HOW TO USE THEM, BUT NOT ABUSE THEM

Credit Card Debt

A Look at Credit Card Debt

There are currently 1.2 billion cardholders of all ages with a total

of $650 billion in debt.

Americans charged $1.3 trillion to credit cards and $400 billion to

debit cards

Students & Credit Cards

Some recent statistics 78% of undergraduate students (18-25) have credit

cards (up from 67% in 2002) 32% of students have four credit cards or more One in four students owes more than $3,000 Nearly 10% owe $7,000 or more In 2002 more than 100,000 people under the age of 25

filled for bankruptcy

2004 Nellie Mae Study

What is the average rate for a credit

card?14.71%

What is the highest interest rate currently

charged on a credit card?

41%That’s almost

half!!!

Fees, fees, and more fees

Annual fee for just having the credit card Over the limit fees, charged whenever you exceed

your credit limit Late payment fees Transaction fees Other miscellaneous fees

read the fine print!!!

Credit Cards:

Some positivesmajority of students use credit

cards responsiblyprovide convenience and securityallow students to establish credit

histories

Analysis of consumer spending shows

customers spend 20% to 30% more using credit cards than

they would with cash!

Some disadvantages

college students are more likely to run up debts they can not pay than other types of credit card users

college students (with limited or no credit history and income) are charged higher interest rates

And still more bad news…

many students do not understand the consequences of incurring excessive debt and making payments late impaired credit rating more difficult and costly to obtain credit later

many students pay only the minimum amount due each month.

Career choices can be limited Some are forced to file bankruptcy (1.3 million

cardholders filed for bankruptcy last year) A few students, so overwhelmed with debt, have

committed suicide

Characteristics of high-risk use

Average credit card balances over $1,000

Owning four or more credit cardsCarrying a balance each month

Credit Card DebtHow long will it take to pay off

$2,500 at an interest rate of 17% if you pay only the minimum

balance due?

30 years and total cost would be $7,733.49

What is the average # of credit cards a person holds?

14

Credit Card Don’ts

Don’t use them for cash advancesDon’t charge more than you can pay off

in a monthDon’t let banks increase your credit

limit

Source: USA Funds Life Skills -Module 1

Credit Card Do’s

Limit the number of cards you haveUse a debit card vs. a credit cardUse a card that has no annual fee and lower

interest ratesKnow all of your card’s hidden feesAlways pay more than the minimum amount

each monthPay on time, all the time.

What’s a credit score?

A credit score is:

300-850

A numerical forecast of the likelihood you’ll successfully repay a future loan

Based on credit account information in your credit report

An automated credit evaluation tool

Comparable to your “credit GPA”

What factors affect your score?

35%

30%

15%

10%

10%Payment History (35%)

Amounts Owed (30%)

Length of History (15%)

New Credit (10%)

Account "Mix" (10%)

To Maximize Your Score . . .

Don’t procrastinate – pay all your bills on time

Avoid owing more than 30% of your available revolving credit

“Less is more” – keep your revolving debt as low as possible

“Older is better” – older accounts score more favorably

Minimize the opening of new revolving accounts

What is the true cost of paying the “minimum”

Suppose:

Credit card balance = $8,000

Interest rate (APR) = 18%

Minimum payment = 2% of balance

How long would it take to pay it off?

647 months / 54 years

Total interest paid = $22,931

This assumes you STOP using the credit cards!

It will take even longer if you don’t stop!