Guide to Personal Finances

The bare basics for beginners

Coos Health & Wellness2015

Guide to Personal Finances

Table of Contents

Your Credit Score………………………………………………………………………………….2

Credit Cards………………………………………………………………………………………….5

Savings and Emergency Funds…………………………………………….……………….6

Managing your Debt…………………………………………………………………………….7

Credit Union vs. Bank……………………………………………………………………………8

Predatory Lending………………………………………………………………………………..9

Payday Loans……………………………………………………………………………...9

Rent-to-Own……………………………………………………………………………..11

Basic Personal Finance Terms…………………………………………………………….12

Financial Resources…………………………………………………………………………….15

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Guide to Personal Finances

Your Credit Score

What is a credit score?

Your credit score can mean the difference between being approved or denied for a loan or rentals housing. It can also mean the difference between being approved for a loan with either low or high interest rate. A high interest rate would mean that scheduled payments for the loan would be much higher than somebody making the same payments with a low interest rate.

A credit score is a 3 digit number that is linked to your social security number and is designed to assess whether you tend to be good with your bill payments or tend to leave you bills unpaid or late. Scores range from 300-850 and the way the scores are assessed can be broken down into these five categories:

What is good credit and bad credit?

The below graphic shows what ranges of credit scores are poor, fair, good, or great. This is based off of your FICO credit score. You can check your credit score annually for free off of various website such as www.annualcreditreport.com

How to improve your credit:

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Guide to Personal Finances

Consistently pay bills on time. If your bank or credit union is online, set up automatic payments for the minimum amount on your account. If that is not an option, set up a reminder on your phone or something you look at regularly (calendar, planner, etc.) so that you don’t miss the deadline.

Check your credit score annually at a website like www.annualcreditreport.com to make sure that there aren’t any mistakes such as a paid-off debt appearing unpaid. If there are mistakes, contact the creditor to ask them to update your account. Every credit bureau has an application on their website to submit disputes.

Pay monthly balances on your credit cards in full.

Keep your balances low: just because your credit card allows you to spend as much as $5,000, do not spend that much. Creditors like to see a significant difference between what you’ve spent and what your credit card’s maximum balance is. Limit yourself to spending %30 of your available balance – so if your credit limit is $5000, than you would limit your spending to $1500.

Resolve outstanding debts collectors – nowadays, once you’ve paid off or settled a debt with a collection agency, it will not be calculated negatively to your credit score. Before, this would have been a negative ding on your record. Any unpaid bills will still be noted on your credit report for lenders to see.

What hurts your credit?

Evictions: If you are evicted, collection agencies will typically come after you for any back rent. Collection agencies will report to credit bureaus, and this will have a negative impact on your credit for 7 years.

Bankruptcy: Avoid filing for bankruptcy at all costs. Make sure you’ve evaluated any other emergency alternative (take up another job, work over time, take out a small loan, borrow from family members or close friends). Know that it is a serious state to be in, and should not be taken lightly (it is not an alternative way out of your debt). Bankruptcy will negatively impact your report for 10 years.

Criminal Convictions: Any criminal convictions will be on your credit report for the rest of your life.

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Guide to Personal Finances

Don’t have credit?

The best way to establish credit without having a credit history would be to open a credit card up with a bank or credit union.

1. First, however, you must establish a checking and savings account if you haven’t already done so. This will not reflect your credit score, but lenders would like to see that you have a few years of experience with managing your finances. If needed, ask a family member or close friend that has already established good credit to be a co-signer on your application. Understand that this would mean that both parties would be legally responsible to provide timely payments, and both of your credit scores would be affected negatively if you make late payments. Besides being legally responsible, it does not mean that your cosigner should have to make any payments on your behalf. Understand that it is not unreasonable for a family member or friend to decline your request to be your cosigner, especially if you have not been good with handling money in the past.

2. Second, apply for a credit card. Look for lowest interest rates possible.

Pay bills on time, stay within 30% of maximum credit limit, and stick with one card to establish history.

3. Apply for a small loan. This is different than credit cards since you make monthly payments with interest, called “set loan installments”. Some examples of installment credit would be to apply for a student loan, a car loan, or mortgage. You can also apply for small loans from banks for just about anything – such as to buy a used car, an appliance, or personal loans. The lender has the right to say no, so establish a case as to why they should give it to you before applying for this loan.

4. Be employed and stay employed. Demonstrate stability to your lenders by maintaining jobs and achieving pay-raises.

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Guide to Personal Finances

Credit Cards

How do I manage a credit card?

