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Credit Wisdom
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Managing Money & Credit:A Lifelong Skill
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Why Credit is Important
• FICO or credit score:• Credit Card Issuers &
Lenders– Determine APR
• Auto Insurers– Determine Premium
• Employers– Are you a worthy hire?
• Landlords– Are you a reliable tenant?
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The Three Cs of Credit
• Character: The way you handle money and have repaid debt in the past.
• Capacity: Your ability to pay the debt after considering other monthly expenses.
• Capital: The value of your assets or what you own.
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What’s Next? Life After High School
60%
40%Work force
School: 2-year, 4-year,
or vocational school
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Learning Boosts Earning
Education Average Annual Income
Professional $71,258
Doctorate $60,729
Master's $48,772
Bachelor's $40,387
Associate $26,536
Some college, no degree $20,998
High school graduate only $18,571
Not a high school graduate $10,839
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Your Paycheck
• 50% of U.S. young adults work
• Earn a minimum of $5.15 per hour
• Work an average of 20 hours / week
• $412 - Monthly• $4,946 - Annual
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Where Does All the Money Go?
• Food, Snacks & Beverages
• Movies• School Events• Music, CDs, Concerts• Clothing, Cosmetics &
Shoes• Cars, Gas &
Insurance• Cell Phones
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Credit Cards – The Perceived Great Equalizer
• Credit lets you buy more than they can afford. – Credit and credit cards– Current World Problem
• Needs are essentials– Food– Shelter– Clothing– Reliable transportation
• Wants are extras– Eating out– Big, expensive house– Shop till you drop– Brand new or an expensive
car
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Who Uses Credit Cards?• U.S. population = 298 million
• Use credit cards = 150 million
• Pay off monthly = 50 million
• Carry a balance = 100 million
• 2/3 of credit card users don’t pay off their balance
•
$9,300 = average debt per household
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America’s Love of Credit
• 1.6 million bankruptcies were filed in 2004
• Americans are declaring bankruptcy at 10x the rate they were during the depression
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Personal Savings Rate Declining
• 1974 to 1984– 10%
• 1985-1994– Fell to 4.8%
• 2004– 1.8%
• 2005– -0.5%
• 2006– -0.7%
• Hasn’t been negative since the Great Depression
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Saving for the Future
• Save 10% of every monthly check
• Use savings for:– Emergencies– Big purchases
• Trip with friends• Car
– Down payment on a home
– Retirement
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Advantages & Disadvantages of Credit Card
• Advantages– Convenient– On-line purchases– Kick-backs i.e. cash, airline
miles, etc.– Can rent a car
• Disadvantages– Doesn’t seem like real
money– Easy to overspend
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Use Credit Wisely
You should use credit to buy:– House – Car– Education (student loan)
and you’ll avoid trouble
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Only Buy What You Can Afford
• Pay off monthly balances– Avoid interest– Avoid late fees
• Know your budget• Know yourself
– Are you an impulse buyer?
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Pay More than the Minimum
• If you have a credit card balance:– Make a plan to pay as
much as you can every month
– Start with the credit card with the highest interest rate
– Pay off the credit cards as quickly as you can
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Limit the Number of Cards
Americans have an average of 8 credit cards
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Always Pay on Time
• Avoid late fees• Keep your money in
your pocket• Maintain a good credit
score– Late payments have
the biggest negative impact.
• Easiest way to make money is to save money.
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Choose a Low Rate
• 0% is lowest– But remember the catch
• 15.75% average fixed rate.
• If you pay your card off every month, the rate won’t matter.
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What Not to Use Credit For:
Pay Day Loans
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Payday Loans / Check Cashing
Stay Away!What is it?
– Cash Loan– Extremely High
Interest– Short-term (14 – 45
days)
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How Do They Work?
• You postdate a check
• They give you a loan
• Loan last for 2 weeks
• They charge you a fee for borrowing the money—equivalent APR can be over 300%.
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WA State Payday Regulations
• Can loan up to $700
• Charge $15 per $100 borrowed up to $500
• Charge $10 per $100 borrowed above $500
• You pay $95 to borrow $700 for two weeks
• Annual APR =
391.07%
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Risks of Payday Loans
• Not a long-term cash solution
• Borrowers get trapped in a payday loan cycle of debt– Take out loan after
loan