© 2004 aca international all rights reserved sponsored by personal finance with materials and...
TRANSCRIPT
© 2004 ACA International all rights reserved
Sponsored by
Personal Finance
With materials and information provided by: The American Bankers Association, the American Center for Credit Education, CBM Credit Education Foundation, Efunds, Experian, Federal Trade Commission, Minnesota Bankers Association, Nellie Mae, and the U.S. Department of Labor.
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The Basics:
• What is credit, anyway?• Establishing credit• Credit cards• Budgeting• Saving• Auto loans
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• Credit – the amount of money available to you through lenders
• Debt – the amount of credit you’re using at any given time
• Creditor – any person / business that extends credit
Important definitions:
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• Based on trust• Checks & balances
– Federal Trade Commission– Federal Reserve Board– local Better Business Bureau– local Chamber of Commerce– trade associations– consumer advocacy groups– credit reporting agencies
Our credit system
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• Credit Reporting Agencies– Equifax– TransUnion– Experian
• Credit report– Reputation– Past history is an indicator of future performance– 7 years of info
Your Credit
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• 3 national credit reporting agenciesEquifax (800) 685-1111 www.equifax.com
TransUnion (800) 888-4213 www.transunion.com
Experian (888) 377-3742www.experian.com
• Check your report:– Once a year– Before major borrowing decisions– Any time you are denied credit– If you suspect fraud
Obtaining your credit report
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• Secured vs. Unsecured– collateral– risk
• Installment vs. Revolving – Installment: has set period of time
• auto loan• mortgage
– Revolving: open line of credit• credit card
Types of Debt
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Establishing credit• 3 possible situations
– Good credit history– Bad credit history– Insufficient credit history
• Getting started – Credit cards– Co-signed loans– Start small– Start with familiar institution
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• Good or bad?• Unsecured loans• Higher risk = higher rates & fees
Credit cards
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Choosing your first card
• APR– Lower is better– Read the fine print!
• Fees• Perks• Balance Calculation Method
– Average Daily Balance– Two-Cycle Avg. Daily Balance (avoid!)
• Evaluating– bankrate.com– cardweb.com
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“Unlike student loans, which are designed for students, credit cards are designed for people with income.”
(Nellie Mae)
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Guidelines for using credit cards:
• Intended for short-term borrowing– Not for carrying a balance long-term– Have a repayment plan in mind beforehand
• Always pay more than the minimum! – Pay off every month when possible– Pay at least 2x the minimum
• Always pay on time!– Avoid late fees– Pay by phone or online for convenience
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• Bankrate.com CalculatorBalance: $2,748
APR: 18%
min. payment: 2%
• How long to pay off…?
the minimum payment trap…
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the minimum payment trap…
• At minimum payment: 434 months (36 yrs, 2 months)
$7,174.63 in interest
• At $80/month (min. + $25/month at start)
49 months (4 yrs, 1 month)
$1,143.01 in interest
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vs.Durable goodsMp3 playerSnowboardNew tires for car
Consumable goodsConcert ticketsGasolineGroceriesDining out
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Budgeting
• A budget is:– Not about restriction– About getting what YOU want!– The best tool you have for financial success– Continuous– Flexible– Individual– About the future
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Prioritize• Needs
– Should always come before wants– Reflected in your budgeting & bill paying habits– Examples: savings, housing, reliable transportation, insurance
coverage, groceries, clothing, utilities, existing financial obligations.
• Wants– cable/satellite TV– Toys: boats, snow mobiles, expensive jewelry, cell phones
– Vacations– Dining out
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Live Within your Means• Paying for living expenses on credit
– denial
• Savings• Lifestyle changes are difficult
– Justification– Entitlement
• See the “big picture”– Set goals
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Debt: How much is too much?
• How much of your monthly budget is going to debt payments?
• Add up payment amounts for all loans, excluding mortgages (ex: auto loans, student loans, furniture loans, credit cards, personal loans, etc.)
• Divide by monthly gross income• 20% or higher = potential problem
• Ex: $275 car payment
$ 55 Visa card
$ 30 Discover card
$ 70 student loan
+ ________________
$430
$430 ÷ $2,000 = 0.215or
21.5% avoid taking on more debt!
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Warning Signs
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• no budget plan• no savings• denied for a loan• debt increasing month after month• total monthly debt payments ≥ 20% gross income• making only minimum payments• hiding purchases from others• cash advances/payday loans• late fees, over limit fees• creditors/collectors calling
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Saving• “Pay Yourself First”• 10% of gross income• Long term
– Over 5 yrs– Retirement– Children’s education
• Short term– 1 to 5 yrs– Vacation fund– Down payment for a house
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Auto Loans
• Borrow conservatively• It’s just a car
– Not a status symbol– Practical– Avoid emotion
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• Shop for the loan carefully– Find the financing before you find the car– Know your credit score– The shorter the term, the better
• Depreciation• “Upside down”
Auto Loans
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Auto Loans
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$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
1 13 25 37 49 61
Month
book value
loan balance
Depreciation:
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Buying a car
• New vs. used• Negotiate!• Consider all the costs before you buy
– Insurance– Reliability/maintenance– Gas mileage