1. Look for a credit card with low interest rates – refer to the section in this training entitled “Credit Union vs. Banks” to learn about obtaining a credit card with your local credit union.

2. If you are able to sign on to your account online, assign an automatic transfer to your credit card with at least the minimum payment, so that you never get late fees.

3. Pay off all debt or as much as possible every month on your credit card. Do not get into the habit of only making only the minimum payments.

4. Do not buy items that you cannot afford. Credit cards are great to have for establishing a good credit, but if you get into the habit of buying items that you can not immediately pay off, then you can end up falling into credit card debt.

5. Using credit cards to their limit can hurt your credit score. Only use 30% of the total balance on a credit card. This means that if you have a $1000 credit limit, only use $300 at a time, then pay it off.

Pre-approved Credit Cards

Exciting day, you got a pre-approved credit card in your mail! Wrong, it IS too good to be true, and there IS a catch.

The Facts

You still might get rejected.

The interest rate is usually sky-high, as much as %200 or %300! This means that for every dollar you borrow, you will have to pay two-three dollars back to the creditor.

You could be targeted due to having a poor credit score—the bank wins by earning more money in interest from you not paying their bills on time. You lose by not being able to pay off their extremely high interest rate and fees. Thus, you end up with more debt.

These are often debit cards in disguise, and aren’t a good way to build credit history

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Guide to Personal Finances

Savings and Emergency Funds

Putting money into a savings account helps your money grow, rather than sitting in your checking account. If you don’t put your this money in a savings account, inflation* will diminish the value of your savings.

A good rule to go by:

A good rule to go by is to save at least 10% of your income per pay period, if possible. Another good tip to establish an emergency fund is: if you’re in debt, pay all minimum fees towards debt and put everything else into a savings account until you reach $1000. After you have reached $1000, go back to putting all of your extra money towards debt. $1000 is a good mark to hit for an emergency fund since it can cover most of life’s curveballs that tend to pop up such as medical bills, veterinary bills, auto repair, etc.

Once you are out of debt, you should concentrate on building an emergency fund that would cover 3 months’ worth of your expenses. This will ensure that in the event of an emergency in which your monthly income is discontinued (i.e. you were laid off, fired, or must leave your job for personal reasons), you can have sufficient time to find an alternative source of income.

*See definition in Financial Terms section

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Guide to Personal Finances

Managing your Debt

How do I manage my debt?

1. Get to know what you owe: obtain a free annual credit score report to see what outstanding debts you may still have.

2. Make a list of amounts due: include monthly and minimum payments, interest rates, and any other fees.

3. Prioritize your debts: get the most burdensome debts off your plate. Concentrate on any high-interest-rate debt and credit card debt. Lower-rate debts like mortgages or student loans can be a lower priority, where you should just meet the minimum payments until the others are out of the way.

Tips for handling debt collectors:

1. Never engage in casual conversation with debt collectors

2. Never give debt collectors names of bank, bank number, or social security number

3. Do not answer any questions you don’t want to answer

4. Ask debt collector for a written account of exactly how much you owe in debt and why: this includes fees, interest, and collection costs

5. If you don’t believe the amount of debt is correct, dispute it in writing

6. If you don’t have money to pay off the debt, say so and ask for the debt collector to stop calling you. The debt doesn’t go away of course, but you will stop receiving phone calls.

7. If you can’t afford the debt, but could pay it off in increments, ask the debt collector to work out a payment plan with you. Be sure to get any agreement in writing.

8. If a debt collector harasses you in any way, take note of it. Include the date and time of the incident, as well as the name of the collector and agency. Harassment includes verbal abuse, profane language, threats, or calling you repeatedly day after day. With this information, you could possibly have grounds for a lawsuit, if things get out of hand.

Credit Unions vs. Banks

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Guide to Personal Finances

Credit Unions are very similar to traditional banks in the sense that they have checking and savings accounts, loan products, credit cards, and certificates for deposit (CD). The several key pros of credit unions are:

1. Credit unions are not-for-profit institutions. Therefore, they often can offer higher interest rates on savings accounts, and lower interest rates for credit cards and loans. They tend to give better service in general due to not focusing on making a profit.

2. They are member-focused institutions and are cooperative institutions. This means that they are owned and operated by its members rather than its stockholders. Your initial membership deposit will make you a part owner of the credit union, giving you a say on operations within the institution.

3. Lower fees associated with checks, withdrawals, and electronic transactions (often free of charge). Often they offer accounts with no minimum balance and monthly service charge. They do charge overdraft fees, however they are typically about $10 lower than the average banking fee.

