Analyzing the Benefits and Risks of Using Credit, and Examining the Various Uses of Credit Scores and Reports

1. Analyzing the Benefits and Risks of Using Credit, and Examining the Various Uses of Credit Scores and Reports Information and Resources to Help Your Students Achieve the Common Core Standards: Civics developed by the La. Dept. of Education Presented by: Layne R. McDaniel, CPA, CGMA

2. Why is it important to teach teens about credit?

3. What percentage of undergraduate students have at least one credit card? • 38% • 64% • 91%

4. Who Has Credit? • 91% of undergraduates have at least one credit card. • The average number of cards is 4.6, with half of college students having four or more cards. • 39% of students already have a credit card before arriving at college. • Only 2% of students carry no credit history. Source: Sallie Mae’s National Study of Usage Rates and Trends of Undergraduate Student Credit Card Use released in April 2009.

5. How Much Do They Owe? • The average undergraduate student carries $3,173 in credit card debt. • 21% of students carry a balance between $3,000 and $7,000. • The average senior will graduate with $4,100 in credit card debt. • 19% of seniors will graduate with a balance greater than $7,000. Source: Sallie Mae’s National Study of Usage Rates and Trends of Undergraduate Student Credit Card Use released in April 2009.

6. What percentage of students carry a balance on their credit card? • 38% • 54% • 82%

7. How are they doing? • 82% of students carry balances and incur finance charges each month. • 17% of students regularly pay off their balance each month. • 7% of students pay less than the minimum required payment each month. • 40% of students have charged items knowing they didn’t have the money to pay the bill. Source: Sallie Mae’s National Study of Usage Rates and Trends of Undergraduate Student Credit Card Use released in April 2009.

8. How are they doing? • 25% of the students missed at least one payment. • 15% of students have gone over their credit limit. • 84% of undergraduates students admit the need for more financial management education. • Of these, 64% would have liked to receive financial information in high school and 40% as college freshman. Source: US PIRG's Campus Credit Card Trap 2008; Sallie Mae’s National Study of Usage Rates and Trends of Undergraduate Student Credit Card Use released in April 2009.

9. What are We Doing? On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 was signed into law by President Barack Obama. This Act, which went into effect February 22, 2010 requires those under age 21 to have a parent co-signer, or show proof of income, in order to get a credit card in their name. Other provisions of the Act aimed at protecting younger consumers include: • Prescreened credit offers may not be sent to those under the age of 21 unless they have opted in with the credit reporting agencies to receive such offers. • Card issuers and creditors may not offer a student at an institution of higher education any tangible item to get them to apply for a credit card if the offer is made on or near campus, or at an event sponsored by or related to the college or university.

10. What are We Doing? What your credit card company has to tell you • When they plan to increase your rate or other fees. • How long it will take to pay off your balance. Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%. Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

11. What are We Doing? New rules regarding rates, fees, and limits • No interest rate increases for the first year. • Increased rates apply only to new charges. • Restrictions on over-the-limit transactions. • Caps on high-fee cards. Changes to billing and payments • Standard payment dates and times. • No two-cycle (double-cycle) billing. • Payments directed to highest interest balances first.

12. What can you do? While the new law legislates a number of protections for younger consumers, it's important that we educate them on the risks and benefits associated with using credit. However, because credit can be confusing, it is better to focus on the big picture and the basics rather than overwhelming them with details such as double-cycle billing, nominal APR versus effective APR, balance computation method, etc. Emphasize that credit is a good thing when used wisely. It lets you buy necessities when you're short of cash and luxuries when you want them. But, like other good things, credit can be misused. Explain that overextending yourself or neglecting payments leaves you with nothing more than a bad credit rating. And, while this may be of no consequence to them now — let them know that their financial future is dependent on it. Understanding their credit rating is key to their financial success.

13. What can you do? Focus on these key points: • Credit isn't extra money. • Credit isn't usually free. • Don't max out your credit. • Avoid cash advances. • Pay your bills on time. • Pay your bill in full each month. • Be wary of ads that promise you “instant credit”. • Read everything, even the tiniest fine print (especially the tiny fine print) associated with your account before you use the credit card.

