Credit in a Money World

1. Credit in a Money World

2. Credit makes the world go round • Credit…buying something today with income you will earn in the future. • Credit has existed for only half a century. • During good times and bad…… • Makes global commerce possible • Allows more people to go to college • Makes home buying possible for more people • Has transformed how consumers make buying decisions

3. This Chapter • You will learn….. • How to determine your debt load • How to calculate your debt-to-income ratio • To identify “good” and “bad” debt • How to manage the use of credit • How to get your credit reports free of charge • How credit scores are determined • How finance charges and fees are determined • Strategies for paying down debt • How to establish and shop for credit • How to shop for mortgages • How to resolve credit problems • How to protect yourself against identity theft

4. Calculating Your Debt-to-Income Ratio • How much credit its too much? • List everything you owe to determine debt load (credit cards, mortgage, line of credit, student loan, car loan etc.) • List the amount of each monthly payment (except mortgage payment) • Divide the total amount of your monthly payments by your total net pay

5. Calculating Your Debt Load *Only includes principal and interest; it excludes property taxes and insurance.

6. Calculating Your Debt-to-Income Ratio Recommended Debt-to-income ratio is less than 15%! Once the ratio exceeds 20% repayment problems Increase dramatically.

7. Identifying “Good” and “Bad” Debt • Clothes G/B • Car G/B • Credit cards G/B • House G/B • Food G/B • Education G/B • Gasoline G/B

8. Good Debt Anything that appreciates in value and/or adds value or boosts future earning potential Bad Debt Anything that depreciates in value or limits your ability to take advantage of positive financial/life opportunities

9. Managing the Use of Credit • Make a budget and stick to it. • Set personal and family limits on credit use (30% of credit card limit). • If you can’t balance in full each month, pay more than the minimum. • Recognize the difference between needs and wants. • Always open your credit card bill, and pay it on timeevery month (Carefully watch the due date; this may change month to month). • Limit the number of credit cards you have so that you can make payments on time. • Be wary of anyone who claims they can “fix” your credit. • Keep your credit cards secure. • Think before you close out credit accounts you don’t use.

10. Managing the Use of Credit Real Life Real Money • Dora uses her credit card to charge $50 worth of groceries every week. She also uses her card to buy other things when she runs “short” in her checking account. Each month she has been making only the minimum required payment (5% of the total outstanding balance or $15, whichever was greater). Her current balance is now $2,500, and the Annual Percentage Rate of interest on unpaid balances is 18%. • Dora wants to compare how long it will take to pay off her balance and how much total interest she would be paying back if: • She stops charging on this card altogether and continues to make only the minimum payment each month, and • She stops charging on this card altogether and pays $200 per month instead of the minimum payment • She used the Federal Trade Commission’s online calculator to figure this out. Here’s what Dora found out: • Using the minimum payment approach, it will take Dora seven years to pay off the balance, and she will pay $1,003 in interest charges during those seven years. • Using the $200 per month payment approach, it will take Dora just 14 months to pay off the balance, and she will pay $290 in interest charges. • Using the second method, Dora will save $713 in interest and pay off the balance in a little over a year vs. seven years.

11. Credit Reports and Credit Scores • Why They Matter • Your credit history (good, bad, or non-existent) and debt-to-income ration are used by lenders to determine your “credit worthiness” (credit score) and what interest rate they will charge. Your credit score is an indication of the lender’s level of risk. • Your credit history is your record of paying loans, credit cards, and other bills. It is documented and updated frequently by the credit bureaus. Your credit reports are used by: • Insurance companies • Employers • Utility companies • Mortgage companies • Banks • Credit card companies

12. FICO Scores (Fair Isaac Corporation) Fair Isaac Corporation (FICO) is the largest and best known of several companies that provide software for calculating a person's credit score. Credit scores range from 300 to 850; 723 is the median score. The higher the score, the lower the lender’s risk and the lower the interest rate a borrower and expect to receive. Ninety percent (90%) of all lenders use FICO scores.

13. How FICO Scores Break Down • Payment History 35% • Amount owed 30% • Length of credit history 15% • Number of recent/new accounts 10% • Types of credit used/mix 10%

14. Real Life, Real Money Carolina learned the hard way how mistakes in her credit report made it look like she was a poor credit risk. After obtaining a copy of her credit report, she noticed that there were more accounts than she know she had. When she reported the discrepancies back to the credit-reporting agency and they investigated, it turned out that the credit history of another person with an identical Hispanic surname had been erroneously recorded as Carolina’s credit history! The result: wrong name, wrong history, and lower credit score! Because she knew what steps to take, her credit report was corrected. She still monitors her credit report to make sure the problem doesn’t happen again.