Cons of Credit Unions

1. There are fewer options of types of checking and savings accounts. For example, Bank of America offers 5 kinds of checking and savings accounts as well as 29 different credit cards, while sometimes a credit union may only have as little as 2 types of checking and savings accounts and 2 types of credit cards. A larger bank can give you a choice that may suit your financial situation.

2. Credit Unions have fewer locations and are often have shorter business hours and fewer ATM locations. This poses a problem especially for those that travel a lot.

3. Depending on the credit union, they can often have poor online banking technology.

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Guide to Personal Finances

Predatory Lending

Payday LoansYou may have seen them in movies inflicting pain on a victim, demanding for an incredible amount of money to pay them back, or else... Well, unfortunately, there are legal practices similar to this that will inflict financial and emotional pain if you fall into their trap. We know these kinds of services as payday loans.

By definition, predatory lending benefits the lender, not the borrower. A form of predatory lending is “subprime lending” which specifically targets vulnerable populations that may have difficulty paying loans back, reflected by their poor credit score status. They also tend to disproportionately target minorities and the elderly to participate in their risky and unfair loans. Payday loan centers tend to concentrate in minority and low-income neighborhoods, for predatory purposes. Coincidence? Think again.

How do Payday Loans work?

Payday loans are everywhere, and they are completely legal in the state of Oregon. How payday loans work: you need to borrow $200 to pay your bills this month. You give lenders a check for $200 plus + $72 interest + $10 fee, totaling $292, post-dated for 4 weeks from then. Four weeks go by… you don’t have enough money to pay off the loan. You ask for another four weeks to pay it off, adding another 36% interest to your loan you haven’t paid off yet. Another four weeks go by, and you find that you have to take out a whole new loan to pay for the existing loan. And the cycle continues...

How to get out of the trap once you’re in

1. Don’t panic. These things happen to the best of us. You can recover from this and prepare better for next time.

2. Cancel Continuous Payment Authority (CPA); CPA allows lenders to keep taking money out of your account

3. Buy back your check or make sure enough money’s in your account so your check doesn’t bounce (that would make things much worse)

4. Figure out how much you owe, and how much you will owe over time. Do this to motivate and be honest to yourself.

5. Pay as much and as soon as you can, even if you’ve set up a payment plan.

6. Loan down: make loans smaller each time

7. Make up a budget: write down monthly income and expenses, and see where you could cut back

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Guide to Personal Finances

Facts on payday loans in Oregon

Lenders can charge up to 36% interest rate or 153.77% APR on any loan

You pay $10-$30 one-time fee on top of interest

2 rollovers permitted in state of Oregon (must pay in full after two pay-periods)

Incredibly short loan terms – payday loans last only until your next paycheck, allowing only 4 weeks to repay your loan (in other states, it can be as little as 2 weeks)

The cycle continues with more fees: most borrowers of payday loans cannot pay back the bill in such a small amount of time. They must take out another loan to pay off their current loan.

People will take out payday loans for basic needs: payday lenders take advantage of people that just need a little help with groceries, utility bills, rent, medical costs, and more.

In 2005, the payday lender industry handled $40 billion worth of loans, and pocketed $6 billion

How to avoid using Payday loans in the first place:

1. Build an emergency fund: follow the instructions in the section entitled “Savings and Emergency Funds”

2. Borrow from a credit union or other small loan lenders. Be sure to understand the fees and terms before signing anything.

3. Borrow from a family member or friend, or ask for an advance on your paycheck

4. Use your credit card (this can often be cheaper in interest)

5. Request overtime or pick up a part-time job

6. Put off expenses until you have the money

7. Ask utility providers or other creditors if they offer payment plans

8. Oregon Coast Community Action agency (ORCCA) of Coos County provides resources to help with rent, utilities, food, etc., see info in section entitled “Financial Resources in Coos County”

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Guide to Personal Finances

Rent-to-OwnSo you want to get a nice TV but you don’t have all of the money up front to buy it. You hear about a place that you can make small payments over time while immediately getting the enjoyment of that TV you’ve been eyeing. While this may give you a boost of immediate satisfaction, what you may not realize is the overall money you will end up paying in the end. Is that TV really worth the $1000 you will spend over time, by renting to own? Or is it possible that rent-to-own centers are in fact, predatory lenders?

Kristy Welsh of the Credit Info Center writes: In October 2009, the U.S. Defense Department issued a report on predatory lending practices, and included rent to own as one of these programs.

