Money MattersMoney MattersClass 4Class 4

CREDITCREDIT

A loanA loan: when we use someone else’s money to : when we use someone else’s money to pay for things with a promise to repay the loaned pay for things with a promise to repay the loaned amount, plus interest.amount, plus interest.

Used wisely, credit can enable each of us a Used wisely, credit can enable each of us a chance at: chance at: home ownershiphome ownershipeducationeducationpersonal transportationpersonal transportationother goods and services.other goods and services.

Credit GuidelinesCredit Guidelines

House: no more than 25-30% of net House: no more than 25-30% of net incomeincome Taxes, insurance and interestTaxes, insurance and interest

Car: no more than 10-15% of net incomeCar: no more than 10-15% of net income Insurance, taxes, gas and maintenanceInsurance, taxes, gas and maintenance

EducationEducation Student loans often have low ratesStudent loans often have low rates Do not have to be repaid until the student graduates or Do not have to be repaid until the student graduates or

stops going to school stops going to school

Establishing Credit Establishing Credit

First, make an applicationFirst, make an application The Lender will determine your financial The Lender will determine your financial

trustworthiness based on:trustworthiness based on: Credit historyCredit history Employment statusEmployment status IncomeIncome

Co-SignorCo-Signor

Credit TermsCredit Terms

Credit LimitCredit Limit Annual Percentage Rate, interest rate Annual Percentage Rate, interest rate Annual FeeAnnual Fee Payment Due datePayment Due date Minimum payment requiredMinimum payment required Grace PeriodGrace Period FeesFees

Installment PlansInstallment PlansLay-awayLay-away

Enable you to buy something expensive and pay Enable you to buy something expensive and pay for it little by little over a set period of timefor it little by little over a set period of time

Fees are generally lower than credit cardsFees are generally lower than credit cards However, you must wait until the item is paid off However, you must wait until the item is paid off

before you can take it home.before you can take it home. Remember, once you have agreed to these Remember, once you have agreed to these

payments, you may lose money if you do not payments, you may lose money if you do not make payments on time. make payments on time.

AUTO LoansAUTO Loans

Use the 10-15% of net income formula to Use the 10-15% of net income formula to determine how much you can spend on a determine how much you can spend on a carcar Taxes Taxes InsuranceInsurance Gas and MaintenanceGas and Maintenance

Keep the loan term to 5 years or lessKeep the loan term to 5 years or less Obtain your own financingObtain your own financing

Pre-Owned CarPre-Owned Car

Buy the $20,000 car today or buy the same car Buy the $20,000 car today or buy the same car used one year later for $16,400.used one year later for $16,400.

  NEW USED

Car Price $20,000.00 $16,400.00

Interest Rate 7.50% 7.50%

Term (months) 60 48

Monthly Payment $ 429.00 $ 425.00

Total Cost $25,740.00 $20,400.00

Credit CardsCredit Cards

Also known as, Consumer DebtAlso known as, Consumer Debt UnsecuredUnsecured Easiest type of credit to getEasiest type of credit to get Higher interest rates Higher interest rates Never charge more than you can pay off in Never charge more than you can pay off in

one year or lessone year or less Always pay at least the minimum, Always pay at least the minimum, plusplus the the

interest payment interest payment

Benefits of Using Credit CardsBenefits of Using Credit Cards

1.1. Convenience and safety of not dealing with cashConvenience and safety of not dealing with cash

2.2. Protection under the Consumer Credit Protection under the Consumer Credit Protection ActProtection Act

3.3. Incentive BenefitsIncentive Benefits

4.4. Cash Back RewardsCash Back Rewards

Given all of the above, credit cards still cause Given all of the above, credit cards still cause problems for most people more often than problems for most people more often than they provide benefitsthey provide benefits

How to use credit cards and How to use credit cards and stay out of stay out of DEBTDEBT

Never use your credit card for anything but Never use your credit card for anything but budgeted purchasesbudgeted purchases

Use only a small amount of the credit you Use only a small amount of the credit you havehave

Pay off your credit card every month and Pay off your credit card every month and on timeon time

Carry a balance the right wayCarry a balance the right way Read the fine print Read the fine print

Choosing a Credit CardChoosing a Credit Card

What kind of card is it?What kind of card is it?

Standard Card, revolving balanceStandard Card, revolving balance Premium Credit Card, offer incentivesPremium Credit Card, offer incentives Charge Card, no limit / PIFCharge Card, no limit / PIF Limited purpose, gas and department Limited purpose, gas and department

storestore Secured Credit CardSecured Credit Card

How are you going to use it?How are you going to use it? Pay in full each monthPay in full each month Transfer balancesTransfer balances Carry a balanceCarry a balance

What is the Annual Percentage Rate?What is the Annual Percentage Rate? How long is the grace period?How long is the grace period? What is the Credit limit?What is the Credit limit?

What are the fees?What are the fees? Annual FeesAnnual Fees Late FeeLate Fee Over-the-Limit FeeOver-the-Limit Fee Check Return FeeCheck Return Fee Payment over the phonePayment over the phone

How is the Finance Charge Calculated?How is the Finance Charge Calculated? What are the rewards?What are the rewards?