15. Getting Free Credit Reports Your credit report does not contain your credit score. You must pay to get your credit score. The Fair Credit Report Act allows you to order one free copy of your credit report from each of the 3 credit reporting agencies (Experian, Equifax, TransUnion) every 12 months. A common strategy is to order one from one of the 3 agencies every 4 months. Online at: www.annualcreditreport.com(beware of imposters!) Telephone: 1.877.322.8228 Mail: Download form from: www.annualcreditreport.com Or http://www.ftc.gov/bcp/edu/resources/forms/requestformfinal.pdf You are also entitled to a free report if you believe you are a victim of fraud, identity theft, have been Denied credit within the past 60 days, receive welfare benefits or are unemployed.

16. How are Your Finance Charges and Fees Determined • Read the fine print in the Member Agreement; Debt has a price! • Annual Percentage Rate: When you don’t pay off your balance each month, you will pay a finance charge based on average daily balance, two-cycle average daily balance (least advantageous), or adjusted balance method • Check if the APR can change and what can/will trigger a change. • Check the other conditions affecting how much you could be charged in fees. • Late fees …can result in fees up to $35 and increased interest rate • Over the credit limit fee • Other

17. Paying Down Your Debt Stop taking on additional debt! Make a list of all your debts. Include creditor, amount owed, monthly payment, interest rate, and how many more payments your have to make (installment loans i.e. car loan). Examine household spending and look for ways to cut back so that you can increase payments you are making, particularly on credit cards. Identify debts with the highest interest rates. The higher the interest rate, the more of your payment goes to interest. Pay off the highest interest rate debts first OR the debt with the lowest balance. Make “power payments” (After paying off one debt, apply that additional amount to payments being made on another debt in order to pay it off.) Increase payment amounts with money cut from your budget.

18. Student Loans • Service Loan Forgiveness program…encourages people to take public service jobs; after 120 payments, • Loan is forgiven • Other repayment options: • http://Check website studentaid.ed.gov/Portalswebapp/student/English/repaying.jsp • Other debt: avoid credit card debt during college—it’s not worth the t-shirt!

19. How to Establish Credit • Make sure you pay all of your bills on time (i.e. telephone, utilities, rent etc. • Open checking and/or savings accounts. • Apply for a charge card in your name. Shop around for the best rates. Generally speaking, credit unions offer better rates. • Only charge what you can pay off each month. • Take out a small loan. Make payments on time but do not pay it off early. You want to develop a track record. • Open a secured credit card account. • If you are turned down by one lender, try another. • Apply for a loan using a co-signer, if necessary.

20. How to Shop for Credit • Is there an annual fee? • Interest rate • Annual Percentage Rate (beware of teaser rates) • Is there a “grace period” • Other fees? • Method used to compute finance charge • Late fee

21. Buying and Financing a Home • Make sure that payments are affordable. Your mortgage payment should not be more than about 30% of your take-home pay. • A mortgage is just the beginning. A house payment has four parts: Principal, Interest, Taxes, and Insurance (PITI) that you will ow as a homeowner. Thirty-eight percent should be allocated for PITI, regular maintenance, and possible upgrades. • Make the largest down payment you can afford. This will give you instant equity (value that you own). • It may take several years to save for a down payment. First-time homeowners may qualify for special down-payment assistance programs from local authorities. • Learn about types of mortgages and the mortgage process.

22. Resolving Credit Problems • Many people face financial crises at some time in their lives. Your situation does not have to go • From bad to worse. • Contact your creditors immediately if you are having trouble making ends meet. Try to work out a modified payment plan to reduce your payments to a manageable amount. Don’t wait until your accounts have been turned over to a debt collector. Most lenders are willing to work with you if they feel you are acting in good faith. • Examine ways to bring in additional income and to cut back on expenses • If you cannot work out a manageable repayment plan, consider contacting a credit counselor. Some credit counseling services may charge a fee (beware, no one can “fix” your credit). • Personal bankruptcy is generally considered an option of last resort.

23. Handling Suspected Identity Theft • Request a copy of your credit report to check for unauthorized accounts • Immediately file an Identity Theft Report with local police or the police in the community where the identity theft took place. • Contact the fraud division of the credit bureaus, and request that a Fraud Alert on your credit file. • Close any accounts opened fraudulently or that have been tampered with. • File a complaint online with the Federal Trade Commission. • Change all passwords • Change credit card and bank card numbers

24. Protect Yourself From Identity Theft • Get a copy of your credit report from each of the reporting agencies each year. • Examine your monthly account statements thoroughly. • Tear up or shred all pre-approved credit officers, receipts, and other personal information that link your name to account numbers before throwing them in the trash. • Keep track of renewal dates for your credit cards. If they are more than two weeks late, contact the issuer. • Protect your account information. Don’t write your personal identification number (PIN) or passwords on your ATM or debit card • Mail your payments at the post office. Never use the your mailbox with the red flag up. • Carry only the ID, credit cards, and bank account information you need • Ask how your employer safeguards your personal information against unauthorized access. • Remove your name from credit bureau mailing lists. • Get off other mailing lists for “junk” mail.

25. Contact The National Council of Negro Women, Inc.633 Pennsylvania Ave. NWWashington, DC 20004Telephone: (202) 737-0120Fax: (202) 737-0476Email: membership@ncnw.org Paulette Lewis paulettelewis1234@gmail.com