What is your gut reaction to these words?

Credit cardsDebtBankruptcy

Suze Orman says…

The First Law of Money =People first. Then money. Then things.

Investment in Consumer Durables Most household durable goods have both

investment and consumption attributes consumption benefits are services provided and

typically these largely outweigh any investment attributes

Examples of large household durables automobile washer

Large expense of durables necessitates that many households must either save for such purchases or finance them by going into debt.

Saving for the Purchase of Durables

Benefits acquisition costs are lower

Costs delayed gratification / loss of use relative price may rise in interim

Financing the Purchase of Durables

Benefits immediate use / gratification establishment of credit rating (?) purchase price known with certainty

Costs acquisition costs are higher

Acquisition Costs

Financing costs Search costs Delivery charges Installation charges Education costs Accessories

Then, there are operation costs…

Maintenance repairs / service contracts disposables energy costs insurance storage foregone interest (opportunity costs)

How much will that durable good really cost you?

List 3 durable goods you want to purchase some time in your life

Estimate the cost of each item Think of your hourly wage How many hours do you need to work to

purchase each item?

Given substantial acquisition and operation costs, why do households continue to purchase durables?

time savings direct utility / satisfaction status

Overspending

is hazardous

to your wealth

Definition... Consumer debt - two components

consumer installment credit which covers most non-mortgage loans to consumers repayable

in two or more payments (e.g., car loans) revolving credit (e.g., credit cards)

Borrower may obtain funds up to a certain pre-approved limit There is no set amortization schedule The credit may be used repeatedly Borrower may repay over time or all of the balance at once Most of the time interest rates are not fixed

Mortgage debt is a separate category in credit files, even though it is either installment (traditional mortgage) or revolving (home equity line of credit)

Dave Ramsey says,

To avoid debt, ACT YOUR

WAGE

Where can you get credit? Banks, S&L’s, Credit Unions

low risk, low interest rate Sales Finance Companies (e.g. Sears, GM) Credit Cards Consumer Finance Companies (e.g. Advance Check

shops) Interest rates from 400-980% APR Doesn’t always seem so high because you are charged fees

Ex. Borrow $100 for 31 days at USA Cash = $44.29 loan fee

Pawnshops high risk, high interest rate

This shows the stratification of the credit market

An ad I saw once:

Use our “Easy Credit Plan”100% Down$0 Monthly Payment

Credit Report Score

Determined by FICO (Fair Isaac Corporation) based on: Payment history – 35% Amount owed – 30% Length of credit history – 15% New credit – 10% Types of credit in use – 10%

Check out the official website at www.myfico.com

Credit Reports Each of the 3 credit reports from Experian, TransUnion, and

EquiFax lists your: Credit accounts, including all credit cards, auto loans, student loans,

and mortgages in your name, with information about the: Creditor and account number Balance Date opened Payment history Current status, such as “OK”, “Closed by customer”, “30 days late

payment”, etc. Inquiries: recent applications for new credit Collections: when a collection agency is seeking you to repay a debt Public Records: court judgments such as a bankruptcy, foreclosure,

or tax lien You are entitled to one free credit report from each agency every

year. Access it at www.annualcreditreport.com or by calling (877)322-8228

Credit Report Myths

Check out the reading on this – very important to understand

Does one late payment really hurt me?

Survey by Experian (2005): More than half of US consumers have a

delinquent payment on their cc More than a third have a late payment in the past

year Average score with 1 late payment = 598 credit

score Average score with no late payments = 759

Credit Card (a definition)

A means for buying something you don’t need, at a price you can’t afford, with money you don’t have.

Credit Cards

Which credit card is best for you? Evaluate:

annual fee periodic interest rate how they calculate outstanding balance (grace

period and loan repayment) Do you pay off your balance every month? -

OR- Do you carry a balance?

How long will it take to pay cc off with 2% minimum payments?

$2,500 balance, 18% interest 244 months (>20 years) with $3365.51 in interest

$2,500 balance, 22% interest 347 months (almost 29 years) with $6102.13 in

interest

Credit cards, cont.

When are credit cards a good thing?

When are they a bad thing?

How can you resurrect yourself and your credit if credit cards are a bad thing for you?

More on Credit Cards

Need a credit card to establish credit history and for emergencies If you can eat it, drink it, or wear it, then it's not an

emergency!

Even if the lender thinks you can handle $2,000 or $5,000 or $10,000 in debt (credit limit) doesn’t mean that you should or can

Changes in Credit Card Rules-2009-2010

1. Limited interest rate hikes

2. No more universal default

3. More time to pay bills

4. Clearer due dates and times

5. Highest interest paid first

6. Limits on over-the-limit fees

7. No double-cycle billing

8. Making minimum payments

9. Subprime card fee limits 

Some statistics…

Among college students, >80% have 1 cc 15% have 4+ cc’s 50% pay bal every month 16% have bal >$1,000 5% have bal >$5,000

In the 1990s, the bankruptcy rate for 18-25 has DOUBLED Most filings were for revolving credit with

balances <$10,000