Don’t be stupid Don’t be stupid about credit!about credit!

A brief guide to using A brief guide to using

credit cards and loans wiselycredit cards and loans wisely

The American love affair with creditThe American love affair with credit

The first credit card was introduced The first credit card was introduced in 1958 – American Expressin 1958 – American Express

The American love affair with creditThe American love affair with credit

The first credit card was introduced The first credit card was introduced in 1958 – American Expressin 1958 – American Express

By 2007, American consumer debt By 2007, American consumer debt totaled $904 billion – that doesn’t totaled $904 billion – that doesn’t include home and car loans!include home and car loans!

The American love affair with creditThe American love affair with credit

The first credit card was introduced The first credit card was introduced in 1958 – American Expressin 1958 – American Express

By 2007, American consumer debt By 2007, American consumer debt totaled $904 billion – that doesn’t totaled $904 billion – that doesn’t include home and car loans!include home and car loans!

Americans paid $90 billion in interest Americans paid $90 billion in interest in 2006 alonein 2006 alone

The American love affair with creditThe American love affair with credit

The first credit card was introduced The first credit card was introduced in 1958 – American Expressin 1958 – American Express

By 2007, American consumer debt By 2007, American consumer debt totaled $904 billion – that doesn’t totaled $904 billion – that doesn’t include home and car loans!include home and car loans!

Americans paid $90 billion in interest Americans paid $90 billion in interest in 2006 alonein 2006 alone

The average American owns 13 The average American owns 13 credit cardscredit cards

On the other hand…On the other hand…

¼ of American households get by ¼ of American households get by without a single credit cardwithout a single credit card

On the other hand…On the other hand…

¼ of American households get by ¼ of American households get by without a single credit cardwithout a single credit card

40% of households who do use credit 40% of households who do use credit cards pay their monthly balance in cards pay their monthly balance in fullfull

On the other hand…On the other hand…

¼ of American households get by ¼ of American households get by without a single credit cardwithout a single credit card

40% of households who do use credit 40% of households who do use credit cards pay their monthly balance in cards pay their monthly balance in fullfull

So, 45% of American households So, 45% of American households have all of the consumer debt.have all of the consumer debt.

On the other hand…On the other hand…

¼ of American households get by ¼ of American households get by without a single credit cardwithout a single credit card

40% of households who do use credit 40% of households who do use credit cards pay their monthly balance in fullcards pay their monthly balance in full

So, 45% of American households have So, 45% of American households have all of the consumer debt.all of the consumer debt.

The biggest problem is that The biggest problem is that consumers tie up future income and consumers tie up future income and can end up in bankruptcy if they can’t can end up in bankruptcy if they can’t pay it back.pay it back.

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

ConvenienceConvenience

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

ConvenienceConvenience EmergenciesEmergencies

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

ConvenienceConvenience EmergenciesEmergencies IdentificationIdentification

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

ConvenienceConvenience EmergenciesEmergencies IdentificationIdentification Consolidation of debtsConsolidation of debts

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

ConvenienceConvenience EmergenciesEmergencies IdentificationIdentification Consolidation of debtsConsolidation of debts Establishing a good credit historyEstablishing a good credit history

So why use credit cards?So why use credit cards?

Earlier consumption – use goods Earlier consumption – use goods while you pay for them!while you pay for them!

ConvenienceConvenience EmergenciesEmergencies IdentificationIdentification Consolidation of debtsConsolidation of debts Establishing a good credit historyEstablishing a good credit history Incentives, like points!Incentives, like points!

Credit BasicsCredit Basics

Credit LimitCredit Limit Minimum PaymentMinimum Payment PrincipalPrincipal Interest Rate/interestInterest Rate/interest FeesFees PointsPoints Credit rating/credit reportCredit rating/credit report LoanLoan MortgageMortgage

Credit BasicsCredit Basics

Credit LimitCredit Limit

This is the maximum amount a credit This is the maximum amount a credit card company will let you borrow at a card company will let you borrow at a time. A starting limit might be $5,000 time. A starting limit might be $5,000 or $8,000. Once you’ve established a or $8,000. Once you’ve established a good reputation for paying your bills, good reputation for paying your bills, the limit is raised.the limit is raised.

