credit management 1. two – day seminar day one establishing & maintaining credit credit...

Credit ManagementCredit Management

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Credit ManagementCredit ManagementTwo – Day Seminar

Day One Establishing & Maintaining Credit Credit Scoring

Day Two Loan Agreement Terms & Conditions Managing Credit

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Credit is ImportantCredit is ImportantCredit gives you the ability to acquire goods and services today, but pay later.

When you borrow you are making a promise to repay, usually including interest.

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The Three C’sCapacity

Your ability to pay your debts.

Character Where credit is concerned, a person’s reputation for

paying bills when due. This is also referred to as your willingness and ability to pay—or credit worthiness.

Collateral An asset pledged to the creditor until the credit

obligation is paid. Example: If you own your home (or another car), it may be used as collateral to secure a car loan.

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Credit Definitions

Pros Cons

Convenient Cover emergencies Build assets Build future credit

Tempted to spend excessively

May limit ability to save and invest

Increases cost of item or service due to interest charges

Constant drainage of financial resources

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Pros vs. Cons of Credit Pros vs. Cons of Credit

Credit Formula

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Debt Tracker Debt Tracker Item Bought/

PurchasedAmount Owed

Payment Amount

Interest Rate

Term of Loan

Total Interest

Paid

Total Cost of Loan

Total $0.00 $0.00 0.00% 0 0.00% 0.00%

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Debt-to-Assets (liabilities divided by assets)The higher the percentage, the greater the level of risk you have.

Debt-to-Limit (divide outstanding credit card balance by credit card limit)The percentage should be 30%, but no more than 50% of the credit card limit.

Debt-to-Income (divide total monthly payments by net monthly income) A high debt-to-income ratio signals to lenders that you may not be able to make payments on the loan that you are seeking. Should not exceed 20% of net monthly income.

Financial Ratios

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Credit Card Management

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Types of Credit CardsBank Cards: Issued by banks, savings and loan associations, and credit unions.

Charge Cards: “Travel and Entertainment” cards. Charges generally have to be paid at the end of the month.

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Types of Credit CardsRetail Credit Cards: Issued by businesses such as department stores, gasoline companies and airlines. Credit is limited to goods or services offered by the card issuer.

Secured Credit Cards: A credit card secured by a deposit in account held by the card issuer.

Affinity Cards: Affinity cards issued jointly by a lending institution and some other organization such as charity or college alumni associations.

Credit Card ManagementCredit Card Management

An open-ended card that allows you to borrow money up to an established limit

Carry-over an unpaid balance

No fixed-time to repay

Allows a minimum payment each month

Entering into a loan agreement to repay lender

Giving up the use of future money

A Credit Card:

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How Finance Charges are CalculatedHow Finance Charges are Calculated Annual Percentage Rate (APR): This os the cost of

credit, expressed as a yearly rate.

Periodic Rate: This is the interest rate used to figure the finance charge on your balance.

Annual Fee: Amount you pay to be a cardholder. Similar to a membership fee.

Grace Period: This is the number of days you have to pay your bill before finance charges begin to add up.

Finance Charges: Most lenders calculate finance charges using an average daily account balance. Look for offers that use an adjustable balance that subtracts your payment from your beginning balance.

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Debt-to-Limit Ratio

Outstanding Credit Card Balance / Credit Card Loan Limit

$300 / $1,000 = 30%

$450 / $1,000 = 45%

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Credit Card Payoff Schedule Credit Card Payoff Schedule for $1,500 Debtfor $1,500 DebtAssumes 13.8% Interest Rate and 4% Minimum Monthly PaymentAssumes 13.8% Interest Rate and 4% Minimum Monthly Payment

Assumptions: No late fees or new purchases; monthly payments must be a minimum of $25.00. Minimum 13.8 years; minimum+$10, 4.5 years; and $100, 1.5 years.

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$16 + $25 = $41

$68 + 41 = $109

$100 + $109 = $209

$200 + $209 = $409

$400 + $409 = $809

Debt Liquidation Approach(When you can’t consolidate)

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Some Sources to Reduce DebtsSome Sources to Reduce Debts

Income tax refunds

Gifts

Increase wages or salary

Inheritances

Sale of personal assets

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Questions to Ask Yourself When Questions to Ask Yourself When Making a Buying DecisionMaking a Buying Decision

Do I need it?

Am I buying it because my friend bought it?

Am I buying the item to impress others?

Can I afford it?

Am I good with my personal finances or am I certain that the credit card payments will fit within my current income?

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Questions to Ask Yourself When Questions to Ask Yourself When Making a Buying DecisionMaking a Buying Decision

Do I pay my bills or debt payments on time each month?

Do I pay off the balance each month?

Will the useful life or my interest in the purchased product exceed the payment period?

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Danger Signs of Financial TroubleDanger Signs of Financial Trouble

Pay only monthly minimums or miss payments?

Have you reached the credit limit on your credit cards?

Depend on overtime or moonlighting to cover monthly bills?

Depend on parents to pay your credit card bill?

Borrow from friends and relatives to cover basic expenses?

If you answered “yes” to any of these questions, you may be heading for financial trouble.

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Danger Signs of Financial TroubleDanger Signs of Financial Trouble

Find it impossible to save money or immediately withdraw money from savings to cover bills?

Use credit card cash advances to pay for daily living expenses?

Hope that checks you have written don’t clear the bank before you receive an allowance or before payday?

If you answered “yes” to any of these questions, you may be heading for financial trouble.

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Contact Us… Contact Us…

Society for Financial Education and Society for Financial Education and Professional Development, Inc.Professional Development, Inc.

www.sfepd.org www.sfepd.org

500 Montgomery Street, Suite 400500 Montgomery Street, Suite 400Alexandria, Virginia 22314Alexandria, Virginia 22314

703-920-3807703-920-3807info@sfepd.orginfo@sfepd.org

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Useful Websiteswww.MyMoney.gov

www.FederalReserveEducation.org

www.SFEPD.org

www.controlyourcredit.gov