14. Credit isn't extra money • It's a convenience that lets you enjoy certain benefits now that you'll have to pay for later on. So, don't buy items on credit that you don't have the money to pay for. Just because you can charge a new entertainment system or pair of shoes to your credit card doesn’t mean you should. • A line of credit or credit card is not income, it’s debt. It can be used to help manage cash flow, but it can also be a heavy burden to carry. When you see other students use credit cards to buy things they can’t afford, know that they will have to pay it back later, and it won’t be easy for them. • Also, credit should not be considered your emergency fund.

15. Credit isn't usually free • It's paid for by interest charges that vary with the type of creditor, kind of credit, and the time period involved. This is the reverse of what happens when the bank pays you interest to put your money in the bank. • Borrowing money is expensive. An interest rate can look small, but it adds up in a way that makes a restaurant meal, or music, or a new shirt cost much more than expected. If you make small payments instead of paying off the balance in full, you’ll be making those payments for years.

16. Credit isn't usually free A credit card calculator, like the one offered at CNN Moneycan allow your students to see how long it can really take to pay off something that seems like a minor purchase at the time, especially if they’re only making minimum payments. Your students can then adjust the minimum amount that they pay each month to see how it saves money and pays the debt off more quickly.

17. Don't max out your credit • Young people are more likely than older adults to charge up to their credit limit. But to get a top credit score, it's best to hold your charges to 25% of your credit limit, or even less. A good guideline is never to borrow more than 20% of your annual after-tax income. Never let your monthly debt payments exceed 10% of your monthly net income. • It's also important to keep track of how much you owe overall, so that when you do get your credit established, you won't take on more debt than you can handle. If you make a transaction that takes you over your credit limit you’ll need to pay the extra amount immediately. You could also be charged an over-the-limit fee.

18. Don't max out your credit Never borrow more than 20% of your yearly net income • If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800 • Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960 • So, you should never have more than $960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards.

19. Don't max out your credit Monthly payments shouldn’t exceed 10% of your monthly net income • If your take-home pay is $400 a month: $400 x 10% = $40 • Your total monthly debt payments shouldn’t total more than $40 per month. Note: Housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards.

20. Avoid cash advances • A credit card cash advance is when you take your credit card to an ATM and withdraw cash. There are other scenarios but that one is the most common one people run into. The cash advance is not considered a regular purchase and its treated differently on the card. Finally, your cash advance limit will almost always be lower than your credit card’s credit limit. • Cash advances are bad for a variety of reasons. First, they’re not considered regular purchase charges on your credit card. The credit card will charge you a fee for the cash advance, something like 3% of the withdrawn amount. They will also charge you a higher interest rate on the cash advance balance. For example, the purchase APR may be 19.99% while the cash advance APR is 21.99%. Finally, there is no grace period on cash advance balances. You will be charged interest from the day you withdraw the money.

21. Pay your bills on time Credit issuers are watching how you handle your cards, and paying late is the worst black mark on your record. If you don't keep your payments up to date, the results can be very costly—either in late payments you'll owe or in damage to your reputation, which means you could have a tougher time borrowing money in the future. By paying at least the minimum amount due by the due date, you avoid a late fee and you prevent possible damage to your credit record. Similarly, avoid going over your limit. If you run into a problem because of unforeseen difficulties, discuss it with your creditors. Blots on your credit record can affect your ability to get a job, rent an apartment, buy a car or get a cell phone.

22. Pay your bill in full each month • Pay your bill in full each month if you can, and always pay more than the minimum. A credit card balance is one of the highest interest loans you can have. If you have a balance, paying it off should be at the top of your financial priorities list. • Paying only the minimum payments on your credit card may seem appealing, but if only minimum payments are made, it can take years, and sometimes decades, to achieve full repayment. • Paying the minimum amount due keeps your credit history clean, but it also costs you more.

23. How long will it take to payoff a $2,500 balance on a credit card charging 15% if you pay $45 per month? • 4.3 Years • 5.6 Years • 7.8 Years

24. Pay your bill in full each month • The following table shows the interest costs, true costs, and number of years to pay off the balance for various scenarios using different payment amounts. As the table shows, just making a $10 increase in your monthly payment can significantly reduce the interest costs and length of time to payoff a balance.

25. Be wary of ads that promise you "instant credit" • Be wary of ads that promise you "instant credit" or "a major credit card regardless of your lack of credit history or past credit record." If asked for money up-front to get you a loan, be aware, it may be a scam and you'll never see your money again and still won't have a loan.