Credit BasicsCredit Basics

Minimum paymentMinimum paymentThis is the amount the company requires This is the amount the company requires

you to pay each month.you to pay each month.It is usually ridiculously small, just a It is usually ridiculously small, just a

fraction of your debt. You may own fraction of your debt. You may own $1500 but be required to pay only $15.$1500 but be required to pay only $15.

It’s best to IGNORE the minimum It’s best to IGNORE the minimum payment and pay the balance in full. If payment and pay the balance in full. If you do this, you can avoid paying any you do this, you can avoid paying any interest.interest.

Credit BasicsCredit Basics

Principal or Account BalancePrincipal or Account Balance

This is the total amount you owe. It is This is the total amount you owe. It is listed on each statement, or you can listed on each statement, or you can check it online or by phone at any check it online or by phone at any time.time.

Pay off the balance in full each month. Pay off the balance in full each month. Don’t charge more than you have in Don’t charge more than you have in the bank.the bank.

Credit BasicsCredit Basics

Interest rateInterest rate

This is what they are charging you for This is what they are charging you for the privilege of spending their the privilege of spending their money.money.

While home loans are about 5-6% and While home loans are about 5-6% and college loans a little higher, credit college loans a little higher, credit card interest rates are usually 15-card interest rates are usually 15-30%. Scary.30%. Scary.

Credit BasicsCredit Basics

FeesFees

Some credit card companies also Some credit card companies also charge you an annual fee, like $50, charge you an annual fee, like $50, for the privilege of using their card.for the privilege of using their card.

Look for one that doesn’t.Look for one that doesn’t.

Credit BasicsCredit Basics

PointsPointsUnlike interest rates and fees, points Unlike interest rates and fees, points

are a GOOD thing.are a GOOD thing.You can earn a point for each dollar You can earn a point for each dollar

you spend with your credit card, and you spend with your credit card, and you can redeem those points for you can redeem those points for cash, airline tickets, or other gift cash, airline tickets, or other gift items.items.

Cards with points usually charge higher Cards with points usually charge higher interest, however, so be careful.interest, however, so be careful.

Credit BasicsCredit Basics

Credit ratingCredit ratingEvery time you use a credit card or get Every time you use a credit card or get

a loan, it gets reported to a credit a loan, it gets reported to a credit agency.agency.

The agency tracks your behavior – The agency tracks your behavior – whether you repay on time or not.whether you repay on time or not.

Your accumulated payment history Your accumulated payment history becomes your credit rating – a score becomes your credit rating – a score of 300 to 850 that shows future of 300 to 850 that shows future lenders how reliable you are.lenders how reliable you are.

Credit BasicsCredit Basics

LoanLoan

Credit is basically a loan.Credit is basically a loan.

You can also get a loan from a bank, You can also get a loan from a bank, an auto dealer, a credit union, a an auto dealer, a credit union, a family member, a college or another family member, a college or another source.source.

A loan is simply borrowed money – and A loan is simply borrowed money – and it usually involves interest.it usually involves interest.

Credit BasicsCredit Basics

MortgageMortgageA mortgage is a special kind of loan – A mortgage is a special kind of loan –

it’s only a loan for a house.it’s only a loan for a house.Mortgages usually have lower interest Mortgages usually have lower interest

rates because the buyer has rates because the buyer has “collateral” – the house.“collateral” – the house.

If a buyer fails to make the mortgage If a buyer fails to make the mortgage payments, the bank can foreclose, payments, the bank can foreclose, which means the bank takes the which means the bank takes the house.house.

Why does good credit matter?Why does good credit matter?

People often wonder why good credit People often wonder why good credit matters. They think “I’ll just charge it matters. They think “I’ll just charge it and pay it off over time.”and pay it off over time.”

It’s quick and easy, maybe too easy.It’s quick and easy, maybe too easy. Misusing credit today can hurt you Misusing credit today can hurt you

tomorrow….tomorrow….

Which house do Which house do youyou want? want?

Person # 1Good Credit

Person #2Better than

Average Credit

Person #3Average Credit

Person #4Bad Credit

Cost of House

$200,000 $200,000 $200,000 $200,000

# of Payments

360 360 360 360

Mortgage rate

6% 6.5% 7% 8%

Monthly payment

$1199.10 $1264.14 $1330.60 $1467.53

Interest paidover 30 years

$231,676.38 $255,088.98 $279,017.80 $328,310.49

Total Cost of House

$431,676.38 $455,088.98 $479,017.80 $528,310.49