Be Credit $mart

1. Be Credit $mart Louisiana Jump$tart Coalition Financial Educators Summit September 15–16, 2011 Layne R. McDaniel, CPA President/CEO Noesis Data, an Equifax Sales Agent

2. Be Credit Smart Are You Credit Smart? • Do you Know What’s in Your Credit File? • Do you Know Your Credit Score? • Do you Know Your Annual Percentage Rate (APR)? • Do you Know What Type of Loans to Avoid?

3. Be Credit Smart Are You Credit Smart? • Being credit smart can help you save a lot of money and be the first line of defense against identity theft. • If used wisely, your credit can be a key to your financial future. Credit can be one of your best friends or, if you're not careful, one of your worst enemies. • You can only be smart in playing a game when you know the rules of the game very well and follow the same diligently. Similarly, to be smart with your credit you need to know the rules of credit and follow them diligently. Protecting your credit is a lot easier than repairing it. ID THEFT

4. Be Credit Smart Do You Know What’s in Your Credit File? Being credit smart means knowing what’s in your credit reports, knowing how it is used, and knowing what you can do about it. You have three credit reports, and knowing what's on each of them is very important. Also, the information in your credit files is the sole source used to calculate your credit scores. If you are thinking about applying for a mortgage, credit card or loan it's a good idea to check your credit report to make sure that it is accurate. This will put you in the best possible position to be accepted. www.annualcreditreport.com

6. Be Credit Smart Do You Know Your Credit Score? • Your credit score is the single most important factor in determining whether or not you get approved for new loans, mortgages, credit cards, bank accounts and all other forms of credit. • FICO scores are the credit scores most lenders use to determine your credit risk, and just like credit reports, you have three FICO scores. You need to know them all! • Starting July 21st, 2011, lenders were required to provide a credit score and related information when they deny a consumer's request for credit or provide credit with less favorable credit terms than other consumers with better credit histories. (www.ScoreInfo.org) • By getting your scores, you can be sure that you know the kind of loan offers you should be receiving before lenders present you with the numbers.

7. Be Credit Smart Do You Know Your Credit Score? Basically, the higher your FICO scores the less you can expect to pay for your loan. For example, on a $25,000 3-year, auto loan: As you can see in this example using today’s national rates, a person with a FICO score of 720 or better will pay $159 less per month for a $25,000 3-year, auto loan than a person with a FICO score of 589 – that’s a savings of $1,908 per year.

8. Be Credit Smart Do You Know Your Credit Score? • Other ways your credit histories and credit scores can affect your finances: • Car Insurance • Property insurance • Rental Agreements • Getting a job • Credit card offers • Mortgage interest rates • Credit card interest rates

9. Be Credit Smart Do You Know Your Credit Score?

10. Be Credit Smart Do You Know Your APR? The Annual Percentage Rate (APR) is the cost of credit (actual interest rate) expressed as a yearly rate. Comparing the APR of loans or credit cards is a quick way to determine which loan or card will likely cost you the most, excluding optional fees such as late payment fees, ATM fees, or obtaining a cash advance.Borrowers who know how to figure their APR generally get the best loan terms.

11. Be Credit Smart Do You Know Your APR? The APR is designed to help you shop for loans by making them more comparable. It measures the net effective cost of borrowing – “the actual present value of those funds over the length of the contract." In other words, APR answers the question: "Is it worth it to pay more upfront to get a lower rate?" When you apply for a mortgage, the federal Truth in Lending Act requires the lender to disclose both the nominal rate and the APR. The nominal rate can't be stated more conspicuously than the APR.

12. Be Credit Smart Do You Know Your APR? • For example, you might get the following two quotes for $150,000 mortgages, each for a 30-year term: • Lender A offers 6.5% with the borrower paying no discount points and $5,000 in fees; • Lender B offers 6.25% with the borrower paying 1 discount point ($1,500) and $5,500 in fees, for a total of $7,000 in points and fees. • Which is a better deal? APR gives you a general idea.

