Lecture Notes for Cash Or Credit You Need To Know

● Co-signers can be beneficial because you can use their good credit standing for a line of credit - Understanding Credit Basics ○ What is Credit ■ Borrowing money or purchasing a good with the promise to pay back the lender at a designated date in the future ○ What is a credit card ■ Plastic card providing access to a line of credit. The card can be used to make purchases with the promise to repay. One does not have to pay the full amount each month, but rather, the minimum payment. The balance is carried over from month to month and accrues interest ○ Reasons Why People Use Credit ■ Safety and security, convenience, big ticket items, investments, marketing, lack of information, social environment, spending behavior ○ Safety and Security ■ Travel - eases obtainment of hotel and car rental services, minimizes risk of losing cash ● Many hotels and rental car services require a deposit to secure a hotel room or car rental services ● People use credit cards when traveling to avoid carrying a large amount of cash. Less worrisome way to travel, the trick is to budget your spending before you travel ■ Emergency situations - aids in acquirement of services ○ Convenience ■ Long distance purchases ● It is impossible to use cash online ■ Record of expenses ● Monthly credit card statements list purchases and provide a record ■ Problem Resolution ● If person is unable to resolve a problem with a store and paid for it with a card, credit card company will step in and provide assistance ■ Savings on planned purchases ● Sometimes the things we are saving for go on sale before we have all of the money to purchase them ○ Big Ticket Items ■ Durable Goods ● Refers to items that last a long time like washer and dryer ■ Starting out ● When people leave home they need to purchase these items ● Or a lot of small purchases in a short span of time but cash may be the better option ○ Investment ■ Value increases ● ○ ○ ○ Best use of credit is to buy things that will increase in value like a home ■ Durable ● You want whatever you buy with credit to last a long time ■ Education ● Counts as an investment because it increases your overall lifetime earnings ■ Real estate ● Most people don’t have enough money to pay cash for a house so they use a mortgage instead ■ Stock Market ● Borrowing money to invest in the stock market is not a good idea Marketing and Lack of Information ■ Financial institution and stores want you to use credit ● They can make money by charging you interest on your purchases ■ The media promotes credit use ● TV ads and other ads bombard us with messages encouraging us to buy things, even when we don’t have the cash for it ● Daily exposures to these types of messages can have an effect on your spending and credit use unless you decided to make a conscious effort to control your credit ■ Credit is often advertised as easy with low monthly payments ● Credit cards are quite different in interest rates, penalty fees, and grace periods ■ Consumers don’t know product offering or the impact of their decision Social Environment ■ Consumption society ● Good life is equated with consuming and having lots of goods ■ Friends and Family ■ Social acceptability ● People expect credit will be used ● Money and status ■ Inferred status ● People who carry gold or platinum cards have more social prestige than others. In reality it doesn’t matter ■ Unconsidered behavior ● Acting without thinking the process through ● You could easily spend thousands of dollars Spending Behavior and Credit Use ■ Pattern ● Another form of unconsidered behavior. Purchasing cycle that occurs such as buying gas each week or paying off a credit card bill each month. Patterns can be avoided through careful planning of your cash expenditures Learned ● Habits and patterns are learned behaviors acquired throughout the life span. They may develop through your social environment. Learned behaviors can result from watching what other people do ■ Reversible ● Identify habits you want to change and replace them with new ones ○ What is Credit ■ Neutral ● Credit is neither good nor bad ■ A tool ● Credit is a tool used by people to pay for things. Your use and repayment determines credit’s impact on you ■ A promise to pay ● Credit is not money. They make money because they make interest when you don’t pay your bill in full. Promise is symbolized by signing the sales slip when you use credit ■ Individualized ● Impact of credit depends on how you use it, what you use it for, and how often you use it ■ Different ● Credit Products ○ Each credit card has different interest rates, penalty fees, and grace periods ` ● Credit Terms ○ Importance of Understanding Credit ■ Mental Impact ● Students who have more than $1000 in debt have higher chance of depression ■ Income Allocation ● Credit obligations should demand no more than 20 percent of your net income. This is the 20 in the 10-70-20 rule ■ Spending Plan ● Promotes a balanced use of personal income Week 3: Credit and Money Management - Why should students have a thorough understanding of credit cards and money management? - College Campus Trends - Escalating college costs - Students are borrowing more money to go to college - Financial aid has not kept up with rising tuition and fewer parents can afford it - Growth in student loan amounts ■ - Rising costs not in-check with financial aid - Increase in financially independent students - Fewer parents providing financial help - Mounting credit card usage and debt - Students double their average credit card debt and triple the number of credit cards in their wallet from the time they arrive on campus until graduation - As individuals progress through college, their usage rates and balances increase each year - Students were more likely to carry credit card debt over 1,000 and work more than 20 hours a week compared to students who worked less than 20 hours a week and carried crest card debt of over 1,000 - What can be learned from these studies? - Credit cards allow for spending without thinking - All the extras add up! Many students choose to live a high expense lifestyle while having to pay high tuition bills - Debt level is directly correlated to lifestyle - High credit card debt has long-term consequences - Debt is a stressor - Any level of debt can be a stressor for students. Going to school and doing homework is hard enough without having to worry about making money and paying bills - Now you know the potential consequences