26. Read everything associated with your account … • Often, your use of a credit card acts as your agreement to the credit card issuer’s terms and conditions. Read everything, even the tiniest fine print (especially the tiny fine print). associated with your account before you use the credit card. Using a credit card is your responsibility. How you manage it shows creditors how reliable you will be in paying all your obligations. • The biggest mistake card holders make is not knowing what they have agreed to pay. Be sure to know what the fees are and how they are charged. • Teens need to learn to read the fine print and research a credit card before submitting an application. Annual fees and interest rates are two important factors to consider in the credit card selection process.

27. Credit Reports and Scores One of the most important things that teenagers can have and maintain is their credit standing. As soon as a teenager hits eighteen years old, they have the opportunity to get, build and maintain their credit rating. Their credit rating is something that has an impact on the rest of their life, which is why it is important for teens to have and maintain a good credit history.

28. Credit Reports and Scores A simple way of explaining credit reports and credit scores to students is by comparing them to school papers and grades. The differences between the two can help clarify for your students that they don’t have “beginning” credit scores. When you give an assignment, your students complete it and turn in the paper, which you then grade. In credit terms, a person’s credit report is like the student’s paper. A credit score is like the grade. The grade you give represents an analysis of the quality of the information in the student’s paper. In a similar way, a credit score represents the quality of an individual’s credit report and the relative lending risk associated with the information.

29. Credit Reports and Scores Taking the analogy a bit further, your students can’t have a grade until they complete a paper and turn it in to you. Similarly, in order to have credit scores calculated, your students must have credit reports. If they have never had credit issued in their name, they would not have a credit history, and credit scores could not be calculated.

30. Credit Reports and Scores A good credit history will enable teens and young adults the ability to have additional credit for purchases, such as autos and eventually houses. However, many people do not realize that a good or bad credit history can have an additional impact on other areas such as renting houses, getting insurance and even getting jobs. A bad credit history can cause landlords from denying people from living in their buildings, insurance companies can have people with bad credit to pay higher premiums and employers use credit reports to qualify potential employees, especially in the financial services industry or for positions where the applicant is handling money.

31. Credit Reports and Scores Another, and possibly the most important, reason to maintain a good credit history and credit score is that your credit score has a direct relationship on the interest rate you are charged for a new or current loan. A FICO credit score ranges from a low of 300 to a maximum high of 850. The higher your score, the better your credit. Generally, as your score increases, the interest rate you receive gets lower. The lower the interest rate, the less you will pay in interest over the life of the loan. To use another analogy that a teenager can understand, keeping a good driving record means lower insurance rates. Likewise, keeping a good credit record can mean lower interest rates when borrowing.

32. Credit Reports and Scores While anything below 600 is considered a bad score, the better your score, the more preferable interest rates will be. According to myFICO.com, the current breakdown in Louisiana is as follows (based on a $15,000, 48-month, new car loan): http://www.myfico.com/myfico/CreditCentral/LoanRates.aspx

33. What percentage of your credit score is based on amounts owed? • 15% • 30% • 35%

34. Credit Reports and Scores Your FICO credit score is broken down into five key areas:

35. Credit Reports and Scores FICO Credit scores do not consider the following information: • Your race, color, religion, national origin, sex or marital status. • Your age. • Your salary, occupation, title, employer, date employed or employment history. [NOTE: However, lenders may consider this information in making their approval decisions.] • Where you live. • Certain types of inquiries (requests for your credit report). • Any interest rate being charged on a particular credit card or other account.

36. Credit Reports and Scores Following is a list of creditable online resources aboutcredit reports and credit scores: • Annualcreditreport.com is the ONLY authorized source for the free annual credit report that's yours by law. www.annualcreditreport.com • ScoreInfo.org: www.scoreinfo.org • myFICO.com: www.myfico.com • Equifax: www.equifax.com • Experian: www.experian.com • TransUnion: www.transunion.com

37. What is AnnualCreditReport.com? • AnnualCreditReport.com is the ONLY authorized source for the free annual credit report that's yours by law. The Fair Credit Reporting Act guarantees you access to your credit report for free from each of the three nationwide credit reporting companies — Experian, Equifax, and TransUnion — every 12 months. [NOTE: You must “purchase” your credit (FICO) score. You can order from all three at once or each at different times. • Freecreditreport.com and others charge a “membership” fee for credit report and score.