13. Be Credit Smart Do You Know Your APR?

14. Be Credit Smart Do You Know Your APR? • Lender A's offer has an APR of 6.83 percent, while Lender B's offer has an APR of 6.71 percent. Since Lender B's APR is lower, that loan is a better deal in the long run. • But that's in the long run….. • Consider the termIn the short run, Lender A's offer might be better. A look at the example above tells why. • Lender B's offer carries a lower APR, but you, the borrower, have to come up with $2,000 more in cash. What if you don't have the money, or you have it, but need it to buy appliances? In those cases, you might prefer the first loan, despite its higher percentage rate and APR.

15. Be Credit Smart Do You Know Your APR? • Or what if you think you might move within a few years? Loan A costs $948.10 a month in principal and interest -- $24.52 a month more than Loan B. So with Loan B, you pay $2,000 up front to save a little less than $25 a month. At that rate, it takes 82 months -- more than 6.5 years -- to recoup the $2,000. If you sell the house in less than 82 months, Loan A costs less. • On the other hand, if you plan to remain in the house for the life of the loan, don’t even look at the nominal rate. What you really want to know is what the net effective cost of funds is, and that's APR.

16. Be Credit Smart Do You Know Your APR? Now when it comes to car shopping, “buying down the rate” takes on a whole new meaning. Let’s say that you have a credit score of 620 to 660.  The Dealership knows by reviewing your credit report that you do not qualify for the best rate available; however they also know by talking to you, that a good rate is important to you. So……Have they got a deal for you!

17. Be Credit Smart Do You Know Your APR? The dealership knows that the best “buy rate” available for you is 12%; however, if the loan is sold at a “discount” of $716 to the finance company, they can lower the APR to 9%.  In other words the loan has an initial amount due of $10,716 but the dealership will only receive $10,000 when they “sell” the loan to the finance company. So, the question is “How does the Dealership come up with the additional $716 they will lose on the sale of the loan?”

18. Be Credit Smart Do You Know Your APR? • You got it….! • The Dealership will require a higher purchase price, a lower trade-in credit, over priced add-ons, an overpriced warranty or any combination of these four items.  

19. Be Credit Smart Do You Know Your APR?

20. Be Credit Smart Do You Know Your APR? Although your down payment, monthly payments, and total payments are the same and your APR is lower, are you better off with the lower APR? If you keep the loan for the entire 60 months you have lost nothing with the buy down.  But you have also gained nothing. However, if you payoff the vehicle before 60 months (due to trade-in, totaled vehicle, or re-finance), the amount due on an “early payoff” will be higher and you will be worse off. In this example, paying the higher APR at the lower loan amount is a better deal.

21. Be Credit Smart Do You Know Your APR?

22. Be Credit Smart Do You Know Your APR? This is why it is always important to negotiate the purchase price, the trade-in credit, the add-ons and the warranty prior to discussing your credit with the Dealership or allowing the Dealership to access your credit report. You do not want to give the Dealership an opportunity to “hide” the buy-down costs in any of these four items.

23. Be Credit Smart Do You Know Your APR? • Credit Cards and Other Revolving Lines of Credit work a little bit differently in regards to APR. For these loans, APR usually does not include fees but just the compound interest rate, which is charged on a regular basis (monthly, daily, etc.). Also, you typically have three rates on credit cards: • One for purchases, • One for balance transfers • One for cash advances.

24. Be Credit Smart Do You Know Your APR? So… “Do you know your interest rates on each of your credit cards?” • According to a recent survey, 36 percent of cardholders don't know the rate on the card they use most often. • The national average Annual Percentage Rate (APR) for a credit card is _______ • The Radio Shack credit card charges one of the highest interest rates at 28.99 percent. Staples and Best Buy also charge high interest rates -- 27.99 percent on average. 14.78%

25. Be Credit Smart Do You Know Your APR? It's Not Only the APR … Although looking at the APR is the most obvious way to compare credit cards, the method by which credit card issuers determine your balance can make a big difference in how much interest you pay. Also, look at annual fees, late fees, over-the-limit fees, cash advance fees, grace period, and billing cycle.