of having a credit card. You’ve seen the statistics. You’ve read the credit card horror stories - What Now? - Educate yourself on money management and credit. It’s the best way to prepare yourself for your financial future Week 4: Setting Financial Goals: - Why is a financial plan important? - Helps you achieve your financial goals - Easier to make wise purchase decisions - Gives you control over your money - What is Money? What does it mean to you? - There is no right or wrong answer. What is important is your ability to manage, save, and invest money. This will determine your financial success - What is personal financial planning? - The process of planning your spending, financing, and investing in order to optimize your financial situation - What is a financial plan? - A financial plan is a strategy that specifies your financial goals. It outlines spending, financing, and investing plans that will be used to achieve your financial goals - Why should you make a financial plan? - Easy to spend money frivolously - Purchase decisions influenced by financial goals - Gain control of your money A successful financial plan - Explicitly state financial goals - Have logical and consistent financial strategies - Assess available resources - Developing a financial plan - Consider your current financial position - How much money do you make, are you going to school on student loans, are your parents helping you, do you have a part time or full time job, are you attending college as a full time or part time student, how much are you spending, what are you spending on, what would happen if you lose your job financial aid, or parents support - Establish financial goals - Financial goals should be realistic, stated in specific terms, easily measured, related to a time frame, action-oriented, monitored and revised - Goal: concrete statement of what is desirable. What is it you want to accomplish/strive for? - Values: guide the creation of financial goals - Attitudes: concepts that may express values, serve as a means of evaluation, or demonstrate feelings in regard to some idea, person, object, event, situation, relationship - Needs: things that are required or necessary. Wants are things that are desired or wished for - Develop a plan of action - Want to decide how you are going to achieve goals. Develop an income and expense sheet. Develop a budget or spending plan. - Implement your plan - What steps do you need to take in order to ensure you succeed - Evaluate your plan - What is working and what isn’t. Nothing is set in stone - Revise your plan - If things need to change, then do it! - Path to Financial Management and its importance - Financial decisions require planning - Attitudes towards money may need to be modified - Money influences relationships with friends, family, and coworkers - Money affects stress level and communication with others - Financial decisions help determine your future - Taking the first steps to setting your financial goals Week 5: Establishing Your Debt Limits - Importance of Establishing Your Debt Limit - Financial well-being and success result - Establishing a debt limit will lead to this. The absence of a debt limit leads to unmanageable levels of debt. Monthly payments can quickly equal or - - exceed available income. You are able to manage your spending behaviors if you establish a limit. You are also able to differentiate your purchases as needs or wants - Creditors cannot be trusted - Some people believe that creditors continue to offer or increase their credit limit, they must be able to afford it. Number of lenders has greatly increased. Banks issue major credit cards, stores, alumni associations, cports, and others also offer credit cards bearing their logo - This proliferation of lenders puts pressure on each company to find new customers. As a result, many lenders expect that a certain percentage of their accounts will not be collectable. The default of an account is merely a business expense to a lender, to a person, it can mean the ruin to their financial future. Not being able to pay an account negatively impacts credit score - A debt limit ensures the individual stays in balance - Income distribution 10-70-20 - Debt-to-income ratio Key Considerations in Debt Limit Establishment - Income availability - In establishing your debt limit, it is important to take into consideration the income available to you. Not only do you need to take into consideration the amount of your income after taxes, but the voluntary deductions you wish to take. These “voluntary deductions” may include income allocation to health insurance, a retirement plan, or a savings account. If you do not take into consideration these expenditures, you will find that you may be spending more than you earn. - Position in lifecycle Your position within your lifecycle may also dictate your debt limit. If you are young and are only earning $20,000.00 or less, many financial counselors recommend you keep your expenditures to the bare minimum, and avoid borrowing. However, if you are married, make $50,000 in combined net income, and have children, financial counselors recommend you limit your debt to 15% of your income. If you are retired and have a fixed income, financial counselors recommend a debt limit of 10%. - Income Distribution guideline: 10-70-20 - A common personal income distribution is 10-70-20. Most financial experts recommend you save the first 10% of your monthly personal income. You should pay yourself first rather than saving what is “left-over.” In our consumer-oriented society, we can always find ways to spend what we perceive to be “extra money.” As such, saving first is of great importance. Household expenses, such as housing, food, and clothing, should utilize 70% of your income. The last 20% represents the maximum percentage of debt recommended in establishing a balanced spending plan. Debt-to-Income Ratio - This ratio measures the amount of monthly income that should be allocated to creditors to pay monthly debt payments. To calculate this ratio, add all of your monthly consumer debt payments, and divide it by your monthly net income. Again, you must only use the amount of your income that is under your control. This is also referred to as discretionary income, since you decide how to use it. Guidelines suggest that this figure should be about 20%. While a good guideline, there are a number of things a debt-to-income ratio cannot account for. We will look at these next! What the