOME RATIODEBT TO INCOME RATIO

Debt to income ratios look at how much Debt to income ratios look at how much you owe in comparison to how much you you owe in comparison to how much you earn.earn.

It usually gives a good picture of your It usually gives a good picture of your financial well being.financial well being.

The lower your debt to income ratio, the The lower your debt to income ratio, the more money you have to spend on things more money you have to spend on things other than your monthly bills.other than your monthly bills.

DEBT TO INCOME CALCULATIONDEBT TO INCOME CALCULATION

Take the amount of money that goes to Take the amount of money that goes to paying monthly obligations (loans, credit paying monthly obligations (loans, credit cards, rent, etc.)cards, rent, etc.)

Divide that amount by your gross monthly Divide that amount by your gross monthly income (this is the amount before taxes are income (this is the amount before taxes are taken out)taken out)

Monthly debt payment / gross monthly income = D/IMonthly debt payment / gross monthly income = D/I

DEBT TO INCOME RATIODEBT TO INCOME RATIO

Most experts recommend that no more Most experts recommend that no more than 28% of your gross monthly income be than 28% of your gross monthly income be used to pay for your housing expenses used to pay for your housing expenses (including mortgage or rent, taxes and (including mortgage or rent, taxes and insurance).insurance).

They also recommend that your total D/I They also recommend that your total D/I be no more than 36% when paying all of be no more than 36% when paying all of your recurring debt.your recurring debt.

It is important to keep these D/I ratios in It is important to keep these D/I ratios in mind when acquiring new credit to ensure mind when acquiring new credit to ensure you are always an attractive credit risk to you are always an attractive credit risk to any financial institution.any financial institution.

Don’t find yourself being declined because Don’t find yourself being declined because you have taken on too much debt.you have taken on too much debt.

BUDGETSBUDGETS

A BUDGET HELPS YOU ORGANIZE A BUDGET HELPS YOU ORGANIZE YOUR SPENDING BY:YOUR SPENDING BY: telling you what money comes in, what money telling you what money comes in, what money

goes out, and where it goesgoes out, and where it goes helping you identify expenses that aren’t as helping you identify expenses that aren’t as

important to you so you can free up money for important to you so you can free up money for those that arethose that are

showing you where some changes might be showing you where some changes might be neededneeded

BUDGETING PITFALLSBUDGETING PITFALLSThere are three main reasons budgets fail.There are three main reasons budgets fail.

1. Negative attitude – Try not to think of a 1. Negative attitude – Try not to think of a budget as a financial diet. Try to think of it budget as a financial diet. Try to think of it as a means to an end.as a means to an end.

2. Lack of motivation – The best motivators are 2. Lack of motivation – The best motivators are generated internally. It is important to generated internally. It is important to honestly believe that budgeting can help you honestly believe that budgeting can help you meet your goals.meet your goals.

3. Unrealistic expectations – The reality is that 3. Unrealistic expectations – The reality is that budgeting is an endurance event. Those budgeting is an endurance event. Those who stick with it through thick and thin will who stick with it through thick and thin will come out ahead financially.come out ahead financially.

TIPS FOR CREATING A BUDGETTIPS FOR CREATING A BUDGET

Use a templateUse a template Add/delete categories as applicableAdd/delete categories as applicable Plan on paying more on higher interest rate Plan on paying more on higher interest rate

credit cards or loanscredit cards or loans Prioritize your spending by determining wants Prioritize your spending by determining wants

versus needsversus needs Have both a positive attitude and a positive Have both a positive attitude and a positive

ending balanceending balance Put any annual payments into monthly payment Put any annual payments into monthly payment

figuresfigures

Hypothetical budget assuming:Hypothetical budget assuming: Salary of $35,000Salary of $35,000 Average credit card debt of $5,781 with a Average credit card debt of $5,781 with a

minimum payment of $231minimum payment of $231 Student loan debt of $18,000 with a payment Student loan debt of $18,000 with a payment

of $147of $147 Rent of $400Rent of $400 Car payment of $315Car payment of $315

DEBT MANAGEMENT PROGRAMSDEBT MANAGEMENT PROGRAMS

If you do get yourself into a financial If you do get yourself into a financial nightmare, there are ways to get back on nightmare, there are ways to get back on track successfully and without ruining your track successfully and without ruining your credit forever.credit forever.

Debt management programs, which are Debt management programs, which are also known as credit counseling agencies, also known as credit counseling agencies, can save you a lot of money and years of can save you a lot of money and years of paying on your credit cards if you choose paying on your credit cards if you choose a good one.a good one.

DEBT MANAGEMENT PROGRAMSDEBT MANAGEMENT PROGRAMS

A good debt management company is aA good debt management company is a

third party who will contact your creditors to:third party who will contact your creditors to: Lower your interest rateLower your interest rate Negotiate a payment structure with the Negotiate a payment structure with the

creditor that you can affordcreditor that you can afford Determine a realistic amount of time for your Determine a realistic amount of time for your

debt to be eliminateddebt to be eliminated

KEYS TO DEBT MANAGEMENT PROGRAMSKEYS TO DEBT MANAGEMENT PROGRAMS

Key factors to keep in mind when selecting aKey factors to keep in mind when selecting a

good debt management program:good debt management program: Your current creditors lower your interest rate Your current creditors lower your interest rate

and not just your payment.and not just your payment. It is very important you continue to receive It is very important you continue to receive

your statements to ensure no payments are your statements to ensure no payments are past due.past due.

It is not a loan. The company collects the It is not a loan. The company collects the payment from you and allocates it to your payment from you and allocates it to your creditors.creditors.

DEBT MANAGEMENT PROGRAMSDEBT MANAGEMENT PROGRAMS

For someone who gets into a bad financial For someone who gets into a bad financial position, these programs can be the key to position, these programs can be the key to getting back on track.getting back on track.

Most programs structure your payments to Most programs structure your payments to eliminate your debt in 4-5 years.eliminate your debt in 4-5 years.

They make it so no new revolving They make it so no new revolving accounts can be opened while accounts can be opened while participating in the program so once you participating in the program so once you have paid the debts off, you can have a have paid the debts off, you can have a fresh start.fresh start.

Learning to make wise decisions with Learning to make wise decisions with your purchases, investments, and your purchases, investments, and debt can be the key to your success.debt can be the key to your success.

RESOURCESRESOURCES

http://ezinearticles.comhttp://ezinearticles.com

http://www.saukvalley.comhttp://www.saukvalley.com

http://www.bankrate.comhttp://www.bankrate.com

http://en.wikipedia.orghttp://en.wikipedia.org

http://www.moneyinstructor.comhttp://www.moneyinstructor.com

http://www.citibank.comhttp://www.citibank.com

http://www.mortgagenewsdaily.comhttp://www.mortgagenewsdaily.com

http://www.takechargeamerica.orghttp://www.takechargeamerica.org