Here’s why rent-to-own is such a rip off:

1. A rent-to-own company buys a couch for $500 and sells it to you for $1000.

2. You can buy the couch for $1000 any time in the first 90 days. In the meantime, you are paying $19.95 per week.

3. Most people can’t afford to buy the couch outright in the first 90 days, so they so they are locked into the weekly payment plan of $19.95 a week for 2 years. This is $2045.

4. While you are making payments, the company will require you to pay an extra $2 a week in “loan insurance”, which is another $242 dollars.

5. If you can’t make your payments, the company will give you a payday loan (refer to pg. 9 to learn about that scheme!), or they will repossess your couch no matter how far you are into the payments.

At the end of 2 years, your $2287 couch is probably only worth $200 at this point. You’d have done better saving $20 a week for 10 weeks and then buying one off of Craigslist or a second-hand store.

Many people are lured into these purchases due to the low weekly payments. They may also think they can come up with the full price of the item in the first 90 days, but a money crisis occurs and they are forced onto the 2 year program.

Beware of this form of predatory lending, just because it is legal, does not mean that it is a fair practice of business!

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Guide to Personal Finances

Basic Personal Finance Terms Asset: A resource that you own that has positive economic value. It is something that either

regularly generates cash like a business, or could generate cash. Some examples of assets include real estate, your car, bank accounts, stock investments, retirement funds, and items that are particularly expensive that you own (such as an expensive piece of art or jewelry).

APR (Annual Percentage Rate): The total interest rate for a full year expressed as a percentage. In other words, the total fees (converted into a percentage) that you pay for a year to be able to borrow money.

Balloon Payment: A one-time larger payment in the future that allows for smaller payments before the balloon payment is due. One may select this option if they knew they would be obtaining a larger sum of money on a particular year.

Bankruptcy: A legal status for an individual or business to eliminate all or a portion of one’s debt if unable to pay it off. Filing for bankruptcy should not be taken lightly, and should be the very last resort. Consequences of bankruptcy include being on your credit report (and being the worst possible thing indicated on your credit report) for 7-10 years. Experts believe that filing for bankruptcy can only be beneficial if debt is more than $15,000. Bankruptcy does not eliminate liability (monetary obligations), such as alimony, child support, some student loans, some taxes, debts arising six months prior or after filing for bankruptcy, debts from personal injury while driving intoxicated, and debts from malicious injuries to a person or property.

Beneficiary: A designated individual, institution, trustee, or estate that is legally eligible to profit from your will, life insurance policy, retirement fund, trust, or other legal contracts. For example, your grandmother may designate you a beneficiary on her will, in which you would receive the family farm in the event of her passing away.

Collateral: In the instance of a lending agreement, collateral is used as something pledged as security for the repayment of a loan. If you default (failure to pay) on the loan, then your collateral is forfeited. For example, you are trying to pay for your oil just being changed but you realize that you forgot your wallet. You need to run home to get your wallet, so you put your nice phone up as collateral so the mechanic knows you will come back. If you didn’t come back, then you are forfeiting you nice phone for an oil change.

Compound Interest: This is the accumulation of interest over a specific amount of time. Compound interest also takes the new balance into account after interest has been applied from the previous pay period – it will then calculate the new interest rate based off of the new balance. For example, you put $2,000 in your savings, and earn $100 in interest for the first year of your investment. You leave the $2100 in the bank until the following year, and earn $105 in interest that following year. Your money will grow over time, earning your compounded interest.

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Collections: Attempted recovery of past-due financial obligations by a collection department or agency.

Copay: A fixed amount based off of your health insurance policy that you pay for health care services, usually when receiving the service. For example, when you go to get an annual checkup at the doctors, you may have a $20 copay in order to be seen.

Cosigner: An individual other than the applicant that signs a legal agreement (usually because they have better credit), that has equal liability. For instance, an 18 year old that is first moving out of their parents’ house asks for their parents to cosign a rental housing agreement, due to not having a obtain credit history yet.

Credit: 1) An agreement where a borrower will receive something of value, agreeing to pay a lender back at a later date. A credit card is different than a debit card, because a credit card is borrowed money that you must pay back.

2) An amount of money available to you in another form other than cash, and often able to be spent in a specified location or for a specific purpose. For instance, you buy some pants from your favorite store and realize when you get home that they don’t fit quite right. You return them to the store and in return they give you “in-store credit”. This is essentially a gift card to their store in the amount you paid for the pants being returned.

Credit Report: A report that contains history of the individual’s credit history.

