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Credit Wisdom. Managing Money & Credit: A Lifelong Skill. Why Credit is Important. FICO or credit score : Credit Card Issuers & Lenders Determine APR ( Annual Percentage Rate ) Auto Insurers Determine Premium Employers Are you a worthy hire? Landlords Are you a reliable tenant?.
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Why Credit is Important • FICO or credit score: • Credit Card Issuers & Lenders • Determine APR (Annual Percentage Rate) • Auto Insurers • Determine Premium • Employers • Are you a worthy hire? • Landlords • Are you a reliable tenant?
The Three Cs of Credit • Character: The way you handle money and have repaid debt in the past. • Capacity: Your ability to pay the debt after considering other monthly expenses. • Capital: The value of your assets or what you own.
Your Paycheck • 50% of U.S. young adults work • Earn a minimum of $5.15 per hour • Work an average of 20 hours / week • $412 - Monthly • $4,946 - Annual
Where Does All the Money Go? • Food, Snacks & Beverages • Movies • School Events • Music, CDs, Concerts • Clothing, Cosmetics & Shoes • Cars, Gas & Insurance • Cell Phones
Credit Cards – The Perceived Great Equalizer • Credit lets you buy more than they can afford. • Credit and credit cards • Current World Problem • Needs are essentials • Food • Shelter • Clothing • Reliable transportation • Wants are extras • Eating out • Big, expensive house • Shop till you drop • Brand new or an expensive car
Who Uses Credit Cards? • U.S. population = 298 million • Use credit cards = 150 million • Pay off monthly = 50 million • Carry a balance = 100 million • 2/3 of credit card users don’t pay off their balance $9,300 = average debt per household
America’s Love of Credit • 1.6 million bankruptcies were filed in 2004 • Americans are declaring bankruptcy at 10x the rate they were during the depression
Personal Savings Rate Declining • 1974 to 1984 • 10% • 1985-1994 • Fell to 4.8% • 2004 • 1.8% • 2005 • -0.5% • 2006 • -0.7% • Hasn’t been negative since the Great Depression
Saving for the Future • Save 10% of every monthly check • Use savings for: • Emergencies • Big purchases • Trip with friends • Car • Down payment on a home • Retirement
Advantages & Disadvantages of Credit Card • Advantages • Convenient • On-line purchases • Kick-backs i.e. cash, airline miles, etc. • Can rent a car • Disadvantages • Doesn’t seem like real money • Easy to overspend
Use Credit Wisely You should use credit to buy: • House • Car • Education (student loan) and you’ll avoid trouble
Only Buy What You Can Afford • Pay off monthly balances • Avoid interest • Avoid late fees • Know your budget • Know yourself • Are you an impulse buyer?
Pay More than the Minimum • If you have a credit card balance: • Make a plan to pay as much as you can every month • Start with the credit card with the highest interest rate • Pay off the credit cards as quickly as you can
Limit the Number of Cards Americans have an average of 8 credit cards
Always Pay on Time • Avoid late fees • Keep your money in your pocket • Maintain a good credit score • Late payments have the biggest negative impact. • Easiest way to make money is to save money.
Choose a Low Rate • 0% is lowest • But remember the catch • 15.75% average fixed rate. • If you pay your card off every month, the rate won’t matter.
What Not to Use Credit For: Pay Day Loans
Payday Loans / Check Cashing Stay Away! What is it? • Cash Loan • Extremely High Interest • Short-term (14 – 45 days)
How Do They Work? • You postdate a check • They give you a loan • Loan last for 2 weeks • They charge you a fee for borrowing the money—equivalent APR can be over 300%.
Risks of Payday Loans • Not a long-term cash solution • Borrowers get trapped in a payday loan cycle of debt • Take out loan after loan
Shopping for A Credit Card • Comparison shop credit cards • Don’t take the first offer that comes to you: • Pre-approval • Means nothing • No special rates
Card Holder Agreement • Written statement that gives the terms and conditions of a credit card account. • Look here for all info before signing up • Required by Federal Reserve • Card issuers can change terms at any time with 15 days notice
Billing Statement • The monthly bill sent by a credit card issuer to the customer. • It gives a summary of activity on an account. • Important changes to a credit card account are included in small-print fliers that are sent with the statement. • Schumer box: Important to look here once you’ve selected a card.