26. Be Credit Smart Do You Know Your APR? • Once you have verified your APR, you need to determine how your finance charges are conveyed on your billing statement. There are two ways your credit-card company can do this: monthly or daily. • Computed Monthly: • The monthly periodic rate = 14% / 12 months = 1.167%Finance charges for the month = $1000 x 1.167% = $11.67 • Computed Daily: • Daily periodic rate = 14% / 365 days = 0.0384%Finance charge for the month = $1000 x 0.0384 x 30 = $11.51

27. Be Credit Smart Do You Know Your APR? • Next, determine how the balance on which your finance charges are applied is calculated. To find out how your creditor calculates your charge, look on the back of a recent billing statement. You should find an explanation there. • Average daily balance method • Adjusted balance method • Previous balance method • Ending balance method

28. Be Credit Smart Do You Know Your APR?

29. Be Credit Smart Do You Know Your APR? • Finally, you need to determine your most important need for a credit card: • Carry New or Existing Debt • No Debt — Transact Only (In other words, you will be making purchases throughout the month, which you then pay in full every month, thereby incurring no debt.) • If you have both needs, then get one credit card for each of your needs.

30. Be Credit Smart Do You Know Your APR? • MAIN NEED: Carry New or Existing Debt • If you have decided that you want to have debt on your new credit cards because you will not pay your balance in full every month, then the next decision you have to make is whether you want to use your new credit card to: • Transfer existing debt only • Incur new debt only • Both of the above

31. Be Credit Smart Do You Know Your APR? If you are planning to use the credit card for transferring existing debt only, then you should choose the best balance transfer credit card (i.e. the card that has the lowest introductory Balance Transfer Rate / APR for the longest period). If you are planning to use your new credit card only for buying new things (i.e. incurring new debt), then you should choose one of the best credit card rates credit cards (i.e. the card that has the lowest Purchase APR for the longest period).

32. Be Credit Smart Do You Know Your APR? If you are planning to use your new credit card for both transferring over some existing debt and incurring new debt, then you need a card with the lowest Purchase APR and Balance Transfer APR for the longest introductory period. Also, some cards might have an introductory rate of 0% for both Purchases and Transfers, but the Purchase Intro APR might last for a much shorter time period than the Balance Transfer APR. It is very possible that you’ll be better off if you apply for two credit cards: One of the best balance transfer credit cards (for your existing debt), and one of the best credit card rates credit cards (to finance your upcoming expenditures).

33. Be Credit Smart Do You Know Your APR? MAIN NEED: No Debt — Transact Only: If you pay your bill in full every month, then you are using your card to transact only. If you have decided to use the card to transact only, then it’s most important that you get a card that offers you rewards that you will find useful. I would recommend that you choose one of the best cash back credit cards. It’s hard to keep up with the constantly changing fine print and redemption processes for airline mile rewards, travel bonus rewards, and others. Also, chose a card with low annual fees (or no annual fees whatsoever).

34. Do You Know Your APR? If you have credit cards with high APRs, carry a balance and have a good credit rating, shop around for cards with lower rates. Your costs savings could be significant. Call your credit card issuer and ask if they will lower your APR.

35. Do You Know Your APR? Making just the minimum payment is the most expensive way to pay off your balance. The more you pay each month, the shorter the time it will take you to pay off the debt and the less interest it will cost you.

36. Types of Loans to Avoid • Check Cashing Businesses • Cash Advances • Rent-to-Own Businesses • Tax Refund Anticipation Loans • Telephone and Internet Solicitation Scams • Buy Now, Pay Later! • 90 Days, Same as Cash! • No Payments, No Interest for 3 Months! • No Finance Charges Until Next Year! • PayDay Loans • Car title loans • Overdraft loans • 401(k) loans • Advance fee loans • Finance company loans • Pawnshop loans • ARM Mortgages • Balloon Payment Mortgages • Debt Consolidation Loans • Home Equity Loans Just To Pay Bills

37. Questions Layne McDaniel, CPA 225.922.4746 layne@noesisdata.com Be Credit Smart