Pay More than the MinimumPay More than the Minimum

Save MoneySave Money Pay off the balance soonerPay off the balance sooner Improve your credit scoreImprove your credit score Get ready for a mortgage / car loanGet ready for a mortgage / car loan Make room for more - increase your Make room for more - increase your

available creditavailable credit

Every dollar you spend for interest on Every dollar you spend for interest on credit card payments has two effects:credit card payments has two effects:

1.1. It increases the cost of current spending by It increases the cost of current spending by adding interest to the purchase adding interest to the purchase

2.2. It reduces the amount you can spend and It reduces the amount you can spend and save for tomorrow.save for tomorrow.

DEBTDEBT

Debt is something that we oweDebt is something that we owe

How do we get into debt?How do we get into debt? IgnoranceIgnorance – we didn’t know how to manage – we didn’t know how to manage

moneymoney IIndulgencendulgence – we want everything, NOW! – we want everything, NOW! Poor PlanningPoor Planning – we didn’t prepare for the – we didn’t prepare for the

unexpected (job loss, illness, emergency)unexpected (job loss, illness, emergency)

GuidelineGuideline

What is a reasonable level of debt?What is a reasonable level of debt?

The 20 percent rule.The 20 percent rule. You should avoid committing more than 20% You should avoid committing more than 20%

of your monthly net income to cover your total of your monthly net income to cover your total monthly payments for auto loans, credit card monthly payments for auto loans, credit card purchases, installment and personal loans.purchases, installment and personal loans.

Suggested Budget PercentagesSuggested Budget Percentages SavingsSavings 10-15%10-15% Housing Housing 25-30%25-30% UtilitiesUtilities 5-10% 5-10% FoodFood 10-20%10-20% TransportationTransportation 10-15%10-15% ClothingClothing 2 - 7% 2 - 7% Medical / HealthMedical / Health 5-10% 5-10% PersonalPersonal 5-10% 5-10% RecreationRecreation 5-10% 5-10% DebtsDebts 10-20%10-20%

Warning Signs of Too Much DebtWarning Signs of Too Much Debt

1.1. You don’t have any savingsYou don’t have any savings

2.2. You only make the minimum You only make the minimum payment each monthpayment each month

3.3. You continue to charge while You continue to charge while trying to pay them off.trying to pay them off.

4.4. You have at least one credit at or You have at least one credit at or near your credit limit.near your credit limit.

5.5. You are occasionally making late You are occasionally making late payments.payments.

6.6. You don’t even know how much debt you You don’t even know how much debt you have.have.

7.7. You use cash advances from your credit You use cash advances from your credit cards to pay other bills.cards to pay other bills.

8.8. You bounce checks or overdraw your You bounce checks or overdraw your bank accounts.bank accounts.

9.9. You have been denied credit.You have been denied credit.

10.10. You lie to friends or family about your You lie to friends or family about your spending and debt. spending and debt.

Breaking Free of Debt!Breaking Free of Debt!

1.1. Acknowledge that you are in debt.Acknowledge that you are in debt.2.2. Stop any form of borrowing no matter Stop any form of borrowing no matter

what.what.3.3. Determine where you are in debt.Determine where you are in debt.4.4. If you owe a few creditors – call them If you owe a few creditors – call them

and try to negotiate for a smaller and try to negotiate for a smaller payment.payment.

ALWAYS call ALWAYS call beforebefore you miss a payment. you miss a payment.

5.5. If you owe many creditors, it may be time for If you owe many creditors, it may be time for outside help.outside help.

Consumer Credit Counseling - a national non-profit Consumer Credit Counseling - a national non-profit agency who can work with your creditors to set-up a agency who can work with your creditors to set-up a repayment plan.repayment plan.

6.6. Develop a budgetDevelop a budget

7.7. Curb your impulse to buyCurb your impulse to buy

8.8. Try to find ways to increase your income.Try to find ways to increase your income.

DO NOT ignore bills and past-due notices. A DO NOT ignore bills and past-due notices. A poor credit rating will follow you for years.poor credit rating will follow you for years.

Consumer Credit Counseling Consumer Credit Counseling ServiceService

Founded in 1964Founded in 1964

Non-profit and member of the National Non-profit and member of the National Foundation for Credit Counseling Foundation for Credit Counseling (NFCC)(NFCC)

http://www.credability.org/http://www.credability.org/

1.800.251.22271.800.251.2227

Credit ReportCredit Report

Each credit report lists your:Each credit report lists your: Credit accounts, including credit cards, auto Credit accounts, including credit cards, auto

loans, student loans, and mortgages loans, student loans, and mortgages Creditor and account number Creditor and account number Balance Balance Date opened Date opened Payment history Payment history Current status, such as “OK”, “Closed by customer”, Current status, such as “OK”, “Closed by customer”,

“30 days late payment”, etc.“30 days late payment”, etc. Inquiries: recent applications for new credit Inquiries: recent applications for new credit Collections: when a collection agency is Collections: when a collection agency is

seeking you to repay a debt seeking you to repay a debt Public Records: court judgments such as a Public Records: court judgments such as a

bankruptcy, foreclosure, or tax lien bankruptcy, foreclosure, or tax lien

Credit ReportCredit Report

Credit Reporting Agencies:Credit Reporting Agencies: ExperianExperian Trans UnionTrans Union EquifaxEquifax

Credit reporting agencies track how well Credit reporting agencies track how well you repay your loans.you repay your loans.