Personal Credit

1. Personal Credit Conserving your wealth 1

2. Income seems to be leveling 2

3. Yet, debt is on the rise 3

4. Overview 4

5. Conserving your wealth is about borrowing or is it about buying? 5

6. Persuasion tactic • Phantom Fixation – The objective is to put something that is completely unavailable before you that appeals to health issues, wealth, popularity or avoiding death. • Commitment – The salesperson tries to get you to commit but saying that your earnest money or deposit will be lost. Often there are laws that say you have 3 days to reconsider and get your funds back in full. Know your rights before you go in to buy. • Authority – The salesperson will say that they’ve been in the business for years and know that this is the best deal that they’ve seen. They might cite specific features. • Social Proof – This tactic tries to get you to believe that everyone is getting one so you should, too. 6

7. Persuasion tactics • Scarcity including product scarcity (only three left) and time scarcity (offer good only today) often makes the consumer feel pressure to buy now. • Comparison – It is very common for sales pitches to show inflated regular prices to a hugely discounted “sales price.” You need to comparison shop to see what kind of deal it really is. • Profiling – In cases where the salesperson wants to make a large sale, they will probe for personal information and then customizes pitch. 7

8. Persuasion Tactics • Friendship – The salesperson changes the relationship to friendship. • Reciprocity – The sales pitch gives you a free gift or lunch. With this your response rate doubles. • Landscaping – The salesperson changes social interaction so it lead to where he or she wants to go by setting the agenda, limiting choices or controlling information. 8

9. foreclosure on a mortgage recent loss of employment in family negative change in financial status concerns about owing money concerns about money in emergencies or basic necessities problems with upkeep in their home a change in living arrangements recent retirement in family change in social activities for the worse change in daily routine problems with transportation of traffic problems with troublesome neighbors or co-workers concern about being lonely legal problems minor violations of the law death of a partner death of a close friend or family member serious injury or illness limits to physical activity divorce or marital separation difficulties in relationships or problems with children or grandchildren Negative events can make you more susceptible

10. Learn to resist persuasion tactics • These tactics are used for legitimate marketing • Used in scamming victims • Swindlers bombard their victims with complex combinations of these tactics 10

11. Activity – Identifying persuasion tactics • Here is a clip from the home shopping network • Identify all the persuasion tactics you see 11

12. The Buy Decision • http://www.mazdausa.com/MusaWeb/displayPage.action?pageParameter=zoomMain • Ask the important question: Do I really need this? • Will it increase in value? Will it decrease in value? 12

13. Needs and wants • Find your last credit card statement • Keep all your receipts in an envelope • List your last ten expenditures • Classify them as “n” for needs and “w” for wants • Look through each item: • Did you spend too much in any item? • Are there any needs that should be wants? Check with folks in your group. • Look at the wants. What can you do to reduce the wants? 13

14. An unnamed credit card bill 14

15. Reflecting on what I spent • One third of my bill was “wants” – easily eliminated • Even with necessities such as groceries, could economize –families waste on average $590 in food every year • Had finance charges that could have been eliminated if paid previous balance on time – went on trip and forgot • Medical emergencies can pop up and break the bank • When you purchase things outside of the country (even Canada) you are charge a foreign transaction fee – in this case a hefty 3% for the emergency room charge 15

16. Look at this activity in your workbook Break into groups Be prepared to present your project to the class Activity: Buying a car 16

17. How should you use credit cards? 17

18. Credit Cards Quiz – True or False? • Credit cards encourage you buy • You should have a minimum of five credit cards • You should close out all credit cards you don’t use • If you are late in payment, you are paying a 5% annual charge • You should always pay your outstanding balance • If you lose your credit card, you are liable for all charges so you should buy credit card insurance to cover for this • Credit card companies will contact you by email to let you know about discrepancies in your account 18

19. The big picture 19

20. Credit card facts • Number issued exceeds 691 million or more than twice the population (adults and children) of the US. • Between 1980 and 2005, amount charged to their cards grew from $69 billion per year to more than $1.8 trillion. • 44.4% of families had outstanding credit card balances with a median value of $2200. Average value for Washington state is $5100 in 2006. • Use of credit cards adds to household debt, which grew from $59 billion in 1980 to roughly $830 billion by the end of 2005. • One third of teenagers have credit cards cosigned with their parents. • According to the Federal Reserve, from 1983 to 2001, credit card debt for 24- to 35-year olds tripled from $3,989 to $12,000. • Some experts believe that the rise in credit cards has brought about the rise in personal bankruptcies. 20

21. How well do you know your credit card? • Read the solicitation disclosure • Answer the following questions: • What interest rate are you charged on your purchases if you don’t pay your balance at the end of the month? • Is this interest rate fixed? • How is the interest computed? • What are you charged on cash advances? • Besides the interest rate, what other charges will you incur if you have an outstanding balance? If your payment doesn’t clear? • Assume you had an average daily balance of $500 for the month, calculate what interest rate and other fees you would pay 21