Debt-to-Income Ratio Fails to Address - Income fluctuations - Income fluctuations are typical in some work environments. For example, individuals who work in retail may experience income fluctuations as a result of the number of hours they are scheduled to work. The debt-toincome ratio, when calculated based on an average income, can lead to financial distress should a person experience a period of extended reduced hours. The debt limit may be overestimated. - Family circumstances - Some common changes include marriage, children, death, divorce these changes are unanticipated when an individual decides to take on additional debt - decrease in income - financial distress may occur - Personal comfort level - Some people don’t mind carrying the max amount of debt and routinely allocate their income to numerous credits on the form of minimum payments. Others will make every effort to keep non-mortgage debt to a minimum. It is important to consider your money personality when establishing a personal debt limit - Future plans - Purchasing a house or marriage - consider how future plans will impact expenses and income. Limit you set for yourself must be sustainable for these new situation - Unexpected changes - Can prepare not plan for these - maintain an emergency savings account and keep debt manageable Identify Your Personal Financial Perspective - Money perspective - Your view on money and its purpose will impact how you save and spend. It will also influence your decision to acquire debt. Helps differentiate between needs and wants - Earn to spend trap - Can lead to higher levels of debt. Always considering what they can buy. They often spend their paycheck in their mind before they even receive it. - - - Salespeople promote this attitude by emphasizing monthly payments instead of full price - Income increases and debt limits - An increase in income may lead to increase and ability to carry more debt - just because you can afford it doesn’t mean you should - Consumerism - Dependent on ability to resist messages of consumerism - Credit commits future income not yet earned or received. Keeping debt manageable is important because you don’t know what future financial needs arise. - Preventing Inadvertent Growth of Debt - Limit the number of accounts you have - Monitor purchase behavior - Be watchful of Automatic Credit Limit increases - Avoid incentives to open an account - Devline free periods of service - Be cautious of automatic credit card billing - Deciding the Debt Limit and What Factors to Avoid - The process for deciding the debt limit varies - Single setting - Couples - Family - It is important to avoid - Giving priority in debt comfort level to the high income earner - Thinking a lower debt level means deprivation - Adjusting Your Debt Limit - How to adjust your debt limit in relation to - Life and family elements - Two-income households - The economic environment - An increasing debt level Week 6: Executing Your Financial Plan - Executing Your Financial Plan - Understanding Your Financial Position - Setting Your Financial Goals - Establishing your debt limit - Creating your personal income statement - Developing a spending plan - Personal Income Statement - An itemized list of expected and actual expenses during a specific period of time - A personal income statement leads to - Identification of financial discrepancies - Understanding of one’s financial position - Informed financial decision making - - - - - - Income statements provide a financial roadmap as to how to achieve your financial goals. They are used in all facets of life Business owners utilize income statements to gain a better understanding of their financial performance. They pay close attention to the level of product sales, the cost of materials, and employee wages. Income is generated through product or service sales. The cost of materials and employee wages are a couple of the costs associated with selling the product. The business’ income must exceed the costs or expenses of selling a product in order to be profitable CEOs of large corporations must have a thorough understanding of how much money is coming in and how much money is going out. They utilize this information to allocate their focus and spending in the most efficient manner Just like a business, it is important for you to have a thorough understanding of both your income and expenses to make informal financial decisions that will help you obtain your financial goal Definition of a personal income statement - An income statement categorizes information concerning an individual or family income and expenses. An income statement is an itemized list concerning the expected and actual inflows and outflows of money during a specific period of time. Most individuals develop a monthly income statement which provides the necessary information needed to develop an annual income statement. Role of a Personal Income Statement - A personal income statement consolidates your income and expenses into one, easily-readable document. An individual’s budgeted income, actual income, budgeted expenses, and actual expenses are records. This document highlights how much money is under an individual’s control each month by itemizing income and expenses and adding them up by category. In doing this individuals gain a better understanding of the difference between their budgeted income or expense allocation and the actual numerical figures. A personal financial statement provides the information you need to make informed financial decisions to reach your goals and to develop a spending plan. Benefits of Informed Financial Decision Making - A personal income statement helps individuals determine which actions best meet their needs and align with their financial goals. Informed decision making is practiced in many aspects of life. For example, often individuals will review consumer reports before making an expensive purchase, such as a car or a household appliance. In making an informed financial decision you are more likely to be satisfied with your decision and to achieve your financial goal. Thus, a personal income statement provides the information needed to make these financially-savvy decisions. You can evaluate your financial position adn decide which actions will be most beneficial to you. Achieving your financial goals requires that you live within your means. In other words, you do not spend - - more than you earn and ideally, are saving a portion of your income each pay period Components