Financial Smarts

1. Financial Smarts For Teachers

2. Sponsors

3. Using Credit

4. What Is Credit? Buy Now Pay Later It’s a business transaction!

5. Credit Statistics • Average number of credit obligations • Average number of credit cards • Average available credit 13 9 $19,000 www.myfico.com

6. Credit Use Percent of consumers who carry more than $10,000 innon-mortgage debt 37%! www.myfico.com

7. Basic Terms • Consumer Credit • Credit • Goods, services, money received for promise to pay later • Debt used by consumers • Expenditures other than home mortgages

8. Credit Rule Credit Payments = no more than 15-20% of take-home pay or no more than 1/3 of spendable income Take-Home Pay – Basic Needs Spendable Income

9. Installment Credit • Pay for items in regular payments • Interest varies with item • Usually requires down payment • Seller owns untilall payments made

10. Revolving Credit • Interest can be 1 – 2% monthly • Required payment varies by card • May pay in full or make minimum payment • No finance charge if bill paid in full

11. Credit Agreement • Annual percentage rate (APR) • Finance charge (in dollars) • Service charges, loan fees, life insurance premiums & interest • Date for payment with no charge • Balloon payments

12. Credit Cost Variables • Interest rate • Length of loan • Amount of loan

13. Cost of Time Loan = $500

14. Cost of Credit Simple Interest Interest Paid on Outstanding Balance Each Month Pre-computed Interest Interest Is Calculated on Entire Loan AmountUp Front

15. Simple vs. Pre-Computed

16. Credit Card Interest Average Daily Balance (ADB) = What You Owe Each Day ___________________ # Days in Month ADB ($400) x Monthly Periodic Interest Rate (1.5%) = Finance Charge for Month ($6.00)

17. Other Considerations • Average daily balance, including new purchases, or • Average daily balance, excluding new purchases (better) • Two-cycle billing method

18. Reducing Credit Costs • Find the best price • Make large down payment • Shop for low APR • Pay back as soon as you can • Pay bills on time • Pay extra with each payment • Use only when needed

19. Credit Card Fees • Annual • Late Payment • Over Credit Limit • Cash Advance

20. Cash Advances • Interest begins immediately • Service fee applies Avoid!

21. Smart Card Habits • Develop system for paying • Save receipts • Pay card in full • Avoid “no minimum payment due” offers • Avoid “endless” repayment periods

22. Finance Charges Loan Amount = $1,000 • Interest rate: 19.8% • Monthly payment: 3% of balance not less than $15 • Years to pay: 8.3 Total Finance Charge: $843

23. Loan Comparisons Loan Amount = $1,000

24. Applying for Credit • Fill out application • Lender reviews and scores • Capital • Character • Capacity • Approval or denial

25. Credit Bureaus • TransUnion (877) 322–8228 www.transunion.com • Equifax (800) 685–1111 www.equifax.com • Experian (888) 397–3742 www.experian.com

26. Credit Bureaus • Information varies • Scoring varies • Charge for scores and reports

27. Free Reports • Once a year • Do not include score • www.annualcreditreport.com(877) 322–8228

28. Credit Report Records • Personal information • Credit history • Inquiries • Public records

29. Personal Information • Name • Social Security Number • Addresses • Birth date • Employment history

30. Credit History • Your credit accounts (Delinquent accounts removed after 7 years) • Loan and credit limits • Loan balance • Available credit

31. Credit History • Payment terms • Payment history • Closed or inactive accounts(Removed between 7 and 10 years)

32. Inquiries • Landlords • Lenders • Employers • Insurers

33. Public Information • Bankruptcies (Removed after 10 years) • Overdue child support payments • Liens

34. Not Included • Checking and saving accounts • Marital status • Gender • Ethnicity • Race • Medical information • Criminal record • Religion • Political affiliation

35. FICO Score • Ranges between 350 and 850 • Higher the better • Varies by reporting bureau • Based on Fair Isaac Corp. (FICO) www.myFICO.com (800) 319–4433

36. FICO Score • Creditworthiness determined by • Credit history • Payment history • Outstanding credit • Existing accounts • Inquiries

37. 10% 10% 35% 15% 30% FICO Score Payment History Amounts Owed Length of History New Credit Types of Credit www.myfico.com

38. FICO Score $20,000 Automobile Loan (36 months) Aug. 8, 2007 / www.myfico.com

39. FICO Score $300,000 Mortgage (30-year fixed) Aug. 8, 2007 / www.myfico.com

40. Applying for a Loan • Review all 3 credit reports beforehand • Correct errors • Contact reputable lender • Compare several offers

41. If Denied Credit • Ask for specifics as to why • Reapply after resolving credit issue (e.g., pay down your debts) • Correct false information on credit report

42. Debt Management • Find out where you stand • Income • Expenses • Bills • Find out • Who you owe • How much you owe

43. Debt Management • Decide how much you can pay back • Consider • Secured status of debt • Legal action that has been taken • Interest being paid • What happens if you don’t pay

44. Debt Management • Set up a plan for paying back your debts • Reduce expenses • Sell assets • Increase family income • Loan consolidation, second mortgages, refinancing

45. Debt Management • Discuss plan with creditors • Why you are behind • Your current income • Other obligations • How you will catch up • Stick with plan until all debts repaid • Revisit plan

46. Treat Credit as Cash! Final Thoughts Pay Bills when Due!