Managing Credit & Debt

1. Presented by Great-West In partnership with Colorado Jump$tart Managing Credit & Debt Steve Trigonoplos, Arapahoe Credit Union Elfriede Leicht , CHFA Misti Ruthven, CDE January 26 - 28, 2012

2. 1-Minute Check-in • Teaching responsibilities? • What is the one thing you wish you had learned early on about managing credit & debt? (or) When did you make your first credit purchase and for what?

3. Seminar Topics • Explore strategies to use credit and manage debt • Advantages & disadvantages of using credit • Elements that impact credit/FICO scores • When & why credit history is shared • Credit application & review process • Consequences of high & low credit scores • The ins and outs of mortgage loans • Repaying student loans • Strategies to manage credit use and reduce debt

4. Lender’s Perspective

5. Lender’s Perspective - Overview • Learn how creditors see you and how you can use this information to strengthen your fiscal character. • Building your fiscal reputation and lowering your debt will help you build stamina for the long run.

6. Learning Objectives • Give examples of why and how people borrow money. • Compare and contrast the advantages and disadvantages of using credit. • Discuss how individual credit use impacts society. • Categorize the elements that impact a person’s credit/FICO score. • Give examples of when and why an individual’s credit score and history is shared with others. • Outline the credit application and review process. • Discuss the consequences of high and low credit/FICO scores. • Explore the consequences of excessive debt. • List strategies to manage credit use and reduce debt. • Explain how to address errors in the credit report. • Discuss consumer rights related to credit.

7. Your performance will be successful when: • You predict how your financial goals will be affected by your existing credit history. • You identify at least one new strategy to employ to make a positive impact on your credit rating. • You identify at least one strategy to incorporate the study of credit and debt management into a classroom learning experience.

8. Learning Objective 1 Give examples of why and how people borrow money

9. Learning Objective 1 Give examples of why and how people borrow money. • Large ticket items - Mortgage, HELOCs, Auto • Credit Cards - Consumer Trends • Carry balance and pay the finance charge • Pay off every month to avoid finance charges • Living a luxurious lifestyle on credit • Borrow to begin establishing or establishing credit • Small balance loans • Secured by deposits in a financial institution

10. Learning Objective 2 Compare and contrast the advantages and disadvantages of using credit.

11. Learning Objective 2 Compare and contrast the advantages and disadvantages of using credit. • Important to build a strong credit history • Lenders can’t evaluate how the consumer will pay for future loans without any history on their credit report. • Lender’s base their loan rate on the consumer’s credit/FICO score. This is called risk based lending. • No score established results in a higher interest rate. • Excessive debt will result in a higher interest rate or a loan denial. • Know your debt to income ratio and your unsecured debt to income ratio.

12. Learning Objective 2 Debt to Income Ratio Total Monthly Payments (i.e., House, Car, Student Loans, Credit Cards, plus new loan payment) Divided By Total Gross Monthly Income = 45% or less

13. Learning Objective 2 Unsecured Debt to Income Ratio Total Monthly Payments (i.e., Major Credit Cards and Merchant Credit Cards) Divided By Total Gross Annual Income = 25% or less

14. Learning Objective 3 Discuss how individual credit uses impacts society.

15. Learning Objective 3 Consumers Defaulting on their Loans Discuss how individual credit uses impacts society. • Negatively impacts the lender as they suffer losses in their loan portfolio • If the losses occur in large numbers, this may cause the lender to tighten their loan underwriting and deny loan requests. • This can also cause the lender to increase interest rates, to earn more income to offset the losses

16. Learning Objective 3 Subprime Mortgage Crash • Bank examiners came into financial institutions and those with high loss ratios were forced to tighten their loan underwriting. • Consumers with a mid range credit/FICO score i.e., 640 to 660 were likely denied.

17. Learning Objective 3 End Result: Fewer Cars were Purchased

18. Learning Objective 3

19. Learning Objective 4 Categorize the elements that impact a persons credit/FICO score.

20. Learning Objective 4 Fair, Issacs Company (FICO) Score

21. Learning Objective 4 Items that impact your credit/FICO score as well as what lenders look at: • Tax liens • Court order judgments • Bankruptcy • Collections • Late payments history • 60, 90, 120 days late. YIKES! • Amount of credit card balances as a percentage to credit limits • It is recommend to keep balances under 40% of credit limit

22. Learning Objective 4 Simple rules that will help you get the credit you want.

23. Learning Objective 4 When a consumer is declined based on credit score. • The consumer should not focus on the score number, as the score number will vary depending on the type of credit report used. • Instead, the consumer should concentrate on the factors that most affected the score, i.e., late payments. The factors impacting the credit score will appear on the adverse action notice the consumer receives after the loan request has been denied.

24. Learning Objective 5 Give examples of when and why an individual’s credit score and history is shared with others.

25. Learning Objective 5 Give examples of when a why a individual’s credit score and history is shared with others. • Some Lenders will enlist the credit bureau to pull credit/FICO scores on consumers. • ACU does this with any member who has a credit relationship such as an open loan or open checking account. • ACU uses the score to target market products to members in score ranges. • We can then provide our members with a qualified pre-approval for a future loan. ACU DOES NOT SHARE A MEMBER’S SCORE WITH ANY OTHER ENTITY!!!