of a Personal Income Statement - Income - the income category lists any inflows of money received during a given time period - Regular - Periodic - Expenses - can be any outflow of money. This may include money spent to obtain the basic needs of food, shelter and clothing. Other expenses may include the purchase of movie theater tickets, cups of coffee, gas - Fixed - Variable - Types of Income - For the purpose of this lesson there are two types of income to track: regular and periodic. For many, regular income consists of the pay received through one’s job or place of employment. However, regular income may also include a monthly living allowance received from parents, disability checks, etc. Regular income is received on a consistent, monthly basis. Periodic income is received less frequently and generally not a month-tomonth basis. Periodic income may include money received for a birthday, dividends from investments, etc. The timing and amount of periodic income is often sporadic and varies. For example, the money you most likely receive from student loans can be considered periodic income since it is received in a lump sum at the beginning of a semester - Types of Expenses - Expenses can be separated based on the amount of control one has over the amount of frequency of the expense. There are two types of expenses: fixed and variable. Fixed expenses remain the same from transaction to transaction. They are generally expected and often result from contractual agreements that specific payment amounts and due dents such as rent, care, or cell payments - There are variable expenses that vary from transaction to transaction by amount of frequency. Groceries, gas, clothing, entertainment. The total amount of money you spend on an item or category in a month might be the same but the amount of each transaction may vary. Developing a Spending Plan - Identify financial shortfalls - Look at financial tracking diary - Review financial goals - Set financial priorities and make changes - Regain control Taking Control of Your Expenses - Distinguish a need vs. want - Be a smart consumer - Balance your checking account - Take control of occasional expenses - Prepare your spending plan each month - Achieving Success with your financial plan - Track your spending - Identify your financial short and long term goals - Establish a debt limit - Create a personal income statement - Develop a personal spending plan Week 7: Researching Your Options: Types and Sources of Credit - What is credit - Credit is an arrangement to receive cash, goods, or services now and pay for them in the future - Credit is based on trust in your ability and willingness to pay bills when due - Credit is referred to as a tool used by a person to pay for something - Types of Credit - Consumer credit - Debt used by consumers for expenditures other than home mortgages - Open-end credit/revolving credit - Line of consumer credit extended before you make a purchase. Credit is extended in advance of any transaction, so that the borrower does not need to reapply each time credit is desired. You can repay at whatever pace you like as long as you pay the minimum balance each month. Credit cards are an example of open-end credit. Non-installment credit includes open-end credit. Open-end credit is also referred to open credit or revolving credit - Closed-end credit - Used for specific purpose and amount. Loans are repaid in a designated amount of time with equal monthly payments. An example might be a car loan or a loan for a computer. Another name for installment credit is closed-end credit or closed credit - Types of Credit Cards - Bank credit cards - Travel and entertainment cards - Single purpose cards - Why are there so many different cards? Which one is best for you? - The credit card industry makes billions of dollars each year on interest alone. Competition is tough for your hard-earned dollar, credit card issuers present an array of options so that you might choose their card. So remember, there are many options available to you in terms of credit. - - - In choosing the proper credit card for yourself, you must understand the different types of credit cards available and take into account your own financial standing and goals Debit/Check Cards - Issued by your financial institution - Bank - Credit Union - Provides immediate access to your personal funds - A debit card is like a key to your bank account. This plastic card allows a retailer to make charges directly to your bank account. It allows a retailer or service provider to transfer existing money from your account into their account. This is virtually risk-free because the transfer will not go through unless you have enough money in your account. However, if you have an overdraft protection on your checking account, then other rules might set in. - New overdraft rules and regulations for debit and ATM cards were recently implemented. An overdraft takes place when you use your debit card to make a purchase or to withdraw money from an ATM without enough funds in your checking account to cover the transaction. For a fee your bank might cover the transaction despite insufficient funds. This fee will likely change for each transaction with insufficient funds. In other cases, the bank may issue an insufficient funds notice during the transaction and you will be unable to make the purchase using the debit card. - Debit card withdraws money from your checking account so it is important that you keep a record of your purchases for budgeting purposes. You can also make cash withdrawals from an ATM free of charge at some locations or a small fee at others - There is no bill at the end of the month - A debit card is like writing a check but without paper. Cross between having a credit card and checking account. Spending your own money vs owing money to a company! - Can you build your credit score by using a debit card? - Depends on whether the bank where your card was issued reports your activities from your account to one of the three credit bureaus. You may not be building credit by using the card alone. You will want to check with your bank. Using Debit as Credit? What’s the difference - When purchasing items with your debit card, you have the option to submit your payments as a debit transaction or a credit transaction. What’s the difference? - Debit - Requires pin - May have additional processing fees - Deducted from account immediately - Credit - Require consumer to sign sales slip - - - - - May take