Credit

Unit 4 – Good Debt, Bad Debt: Using Credit Wisely

Credit Card Statistics

176.8 million credit cardholders in 2008 The average credit cardholder has 3.5 credit

cards The average American has nearly $10,700 in

credit-card debt The average age at which a U.S. consumer under

the age of 35 first adopted a credit card is 20.8 years

80% of consumers currently own a debit card

Number of Credit Cards in U.S. ~ 2009

Provider Credit Debit

Visa 270M 382M

MasterCard 203M 125M

American Express

48.9M n/a

Discover 54.4M n/a

Credit Card Statistics ~ Students

84% of the student population overall have credit cards

Only 2% of undergraduates had no credit history

50% of undergraduates had 4 or more credit cards in 2008

76% of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt

41% of undergrads have a credit card. Of the students with cards, about 65% pay their bills in full every month, which is higher than the general adult population

What is credit?

A loan

Paid off with interest

That allows you to buy an item now but pay for it over a period of time

Types of CreditType of Credit

Features

Credit Card Some cards can be used anywhere (Visa); others only at a specific place (Gap)

No payoff deadline

Monthly minimum payments vary based on the balance

Usually has the highest rate

Installment Loan

Typically used for large purchases such as a car

Loan term can vary from a few months to many years

Monthly payment amounts are often set for the life of the loan

Usually has a lower interest rate then a credit card

Student Loan Used for tuition and other college expenses

Some programs let you delay payments until you graduate

Loan term is usually up to 10 years

May provide an income tax break

Mortgage Usually repaid over 15-30 years

Monthly payments are set for the life of the loan

Usually has a lower interest rate than an installment loan

May provide an income tax break

Costs of Using Credit

Annual Percentage Rate (APR) – annual interest rate

Annual Fee – yearly charge you pay for the privilege of using credit

Credit Limit – maximum amount of credit a lender will extend to a customer

Finance Charge – actual dollar cost of using credit to maintain a balance

Origination Fee – charge for setting up the loan (usually seen with home loans)

Over the Limit Fee – fee for spending more than your credit limit

Late Fee – penalty for making a payment after the due date

Pros and Cons of Credit

PROS

Convenience Protection Emergencies Opportunity to Build

Credit Immediate

Gratification Special Offers Bonuses

CONS

Interest Overspending Debt Identity Theft

Are you Credit Worthy?

The Four Cs of Credit Collateral▪ What lenders can take from you if you don’t repay

Capital▪ Your net worth

Capacity▪ Income and employment history; ability to pay back

the loan▪ Debt:income ratio

Character▪ Are you trustworthy?▪ Look at your credit history

How to Build a Good Credit History

Pay your bills on time Make regular deposits in your

savings account Be choosy about your credit cards

and loans; only use the ones you need and keep them for a long time

Better to maintain a low balance and pay if off each month than to have no balance at all

What’s Considered Good Credit? Credit Scores prepared by 3 Credit

Reporting Agencies in the US Equifax Experian TransUnion

Credit Score Description

730-850 Excellent

700-729 Great

670-699 Good

585-669 Average

300-584 Bad

FICO score is calculated statistically, with information from a consumer's credit files. The letters stand for Fair Isaac Corporation

What Determines Credit Score?

What Hurts your Credit Score?

Late Payments Bouncing Checks Having Multiple Credit Cards and Loans Maintaining high balances on your

cards Changing credit cards frequently

Stays on your credit report for 7 years!!!!

Why do you need good credit?

Shelter Mortgage▪ Bad credit = higher interest rate or denial

Rent▪ Bad credit = denied lease

Transportation Unless you have cash to pay for car, you’ll need to get a loan Good credit = larger loan amount and better interest rates

Employment Background checks look at financial responsibility

Entrepreneurship Small Business Loans

Utilities Cable, telephone, water, even cell phones

Credit Score

64% of American adults have not ordered a copy of their credit report in the past year; this grows to (72%) among Hispanic Americans

37% of American adults admit that they do not know their credit score

Corpus Christi, Texas, residents have America's worst credit scores

How do you get your credit score? Contact the 3 credit reporting agencies and

request it! Entitled to a free credit score each year (report

costs $15)

How it can get out of hand

Overspending Spending more than you make

Personal Issues Divorce Medical

Professional Issues Business failure Slowdown/Riding out the Storm

Personal Stories

Jana, 45, college degree, married, 1 child (8)

Director of Purchasing at Ford Motor Company

Earns over $100K/year Lived in the same home for 10 years Daughter in private school Drives nicest cars, wears fashionable

clothes, vacations twice a year

Personal Stories

Husband owned family business in automotive after-market Business historically did well bringing in $250K+; spending habits

reflected that When auto industry went into recession, so did after-market Business slowed, but kept expecting it to rebound Continued to spend money on business, trying to bring in new clients ~

for 5 years Husband’s credit destroyed, put business in wife’s name Bills continued to pile in, but no new revenue from family business Owe $50K to IRS in back taxes Took out a 2nd mortgage to pay off growing debt Husband’s substance abuse explodes Housing market tanked, now owe more on house than it’s worth Daughter still in private school, still buying fabulous boots/jewelry; still

going to Vegas staying in luxury suites Stress of financial worries caused marital problems; filed for divorce Minimum payment on credit cards greater than Jana’s high paying job at

Ford Hasn’t made a house payment in over a year (playing odds with bank

due to high number of foreclosures in Detroit) Continues to pay utilities otherwise won’t have power or heat…

The Dark Cloud of Debt

Jana owes more than $100,000 Paying the monthly minimum of

$1501 at 18% interest, it would take her 38 years to pay it off Note: paying less than $1500 per month

would never pay off the balance assumes she pays cash for all future

purchases and incurs no further charges

What can she do?

Put away the plastic, and stop adding to her debt

Start living entirely on a cash basis again

Make a personal commitment to repay all her debts Start by either paying off the card with smallest amount

– or – the one with the highest interest

Find out exactly how bad it is – how much does she really owe?

Create a repayment plan that she can stick withhttp://money.cnn.com/video/pf/2012/03/30/pf-hd-100K_debt.cnnmoney/

If that doesn’t work

Bankruptcy – a legal process to get out of debt when you can no longer make all your required payments

Chapter 7▪ Allows you to erase most of your debt▪ To qualify, you typically must be unemployed or have a very

low income▪ Must undergo financial counseling

Chapter 13▪ Allows you to repay many of your debts over a period of time▪ Court typically oversees to make sure you do it

Bankruptcy

Still have to pay student loans, child support, alimony, and any penalties and fines for crimes

Stays on your credit record for 10 years Have to rebuild credit starting at approx.

400 Makes it difficult to get new credit cards,

buy a house, rent an apartment, etc.▪ when Jana finally loses her house, her parents

will have to buy a condo for her and her daughter to live in…▪ What would happen if her parents couldn’t bail

her out?!?