26. Learning Objective 5 How do consumer’s names get on a direct mailing list?

27. Learning Objective 5 How can the consumer remove their name from prescreen offers and marketing lists? • Opt Out - Removes consumers from prescreened credit offers. 1-888-5OPT OUT or 1-888-567-8688 www.optoutprescreen.com 2. Direct Marketing Association (DMA) - Removes consumers from direct mail solicitations. www.the-dma.org 3. National Do Not Call Registry - Removes consumers from telemarketing lists. 1-888-382-1222 www.donotcall.gov

28. Learning Objective 6 Outline the credit application and review process.

29. Learning Objective 6 Outline the credit application and review process. After receiving the loan application, the lender begins the task of analyzing the information and evaluating the creditworthiness of the consumer. A decision will be made to approve, conditionally approve or deny the loan request. The five C’s of credit: Character Capacity Collateral Capital Conditions

30. Learning Objective 6 The five C’s of credit - Character Character - Evidence of the consumer’s willingness to repay the debt. Lenders’ must determine if the consumer will make good efforts to pay off the loan. What is the primary tool a lender will use to determine a consumer’s character?

31. Learning Objective 6 Credit Report Three major Credit Reporting Agencies… …who track your credit history www.annualcreditreport.com

32. Learning Objective 6 Did you Know? There are different types of credit/FICO scores used by lenders. • Automobile Enhanced Score - Places emphasis on the auto loan history. • Credit Card Enhanced Score - Places emphasis on the credit card history. • Mortgage Enhanced Score – Places emphasis on the mortgage history. • National Score – Applies equal weight to all creditors. • The lender will use the credit bureau type that applies to their business. • Credit/FICO scores may vary depending on the type of credit report pulled by the lender.

33. Learning Objective 6 The five C’s of credit - Capacity Capacity – Refers to the consumer’s ability to repay the loan. This is calculated by the debt to income ratio. Note: if the consumer discloses income from child support or alimony, the lender must include this in their debt to income calculation. The lender should always request verification of all income prior to closing the loan.

34. Learning Objective 6 The five C’s of credit - Collateral Collateral – Something of value that can be pledged to the lender to secure the loan such as vehicles, deposits or certificates of deposits, and real property. This is extremely important to the lender if the borrower defaults on a loan.

35. Learning Objective 6 The process if a borrower defaults

36. Learning Objective 6 The five C’s of credit - Capital Lenders will consider any capital the borrower puts toward the loan. Example: Consumer wants to buy a vehicle Vehicle cost $11,000 Money Down $ 5,000 Value of Vehicle $12,000 The auto loan may be approved if the credit/FICO score is below the median of 640 since the consumer has a strong equity position in the collateral.

37. Learning Objective 6 The five C’s of credit - Conditions • Conditions of the loan, such as the interest rate and the amount of the loan can influence the lender’s decision to finance the borrower. • A lender may approve a loan with a higher interest rate calculating they will earn more in income, offsetting their perceived risk. ACU does not use the interest rate or the loan amount as determining factors in our credit union decisions.

38. Learning Objective 7 Discuss the consequences of high and low credit scores.

39. Learning Objective 7 FICO/Credit Score Breakdown

40. HELOC 720 and Above 90% Loan to Value Auto 760 and Above 120% Loan to Value Auto 600 - 639 80% Loan to Value Learning Objective 7 Loan to Value

41. 760 $20,000 Auto loan 72 months 4.49% A.P.R. Payments = $317.17 per month Finance charge = $2,850.12 600 $20,000 Auto loan 72 months 17.99% A.P.R. Payments = $455.91 per month Finance charge = $12,824.17 Learning Objective 7 Want to Buy a Car?

42. 760 $200,000 loan 30 year term 3.99% A.P.R. Payments = $953.61 per month Finance charge = $143,298.27 600 $200,000 loan 30 year term 9.5% A.P.R. Payments = $1,681.42 per month Finance charge = $405,305.48 Learning Objective 7 Want to Buy a House?

43. Learning Objective 7 Difference in Lifestyle

44. Learning Objective 8 Explore the consequences of excessive debt.

45. Learning Objective 8 Exploring the consequences of excessive debt. Consumers with excessive debt have lower credit/FICO scores • Maxing out their Credit Cards: • Consumers have a higher propensity to file bankruptcy to escape their debt. • If a consumer is making the minimum payment on their credit cards, it will take years to pay off the card, and they will pay a high dollar amount in finance charges.

46. Learning Objective 8 How much do I Love my TV? Purchased a 52” HD TV for $2000 Your minimum monthly payment: $25 If your A.P.R. is 14.99%, It will take a quarter of your lifetime to pay off the balance if you just make the minimum monthly payment!

47. Learning Objective 8 Excessive debt can also equate to the inability make payments on time. A vicious cycle.

48. Learning Objective 8 Bankruptcy – Last Resort • Chapter 7 • Remains on consumers credit bureau report for 10 years • Chapter 13 • Remains on consumers credit bureau report for 7 years • Bankruptcy has a negative impact on the credit/FICO score and impacts the ability to borrow. • Any creditor included in the bankruptcy that is not paid reports negatively on the consumer’s credit bureau report.

49. How long does each item stay on the consumer’s credit report? Delinquency/Collections 7 – 10 years Liens/Judgments – 7 years Bankruptcies – 7 -10 years Unpaid Tax liens – 15 years Inquiries – 2 years Learning Objective 8 Negative Reporting

50. Learning Objective 9 List strategies to manage credit use and reduce debt.