up to 48 hours to register in account Offer additional fraud protection Bank Credit Cards - Typically known as Visa, MasterCard, American Express or Discover - Issued to you by a bank - Widely used - Many banks that issue credit cards are in NJ, Delaware, South Dakota -not many laws protecting credit card holders Travel and Entertainment Cards - Known as charge cards - Pay off in full at the end of the month - A travel and entertainment card works the same way but was designed for a business person to be used as his/her expense account - If you don’t pay the balance in full, you typically receive a one month grace period - after there is interest of 18% Single Purpose Cards - Department store cards - Can only be used at specified stores in your agreement - High interest fees - Interest fees between 18-26% - Cards come with a signing bonus like a 10% discount Other types of cards - Affinity cards - Issued in conjunction with a specific charity or organization. They work the same way as a credit card but a portion of the fee goes back to the sponsoring group - Secured credit card - Backed by collateral. Collateral is a valuable asset pledged to assure loan payments are made - Simon gift card - Prepaid visa cards that allow you to purchase items anywhere Visa check cards are accepted - Smart cards - U cards - similar to debit cards except these cards magnetically store account information What Credit Card is Best for You? - Your Credit Card Philosophy - Credit user - Carries a credit card balance from month to month. Only pay the minimum balance or pay just part of the bill - important that there’s a low interest rate - Convenience user - Pays off their bill in full each month - disliked by credit card issuer because credit card companies earn money by charging interest - Combination user - Sometimes they carry a balance but pay off their balance most of the time. If they do carry a balance, it is paid off in a few months perfect card would have no annual fee, low interest rates, and have extended grace period - Do your current spending habits influence your potential as a credit card user? - Are you Ready for a Credit Card? - Ask yourself these questions - Do I need a credit card - Can i afford a credit card - Will i be able to pay off my balance each month Week 8: Costs of Credit - Understanding What You Are Signing - Credit Card applications are different - Credit cards have various terms and conditions - Terms and conditions may have long term impact on debt level - Lenders look at different credit worthiness criteria - Each credit card application is different, and each potential lender will be looking at different - criteria as they decide whether to offer you a credit card. Read the fine print before applying - for a credit card. Not all credit cards are the same. What are you agreeing to when you sign - your name on the credit application? What terms and conditions are you agreeing to accept? - Just because all your friends have a particular credit card doesn’t mean that credit card is - right for you. Be a savvy consumer; read before you sign. Know what you are agreeing to - before you sign. - Credit Card Jargon - Billing date - Closing date. Last day of the month for which transactions are reported on your statement. It is usually on the same day each month - Billing cycle/period - This is the time between billing statements. Billing cycle is about 30 days - Due date - Specific date by which your credit card company is expecting to receive your payment - Balance - Total amount you owe on your credit card. Owe before making any payments - Balance owed - After paying the minimum balance or portion balance owed is the amount you owe which still accumulates interest - Minimum payment - Lowest amount of money a borrower must pay toward a loan. It is the minimum portion of your balance that you must pay to the creditors. Most credit card companies require 2% of the balance be paid each month. Some require 4% or more of the balance owed each month. Important to - read the fine print. 5 Major Costs of Credit - Finance charges - The amount creditors make on your balances each month. Important terms: - Annual percentage rate - Interest rate or periodic rate - Penalty fees - Not paying your bill on time - Going over your limit - Using your card for cash advances - Making transaction - Late Fees - fee of $25 is charged to your account if your minimum payment is not received. Could be raised to $35 - Over your limit fees - consumer must opt-in to over the limit fees and transactions - Cash Advance fees: when you use your credit card to withdraw cash from your available credit line - Transaction Fees: charge to your account that occurs every time you use your credit card - Grace periods - Time between the closing date of the billing cycle and the due date in which interest does not accrue given the balance is paid in full - Useless if your bill is not paid in full - Not a standard period of time - Annual Fees - Required by some creditors. These fees allow creditors to earn additional revenue. An annual fee: - Can be considered a yearly membership fee - Ranges from 0-100 - Balance calculation methods - Adjusted balance - calculates balance by taking into account payments and credits made throughout the billing cycle - Previous balance - outstanding balance at the beginning of the billing cycle - Average daily balance excluding new charges - outstanding balance for each day of the billing cycle. The sum is then divided by the number of days within the cycle - Average daily balance including new purchases - Same as above except any purchases made during the billing cycle will increase the balance and the related finance charge - Getting and using a credit card is easy, but climbing out of the debt you rack up is difficult. - Like many things in life, having a credit card comes at a cost. - Credit cards are a multi billion dollar a year industry. But how do they make their money? - Your spending habits increase their revenues. Every card charges some sort of finance - - - charge, APR, or annual fee. There are five major costs to credit card holders. - These five major costs include finance - charges, penalty fees, grace periods, annual fees, and balance calculation methods. These five major costs will help you determine what type of card is right for you given your credit - Philosophy. The Credit Card Trap - Trap can be initiated through: - Changing terms and conditions - companies can change these. Lenders must