Annual Percentage Rate (APR) • Annual Percentage Rate (APR) • Interest • F (Fixed) rate • V (variable) rate • Prime + ___ • Libor + ___ • Won’t go below floor • Introductory rate • How long? • What will the rate “go to” afterwards?
Grace Period • Interest-free time between: • Transaction date • Billing date • Usually 20 – 30 days • No grace period if: • Carry a balance • No stated grace period
Determined by: Adding each day’s balance Dividing by total number of days in the billing cycle. Multiplying by monthly periodic rate (APR/12) Example Day 1: Charge $100 Day 2: Charge $200 Avg. Daily Bal $150 30 days in billing cycle = $5 average daily balance Card with 15% APR has a 1.25% monthly periodic rate (15% / 12 months) $5 daily balance = $6.25 finance charge Billing Methods: Average Daily Balance
Billing Methods: Two-cycle Billing • If you don’t pay your balance off it: • Charges you interest based off of the current and previous month • Interest starts the day you make the purchase.
Credit Limit • The maximum amount you can charge on a credit account. • You're approved up to $25,000! • “Up to” is the key phrase • Enticement offer • Actual credit limit based on credit score • Recommended limit • 20% of net income
Default and Universal Default • Default • A designation that indicates a person has not paid a debt that was owed. • Universal default • If you are more than 30 days late on a payment to anyone, your credit card company can raise your interest rate.
Payment Allocation • How your payments will be applied when you have differing rates • Matters when you: • Use card during and after promotional period • Purchases and cash advances • Payments will pay off lower rate first • Costs you money. Makes the bank money.
Annual Fees on Reward Cards • Paying for the privilege of using a credit card • Many cards offer rewards without an annual fee • Weigh cost of annual fee to value of reward • Mileage • Avoid annual fees
Late-Payment Fee • Charge imposed for not paying on time • Know your payment due date & time • 9 a.m. • 12 noon • 5 p.m. • 11:59 p.m.? • Pay via U.S. mail, phone, online, automatic bill pay, etc.
Over-the-Credit-Limit Fee • You can exceed your credit limit but it will cost you • Fee • Higher interest rate
Currency-Exchange Fee • Credit Cards have replaced traveler's checks. • Fee will be • Flat amount • Percentage of withdrawal • Important only if you travel internationally frequently
Cash-Advance Fee & Interest • Don’t take cash advances • Fee • Flat amount • Percentage of withdrawal • Cash advance interest rate is always higher and has no grace period • Payments are applied to lower-interest balance first
Balance-Transfer Fee • Balance Transfer • The process of moving an unpaid credit card debt from one issuer to another • Cards charge to transfer balance to or from one card to another.
Returned-Check Fee • Your check “bounces” at the bank because: • Not enough money in your account • You don’t have a cash-advance line at the bank to cover the check
Minimum Finance Charge • Also called “No Balance Fee” • Fee charged for using the credit card even when you pay off the balance in full every month. • Don’t select this card • $1.50 * 12 = $18 • Similar to an annual fee
No on Credit Card Insurance • Life and disability insurance policies will cover credit cards. • Any type of credit card insurance is not as flexible as traditional policies. • You will have to take a policy out on each credit card.
Theft Insurance • If your card is stolen • Federal law limits your liability to $50 • Don’t need theft insurance because you’re already protected • Report missing cards within 24 hours or ASAP
Life & Disability Insurance • Credit life insurance • pays off the debt you owe if you die. • Credit disability insurance • Pays minimum monthly payments, but not for new purchases
Unemployment & Property Insurance • Involuntary unemployment credit insurance • Pays minimum monthly payments, but not for new purchases • Credit property insurance • Cancel debt on items that are destroyed by specific incidents not covered in other policies.
Find a Consumer-Friendly Card • Consumer Reports Top 10 cards have • No universal default • No two-cycle billing • No balance transfer fees • Grace period of at least 25 days • No annual Fees • Based on Cardweb’s analysis of 10,200 card offers in August, 2005.