22. Credit Card • Credit cards encourage you to spend. So if you have problems with spending too much, use cash. • Opt out of credit card offers by calling Opt out 888-567-8688 or going to the website www.optoutprescreen.com. • Before you sign on to a credit card, use the credit card evaluation form to evaluate all fees and charges. • Keep only two credit cards on you to minimize loss. • Keep a record of your account numbers, their expiration dates, and the phone number and address of each company in a secure place. Some fraud experts recommend that you photocopy the cards you carry with you. 22

23. Credit Cards • Protect your card and your account number. • Save receipts to compare with billing statements promptly. • Pay all credit cards on time and in full. • Do not spend up to your credit limit. • Report any questionable charges promptly and in writing to the card issuer. Do not pay for purchases where product was not delivered or defective. 23

24. Credit Cards • Correct any billing errors as soon as possible. • If you use your credit card to shop online, install security on your personal computer. • Don’t automatically close credit cards when you no longer use them. Put them in a safe place. • If you lose your credit or charge cards or if you realize they've been lost or stolen, immediately call the issuers. Your maximum liability under federal law is $50 per card. 24

25. Installment Loans • Borrow money now • Pay back over period of time • The shorter the period you borrow, the less interest • The lower the interest rate, the better 25

26. Car Loan - $15,000 – 48 months – 7% 26

27. Summary on Car Loans • Shop around and do a lot of research before you buy a car. A car depreciates or loses value so it’s not wise to spend a lot of money on a car. • Pull your credit report and know how you rate. • The type of car you buy can affect how much you pay for car insurance, maintenance and gas. • Negotiate for the lowest price. • Don’t take out a loan for longer than the time you will be using the car. • Shop around for the lowest interest rates. • Don’t spend more than 40% of your monthly income on debt including your mortgage. 27

28. Student Loan Facts • Students took $80 billion in loans out in 2006. • Student loans outstanding (still to be paid back) are about $525 billion. • Federal student loans are the largest source -12 million loans were made for a total of $55 billion (2006). • On average students coming out with a bachelor’s degree had $20,000 in debt, those with a graduate degree had $35,000 in debt, and those coming out of professional schools such as law school and medical school had $100,000 in debt. • An AOL survey showed 65% of those who took out student loans still had an outstanding balance at age 35. 28

29. Student Loans 29

30. Best way to pay is by saving ahead of time • Qualified tuition plans (529 Plans) allow you to save tax-free • Washington GET • Coverdell Education Savings 30

31. The difference between saving and borrowing 31

32. Summary on Student Loans • Make sure that you have a good chance of earning the income you need to pay off the debt. • Only borrow as much as you need. • Check for federal loans first. They are the cheapest and have the most options. • Comparison shop for private loans and evaluate APRs. • Ask for loan features that will help you if you miss a payment or if you have a good on-time record. • Create a plan for repaying your loan when you take out the loan. 32

33. The home is part of the American dream, but you can’t get one without a mortgage. 33

34. Mortgages -$10.2 trillion in debt 34

35. Mortgages • Rent versus buy? • What factors do you need to consider? Try it at: http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?Section=YPTH 35

36. Debt-to-income ratio • A = Total all your housing expenses (mortgage, insurance and taxes) • B = Total all your debt payments A + others (car, education and credit card) • C = Total all your monthly income • Debt-to-income ratio A/C and B/C determines how much you can afford Try it at: http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH 36

37. How do mortgages work? 37

38. Effect of interest rates 38

39. Adjustable-rate Mortgages You have an adjustable-rate mortgage for $200,000 that resets after a year. The rate is set at 2% above the 90-day treasury bill. When you assumed the mortgage a year ago, you were given the rate of 4.97%. The treasury bill rate is now 5.03%. What will your rate be? What increase will you see in your monthly payments? 39

40. Effect of term of mortgage 40

41. Understanding APR 41

42. Evaluating a mortgage - APR • http://www.dinkytown.net/java/MortgageApr.html 42

43. Mortgage Shopping Worksheet • What could you afford? • Down payment • APR • Points • Private mortgage insurance • Fees (Application, origination, lender, appraisal, attorney, document preparation, broker’s fee, credit report fee • Other closing fees • Other costs 43

44. Mortgages • Adjustable versus fixed rate? • 30-year versus 15-year? • How much down payment? Try it at: http://www.ginniemae.gov/2_prequal/le_intro_questions.asp?subTitle=YPTH 44

45. Activity – Shop for a mortgage • Break into groups. • Using the mortgage evaluation form, evaluate 3 mortgages 45

46. What do you mean I didn’t get the job? The low-down on credit reports. 46

47. Gender Age Childbearing plans Marital status Change in marital status Loans Public assistance Dependents How long you’ve lived at your house Alimony Race Color National origin People in the neighborhood where you want to buy How long you’ve had your job Salary Which of the following factors can a lender use to evaluate your credit? 47

48. Activity – Reading a credit report • Read the sample credit report • Identify the main areas of interest to the consumer reporting companies • What factors do consumer reporting companies use in calculating a credit score? 48

49. Your credit score Source: www.myfico.com 49

50. Credit Scores 50