provide their client with a 45 day written notice concerning these changes - Making the minimum payment Summary - Monitor your credit use - Always be aware of the amount and types of credit you are using - Making a plan to control and reduce debt - Kept at a manageable limit - Be aware of legal remedies - Be selective when seeking help - Make sure organization’s credentials before hiring the company and acting on its advice Week 9: Credit Reports and Credit Scores - What is a Credit report? - Compilation of financial information provided by credit agencies and used by lenders to identify an individual’s credit worthiness - Reflection of how well you manage money, credit, and debt. Takes into account how many lines of credit you have, the available amount of credit, how much credit is in use and how often payments are made by the due dates - Credit report creation - When applying for a new line of credit, you are authorizing the lender to check your credit report at the credit bureau. You are allowing the lender to share their information on how well you manage your account with the credit bureau - When you apply, a file is created and information regarding name, birth, SSN, and place of employment is obtained. When applying for additional credit, lenders will access your credit report to see how you manage your accounts and to see what credit you have acquired. Your information on whether you pay on time, late, how much you have charged against your credit limit, and the available credit you have left. Each month you are creating your credit report as you use and pay your accounts. - Lender use - When lenders are deciding to extend a line of credit, they want to be reasonably sure the person they are lending to will pay back - - the money provided. Lenders use your credit report to see how well you have performed in the past. They use this to determine credit worthiness and how likely you are to pay them back - Credit reporting agencies - Three major credit bureaus manage the collection and distribution of consumer information in regard to how an individual manages their accounts What’s in a Credit Report - Personal information - The beginning of your credit report will include personal information. Does not contain information that is prohibited by law for use when extending credit. Does not include race, ethnicity, number of children. Identify the individual - Trade Lines - List of accounts - The payment history discloses whether the person pays on time. - Inquiries - Requests for credit - How actively the person is seeking and accumulating credit - Public Records - Debt Collection efforts - May be trying to recover the money owed. Public records may contain info on tax lines on property, unpaid charge accounts, unpaid medical bills, rents due to landlords. Bankruptcy filing will show on an individual’s credit report even if the person changes his/her mind during the process - Summary - Abstract of credit usage - Condensed version of credit report - go-to guide for how many accounts, past payment history, largest credit balance carried - Length of reporting history - Three major sections: trade lines, inquiries, public records. If negative info is provided in the trade lines such as late payments this info will be reported for 7 years. Credit Reporting Agencies - The function of credit reporting agency includes - Collecting and distributing consumer credit use information - May sell information to potential creditors, employers, landlords, or insurance companies - May assign the consumer a credit score based on a number of factors. May sell consumer credit info to potential lenders, employers, landlords who perform authorized credit checks. A credit bureau doesn’t make lending decisions - the financial institution that purchases the report makes that decision Determining an individual’s credit rating and score - Based on past payment history - Determined by person’s forecasted payment performance. A FICO credit score is assigned to a person to reflect the consumer’s level of creditworthiness - Selling names of individuals who meet a potential lender’s list of criteria for marketing purposes. - Lenders will contact credit bureaus to request a list of names and addresses of people who meet designated lending criteria. Obtaining Your Credit Report - May obtain a free copy of their credit report every 12 months from each of the three credit reporting agencies. Your free credit report can be obtained three different ways - Visit www.annualcreditreport.com - Call by phone 877-322-8228 - Request by Mail - Print off the form and mail - An individual may acquire an additional free copy of their credit report should: - They be denied credit, insurance, housing, or employment in the past 60 days - Be the victim of identity theft and suspect information is incorrect on their credit report - Unemployed person plan to apply for employment within next 60 days - Currently receive public assistance - Info in their credit report be used to make an unfavorable decision against them - Their request for a credit report investigation result in modifications - They live in one of the following states: CO, Maine, Massachusetts, Maryland, NJ, Vermont, GA Major Credit Bureaus - Equifax - Experian - TransUnion - Three different credit bureaus means three different credit reports - Each obtains different information. Three reports may show different information FICO Credit Score An individual’s credit score provides an overall rating of their credit score The score ranges from 300-850. Generated on Five Factors - - - - Your - - - - - Payment History (35%) - Includes payments made on time, late payments, debt that has gone into collections and bankruptcies - Outstanding Debt (30%) - Information on credit card balances, loans, and number of credit cards - Length of Credit Card History (15%) - Age of longest held credit account, average age of credit account, and time since accounts were last used are included - Pursuit of New Credit (10%) - Info on the number of inquiries from potential lenders and number of newly opened accounts is included - Type of Credit Used (10%) - The more balanced a report is, the higher an individual’s score will be. Creditors like to see both installment and revolving accounts information on bank cards, department store cards, finance companies, secured credit, and unsecured credit is provided here - In order to obtain a credit score you must have these three things on file: at least one credit account 