38. Credit Repair Scams Beware if: • Want you to pay for credit repair services before any services are provided • Do not tell you your legal rights and what you can do yourself – for free • Recommend that you not contact a consumer reporting company directly • Suggest that you try to invent a “new” credit report by applying for an EIN to use instead of your SSN • Advises you to dispute all information in your credit report or take any action that seems illegal

39. In Closing, Remember … Credit isn't a right to be expected. It's a privilege to be earned and protected.

40. Financial Education Internet Resources • Banking on Our FutureBanking on Our Future is a free online financial education program provided by Wells Fargo and Operation HOPE. This interactive program teaches children, teens, and adults the basics of banking, budgeting, savings and checking accounts, credit and investing.CardTrakCardTrak.com is an online resource provided and maintained by CardWeb.com, Inc. The site hosts vast information on how credit cards work and where consumers can find the best rates. • The Dollar StretcherFree weekly newsletter and Web site dedicated to family finances. It explores different ways to increase family income without reducing lifestyle. Some of the major topics covered in the articles include cash management, credit card and credit repair, debt, insurance, mortgages, IRAs, and budgeting. • Financial Times (FT) Your MoneyFree interactive service designed to help consumers manage and maximize their money. Concentrates on personal finance issues relevant to everyone. Offers advice on home buying, retirement, education, travel, saving money, creating wealth, tax, insurance, and loans. • Hands on BankingThis educational Website, provided by Wells Fargo, is designed to teach children (grades 4 and 5), teens, and adults basic money management and skills. The online program includes features such as a dictionary of financial terms, calculators, and an ATM simulator. Each age group contains a teacher's guide that provides activity worksheets, assessments to test students' knowledge, and a Certificate of Completion to recognize student achievement.

41. Resources for Teaching Kids About Credit Cards Websites • An Internet-savvy child could learn everything she needs to know about credit cards through websites that cater to children. ING Direct's Planet Orange (http://www.orangekids.com/) and the San Francisco Federal Reserve Bank's FedVille (http://www.frbsf.org/education/fedville/) both offer information about credit cards and how they work in a kid-friendly style. Books • If you often find your child with his nose in a book, then a book might be the right approach. You might try something like "The New Totally Awesome Money Book for Kids" by Arthur and Rose Bochner for a factual approach. Younger children might enjoy "Why Did I Get This Credit Card" by Twyla Prindle.

42. Resources for Teaching Kids About Credit Cards Credit Card Simulator • A credit card simulator, like the one offered by Channel One News (http://www.channelone.com/life/credit/), can allow your students to see how long it can really take to pay off something that seems like a minor purchase at the time, especially if you're only making minimum payments. Your students can then adjust the minimum amount that she pays each month and see how she saves money and pays the debt off more quickly. Worksheets • If you want to incorporate some math into your lessons, you can use credit card worksheets, such as the ones at Education World (http://www.educationworld.com/). These allow your child to calculate how small differences -- like a higher monthly payment or a lower interest rate -- actually make a big difference in the final cost of a product purchased with a credit card.

43. Online Credit Card Payoff Calculators • CNN Money's Debt Reduction Planner: http://credit.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=credit&cdn=money&tm=4&gps=142_7_853_569&f=00&su=p284.13.342.ip_&tt=3&bt=0&bts=1&zu=http%3A//cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp • Bankrate's Credit Card Payoff Calculator: http://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx • YoungMoney.com Debt Repayment Calculator: http://www.youngmoney.com/calculators/credit_card_and_debt_management_calculators/credit_card_payoff • AOL's Balance Payoff Calculator: http://calculators.aol.com/tools/aol/card04/tool.fcs • FTC Credit Card Calculator: http://www.ftc.gov/bcp/edu/multimedia/interactive/creditcardcalculator.shtm • TimeValue.com Online Financial Calculators: http://timevalue.com/products/tcalc-financial-calculators/overview.aspx?CALCULATORID=PC02&TEMPLATE_ID=www.timevalue.com_2&HIDEFORMTAG=TRUE • feedthepig.org Credit Card Payoff Calculator: http://www.feedthepig.org/creditcardcalc

44. Contact Information Layne R. McDaniel Noesis Data 11606 Southfork Ave Suite 100 Baton Rouge, LA 70816 (225) 922-4746 layne@noesisdata.com