Credit Score: A numerical evaluation of how reliable you are when borrowing money. This evaluation lets lenders know if you are a risk or not to them.

Credit Union: Non-profit financial institutions, offering members checking/savings accounts and loans.

Deductible: The amount of money you pay out-of-pocket before insurance kicks in. For example, say that your health insurance claims they have a $300 deductible. This means that you must pay $300 out-of-pocket before insurance will pay for healthcare services subject to the deductible. Healthcare services like yearly check-ups, screenings, immunizations, and other preventative services are not subject to deductibles (meaning your insurance will kick in automatically for those services).

Default: Failure to make a mandatory payment on a loan.

Garnishment: A garnishment occurs as a result of failure to make mandatory payments, and is a legal agreement for a third party to make said mandatory payments. Typically, the third party would be your employer. In this case, a portion of your paycheck will be directly taken out to pay off your debt. This can be very hurtful towards your credit rating.

Inflation: Inflation is the reason why your grandfather talks about how an ice cream cone used to be 5 cents back in his day. It is why the gas prices are constantly going up and up. The value of your dollar is constantly changing due to inflation due to the costs of goods and

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services constantly rising and falling. Inflation is the reason that is a good idea to put money into your savings account instead of hide your money under your mattress, because savings accounts earn interest, maintaining the value of your dollar over time rather than have you lose worth over time.

Interest Rate: This refers to the percent of money charged in order to borrow money. You also obtain interest if you set up a savings account (earning money rather than it being taken out). This is usually a function of a bank holder, and often seen on loans, mortgages, unpaid bills, and credit card bills. For example, if you have a 10% interest rate on a $1000 loan, you will be paying $1100 in the end, where the bank will profit $100 from the transaction.

Installment Loans: A loan that has a fixed amount of equal-sized payments. An example of an installment loan may be if you decide to buy work-out equipment from an infomercial. It advertises “Just 3 payments of $49.99!” amounting to $149.97 in all.

Investing: Refers to putting your money into something with the expectation of profiting in the end. This can refer to owning property, putting money into a startup business, owning shares to a company, etc.

Liability: A liability refers to a kind of debt or monetary obligation that you have. This includes something like your debt, rent, child support, or income taxes due.

Minimum Payment: This is the minimum amount that you have to pay each billing cycle. You can set it up on your bank account online to automatically transfer a minimum payment so that you never get late fees. However, it is a good idea to pay full amount on each billing cycle so that you don’t acquire any debt.

Net Income: How much money you have after all bills are paid

Payday Loan: Short term loan with extremely high interest rates.

Pre-approved Offer: Beware of pre-approved offers in your junk mail. This is a trick that companies like to use on those with either poor credit or no established credit. If you did happen to sign up, your Annual Percentage Rate* would most likely be an astounding number that would leave you worse off financially.

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Financial Resources in Coos CountyNeighborWorks UMPQUA

If you are of low to moderate income, live in Coos or Curry County, and are considering buying a house, please take a look at the Umpqua Coastal Housing Center. They offer a variety of programs to help you buy a house, including homebuyer education, down payment assistance, pre-purchase counseling, and more. They also provide a service entitled Dream$avers that match your savings 3 to 1 in order to go achieve your goal of going to college, getting job training, becoming employed, getting a better job, buying a home, starting a business, or repair and maintaining your home. Visit their website at: http://www.nwumpqua.org/services/home-ownership/umpqua-coastal-housing-center

ORCCA

For help with utilities, rent, food, and other basic needs, please visit Oregon Coast Community Action agency website: www.orcca.us and click on the link to their programs. They also provide a resource guide to many community programs and agencies that help with ty

Online Budgeting Tool

This easy-to-use tool will help you keep track of your expenses: http://www.kiplinger.com/tool/spending/T007-S001-budgeting-worksheet-a-household-budget-for-today-a/

Resources for managing your debt

The National Foundation for Credit Counseling: www.nfcc.org or 800-388-2227.

The Association of Independent Consumer Credit Counseling Agencies: www.aiccca.org or 800-450-1794.

U.S. Bankruptcy Trustee: The Web site www.justice.gov/ust/eo/bapcpa/ccde/cc_approved lists credit counseling agencies that have been federally approved.

Order your free credit report

To order a free credit report, visit www.annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The US Federal Trade Commission website is an excellent resource in Spanish or English about credit ftc.gov/credit. You may also contact one or more of the credit reporting agencies:

Equifax: 1-800-685-1111, www.equifax.com Experian: 1-888-397-3742, www.experian.com TransUnion: 1-800-916-8800, www.transunion.com

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