6 months or older, reported credit activity within last 6 months, and absence of message ‘SSN reported as deceased’ What the FICO Score Doesn’t Consider - Consumer-generated inquiries - Gender, race, religion, occupation, homeowner status, zip code, and income level - Account review inquiries - Accounts under dispute - Participation in debt management program Rate Shopping - When shopping for a loan for a house or a car, you may have multiple inquiries made on your credit report while trying to find the best deal - However, all inquiries made within 30 day periods will count as one inquiry When to Check your Credit Report - Bes tot check when: - You lose your wallet - Someone could use your info to open new lines of credit - Credit cards could be used - Making major purchases - When shopping for an auto loan, look at your credit report to ensure there are no errors - having a strong credit report and score will help you acquire the best loan - Seeking employment with financially sensitive work Stopping the Credit Card Application Avalanche - In order to stop pre-approved offers from being mailed to your house, optout by calling the following number - 18885-OPT-OUT Lesson 10: Credit Laws, Rules, and Regulations - Laws and Regulations - Fair Credit Reporting Act (FCRA) - Provinces consumer the right to - See what’s in their file, understand what it says, an accurate and complete credit report, request a free copy of their credit report when denied credit, have errors fixed, include detailed statement of consumer’s side of story, know who has seen their credit file, confidentiality, sue the credit bureau - Fair and Accurate Credit Transaction Act (FACTA) of 2003 - Lenders must make decisions on loans based on full and fair credit histories, consumers may obtain a free credit report every 12 months, merchants may only print the last 5 digits of the account number on their receipts, a nationwide system of fraud alerts is created, lenders and credit agencies must be proactive in their actions when fraud occurs - Truth in Lending Act - Disclose true costs of consumer credit, explain all charges, terms and conditions, provide consumer with total finance charge and APR, not send unauthorized cards, limit consumer liability to $50 for unauthorized use, write installment contracts in plain English, provide itemization of amount borrowed and charges not included in finance charge - Fair Credit Billing Act - Protects you from errors: charges not made or authorized by you, charges listing the wrong price, description, or date, accounting errors, failure to reimburse credit for returned items, charges for which you have requested an explanation or written proof of purchase, bills not mailed or sent to another address - If you find an error you should write a letter to the company that issued the card - Fair Debt Collection Practices Act - Prohibits debt collectors from: using abusive language or making threats, using the telephone to annoy you, contacting you at inconvenient times or places, misrepresenting themselves, threatening a lawsuit or other action that the creditor does not intend to take, collecting more from you than you owe - Credit CARD Act - New rules and regulations: 45 day notice must be given before increasing interest rate, consumers may pay by phone or internet with no additional fee, promotional rates must be in effect for at least 6 months, interest - - rates cannot be raised within the first 12 months of opening an account, creditors must accept payment on time if received by 5pm on the due date, individuals ages 18-21 will require a cosigner in order to obtain a credit card It’s illegal for an automobile dealer to access your credit report while you are shopping for a vehicle because you have not yet initiated a credit transaction Lesson 11: Obtaining Credit - Starting Your Credit Journey - Consider your financial position and goals - Understand whether you can afford credit - Look at the long-term impact of credit usage - Credit Score - Cosigning - Research potential credit card options - What Should You Consider - Ability to pay off monthly balance - Other financial obligations - Personal responsibility - Credit philosophy - Credit score - The 5 C’s of Credit - Character - Level of responsibility in meeting your financial obligations. Creditor doesn’t know the applicant’s past credit usage but credit history will help them figure it out - Capacity - Lenders look at consumer’s current income level in regard to how much debt they have accrued - Collateral - When assets or property are used as security to obtain credit. Debt is considered - there are typically no assets used as collateral - Capital - Consumer’s amount of savings and investments - greater amount of capacity and capital a consumer has, the higher the level of credit worthiness. Measure of your financial net worth - Conditions - Economic environment and the purpose of the loan. Economic conditions take into account the overall state of the economy - Credit Card Ownership - There are 3 types of credit card ownership - Individual Applicant - Individual decides to open an account independently and become the primary credit card holder. Credit usage information is - - - - - recorded on the person’s credit report. Person has full responsibility - Joint/Co-application - Two people open a credit account together - they are both responsible for managing credit - Authorized user/buyer - Person is authorized to make purchases with a card but is not responsible for making payments or managing the card. Applying for Credit - Online - Mail - Pre-approved offer - In-store (rapid credit) Co-Signing - When an individual agrees to pay the debt of another individual should they be unable to pay - Co-signing has the power to be both beneficial and detrimental in - Co-signing for another - You promise to pay all debts in the account holder’s name - Having another cosign for you - Co-signers can be beneficial because you can use their good credit standing for a line of credit - Your credit usage will impact their credit history - Before becoming a cosigner you should consider - Can you afford another person’s loan or debt - Do you fully understand the consequences - Has the individual been responsible in the past - How do the 5 C’s of credit apply to the person - What’s the worst case scenario Identifying Credit Card Options - Identify what type of credit user you are - Establish your financial goals - Set your debt limit - Find appropriate credit card