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8 Benchmarks for Borrowing & Credit Card Act of 2009

8 Benchmarks for Borrowing & Credit Card Act of 2009. Financial Planning for Women August 2009 Jean Lown. September 9 FPW. Don’t give your money to Bernie… outsmarting investment fraud Protect yourself, your parents, your kids. 8 Borrowing Benchmarks from Consumer Reports.

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8 Benchmarks for Borrowing & Credit Card Act of 2009

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  1. 8 Benchmarks for Borrowing &Credit Card Act of 2009 Financial Planning for Women August 2009 Jean Lown

  2. September 9 FPW • Don’t give your money to Bernie… outsmarting investment fraud • Protect yourself, your parents, your kids

  3. 8 Borrowing Benchmarks from Consumer Reports • Severe recession creates debt problems • Responsible borrowers lost jobs • Someone you know needs this help

  4. Warning Signs of Excess Debt • Relying on credit cards for daily purchases • Using home equity line of credit to extend purchasing power • Paying minimum on credit card bills • Using cash advances to keep afloat • Losing sleep over debts

  5. 1. 20% • Add up: • Monthly car payment(s) (loans & leases) • Average new charges on credit cards • Other non-mortgage debt payments • Total should be not > 20% of gross monthly income

  6. 2. 28% • Monthly mortgage + property taxes & insurance • Should not > 28% of gross monthly income

  7. 3. 36-48% • Total monthly debt (mortgage + non-mortgage) should not > 36% of gross monthly income • 36-48% is really scary • > 48%: seek help

  8. 4. 80% • First mortgage + any second mortgage or home equity line of credit should not > 80% of property’s value • A lower debt-to-equity ratio is better

  9. 5. 6 points • Low teaser rates on adjustable rate mortgages (ARMs) • Most ARMs have 6% point cap • If considering ARM, add 6% to the teaser rate and calculate the monthly payments • Worst-case scenario • If (with taxes & insurance) > 28% of gross monthly income: don’t do it!

  10. 6. 6 months • Need 3-6 months of living expenses in reserve for emergencies • How secure is your job? • Spouse or partner’s income? • How quickly could you find a new job? • Would you have to sell house and move for new job?

  11. 7. 36 months • Don’t take out vehicle loan for > 3 years • Longer terms: upside down • Owe more than vehicle is worth • Buy used instead of new • “Cars depreciate faster than they roll downhill.” (bankruptcy researchers Sullivan, Warren & Westbrook)

  12. 8. Updated FICO score info • FICO Credit Score needs to be higher to get the best rates. • Median (mid point) FICO® score is 723 • 760-850 needed for lowest rates • http://www.myfico.com/

  13. How to Dig Out • Assess your finances • Add up debts • Use PowerPay to develop a plan to repay • Stop borrowing • Use cash or debit card for daily expenses • Use 1 credit card & pay in full each month • Keep 1 card in reserve… in case of theft or fraud • Call creditors before they call you.

  14. Credit Card Act of 2009 • Limits interest rate increases & fees • 45 day notice of rate hike • Bans: Universal default, double-cycle billing, retroactive rate hikes • Info on how long to repay w/ min. payments • Payment of > min. must go to highest % balance • Promo rates must last at least 6 months • Prohibits raising rates in 1st year (unless variable rate) • Bills must be mailed 21 days before due • Limits cards to applicants < 21 years old

  15. Banks’ Response to New Law • Tightening standards on new applicants • Requiring more info on $ status • Rejecting more applicants • Offering lower credit limits

  16. Impact on Current Cardholders • Raising rates and fees • Switching from fixed to variable rates • Reducing credit lines • Closing accounts • Good to have 2 cards • Reducing teaser rate offers

  17. Future Credit Card Directions • “Era of easy credit is over.” WSJ • HH debt as % of disposable income: 130% • Move towards: • No-fee, no frills cards • Premium rewards cards with annual fees • Harder & costlier to get credit • Is this a good or bad effect?

  18. Check your Credit Report Definition: A continuing record of a borrower’s debt commitments and how well they have been honored.

  19. Free Annual Credit Report Obtain a free credit report once per year per credit bureau Experian, TransUnion, and Equifax www.annualcreditreport.com Ensure your report is accurate 3 times per year: August: Experian December: TransUnion April: Equifax

  20. Estimate your FICO Score • Range: 300-850 • http://www.bankrate.com/calculators/credit-score-fico-calculator.aspx • About FICO Scores: http://www.myfico.com/Default.aspx • (click on “About FICO Scores” near middle of page)

  21. USU Family Life Center Housing & Financial Counseling Center 493 N. 700 E. Logan at bottom of Old Main Hill 435-797-7224

  22. Power Pay Debt Reduction Software • www.powerpay.org • Stop borrowing until debts are paid • Make power payments • As one debt is paid, use that $ to pay another debt rather than spending it. • Get out of debt more quickly • Pay less interest

  23. Questions? Comments? • Don’t forget to respond to email regarding the FPW newsletter • Check out the updated FPW website • Stay tuned for emailed FPW survey • September 9 FPW: Outsmarting investment fraud

  24. Managing Debt: From Credit Cards to Foreclosures • 50-minute Webcast presented by Marilyn C. Dimitroff, CFP® • http://register.webcastgroup.com/event/?wid=0770913084424 • Please feel free to leave as needed • URL is in the August newsletter

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