options given your research Questioning the Credit Card Offer - What type of credit user am I? What terms are important to me? Is the interest rate fixed or variable? Is there an introductory rate? If there is, what will the rate be after the introductory period? Is there an annual fee? Late fee? Other fees? Where can I use the card? What is the company’s policy when cardholders can’t pay for their bill? Is there a grace period? How can I pay my bill? How will the company communicate with me? Are there any perks in using the card? You Just Got Denied For Credit. Why? Now What? - Why people get denied - Poor credit history - - Low credit score - Incorrect information, debt-to-income ratio, delinquent payment history Now What - Don’t apply for another card right away - Check your credit report - Build or rebuild your credit Lesson 12: Managing Credit - 3 steps in credit card management - Step 1: Picking the right card for you - Step 2: Cautious Purchasing - Purchase what you can afford - Don’t use a credit card for small daily expenses - Use the card for what you intended - Save your receipts and keep track of what you are spending - Step 3: Paying the Bill - Pay your bill on time - Match your receipts to your statement - Make at least the minimum payment, if not more - Plan your expenses according to your income - Creating a Credit Card Credo - A credit card credo is a personal goal set by an individual that identifies the purpose of using the card - Goal: I want to maintain a good credit standing for at least 5 years - Time: I will pay off all my bills on time - Behavior: I will only purchase gasoline for my car with my Valvoline credit card and clothes with my Target visa - Action: I will pay more than the minimum payment and half of the remaining balance on each of my statements - Reading Your Credit Card Statement - Summary of Account Activity - Payment Information - Late Payment Warning - Minimum Payment Warning - Notice of Charges to your Interest Rates - Transactions - Fees and Interest Charged - Totals Year to Date - Interest Charge Calculation - Opening your Mail - Open all mail received from your credit card company. The mailed documents may outline changes in finance charges, billing cycles, and interest rates Week 13: Protecting Your Identity - - - Is Identity Theft Really Something to Worry About? - Individuals ages 18-24 have the highest rate of identity fraud - There were 11 million victims in 2009 - New account fraud costs on average $4,849 Identity Theft and Credit Card Fraud - Identity theft: use of someone’s personal information without permission. Personal information includes: name, social security number, date of birth, and address - True name fraud - Someone pretends to be you - applies for loans, gets lines of credits, open checking accounts under your name - Account take over - Thief steals assets or money from a victim’s existing account - Credit card fraud - When a person’s credit card or credit card number is stolen and used to make unauthorized purchases - This includes an individual stealing another’s identity in order to obtain a credit card How Do Thieves Get Your Personal Information - Taking Preventative Measures for Protection - Store personal information in a safe place - Don’t carry unnecessary information - Handle mail carefully - Be mindful of what is taking place when you shop - Watch what you throw out - How Do You Know If You’ve Been a Victim - Creditors call about lines of credit you don’t have - You are unable to open a credit account despite the fact that you are a responsible credit user - Your bank account has been drained - Mysterious, unauthorized charges appear on your credit statement - What To Do If It Happens to You - Request a fraud alert and block be placed on your file with the major credit bureaus - File a police report - Notify your creditors and banks immediately - Send ID Theft Affidavit to creditors, banks, collection agencies, and reporting agencies - Contact the State Attorney General’s Office - File complaint with the FTC - Seek Help - Available Resources - As a consumer, there are many resources available to you including - Identity Theft Resource Center - Federal Trade Commission’s Identity Theft Program - US Department of Justice Lesson 14: When Credit Goes Bad - The Cumulative Effect - The snowball effect - Signs of a credit crisis - Battling debt overload - Acquiring help to stabilize finances - Assessing Your Financial Standing - Recognize how much you owe - Identify how much you earn - Itemize your monthly expenses - Analyze how to reduce your expenses - Plan the road to debt reduction - The Road to Debt Reduction - Implementation of personal financial plan - Stop using credit, do not carry credit cards, store your credit cards, define emergency use, identify and change habits that lead to increasing debt - Acquirement of credit counsel - Helps their client identify and meet their financial goals - Filing for bankruptcy - Bankruptcy is the last resort to resolve debt, the legal forgiveness of personal debt, claimed by individuals facing personal hardship, available to both businesses and consumers, reported on your credit report - Lender Actions to Remedy Non-Payment - When an individual fails to repay their debt, a lender may take action to recover their losses: collection, repossession, garnishment - When Credit Goes Bad and It’s Not Your Fault - Many people find errors in their credit card statement or on their credit report. This can lower their credit score - Write a letter to the company that issued the card - Highlight disputed information, state facts and reason for dispute, make request, include supporting evidence, send copies of all documents, send letter via mail - Helpful Tips - Monitor credit use, control and minimize debt, be aware of resources available to you, be selective when seeking assistance Lesson 15: Managing Student Loans - Student Loans 101 - Investigate options - Grants and scholarships - Loans - Work-Study - How to Apply for Aid - Complete the FAFSA - - - - - Student Aid Report - Financial Aid Award Notice - Master Promissory Note - Entrance Counseling Who is your Lender? - Department of Education - U of M - State of Minnesota - Private lenders Interest - Determined by: - Loan type, amount, repayment option, credit - Variable or fixed rates - Check your promissory note/loan docs! Direct Loans - Subsidized - Unsubsidized - Parent PLUS Other Loans - Student Educational Loan Fund - Private Alternative Loans