Money management for college students making money smart decisions
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For the Freshman Decision Making Class - The importance of making good financial decisions and how the decisions you make today will impact the rest of your life.
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Money management for college students making money smart decisions
- 1. Money Management For College Students: Making Money Smart Decisions Presented By: Sherry Auble Chartered Retirement Planning Counselor Founder, Divorce Financial Strategy & Savvy Women & Wealth
- 2. Agenda • Most Common Mistakes College Students Make With Money • Why Money Management Is So Important • How To Make Thoughtful Decisions • What You Need To Know To Make Good Money Decisions While In College 1. Develop A Monthly Budget & Track Expenses 2. Build An Emergency Fund 3. Manage Your Debt Effectively 4. Understand Your Loans 5. What You Need To Know About Your Credit Report & Credit Score
- 3. Most Common Money Mistakes Students Make •Spending Every Penny Instead of Saving •Living Beyond Your Means – Racking Up Debt •Letting Your Bills Slide – Not Paying On Time •Spending “Extra” Student Loan Money •Not Researching To Find The Best Deals •Not Keeping Track of Account Transactions & Balances
- 4. Why Good Money Management Is Important? 1) Your credit management habits affect your credit score & therefore, your financial future People with low credit scores pay more for: •Rent •Car loans •Car insurance •Mortgages •Health/dental/vision insurance If your credit score is low, it can prevent you from: •Getting an apartment •Getting a job
- 5. Why Good Money Management Is Important? 2) When you graduate and start your first job, you’ll have new expenses: • Moving Expenses • Transportation Expense: (parking fees, train fee, car purchase, car insurance, etc.) • Higher Living Expenses: (food, dry cleaning, laundry) • New Clothes For Work • Student Loan Expense Kicks In The more debt you accumulate today, either through student loans, personal loans, or credit card debt, will impact the financial decisions you are able to make after you graduate.
- 6. Make Thoughtful Decisions Decision Making Process Predict Identify The Gather Identify Make The Immediate & LT Act Evaluate Problem Information Alternatives Best Choice Consequences Reflect on Decide Your List The Which of Learn About Decide What List Pros & Implement Decision & Problem You Your Different Your Options Cons of Your Your Determine Need To Alternatives Options Are Options Decision What You Solve Are Best For Would Do You Differently
- 7. What You Need To Know To Make Good Money Decisions While In College 1. Develop A Monthly Budget & Track Expenses 2. Build An Emergency Fund 3. Manage Your Debt Effectively 4. Understand Your Loans 5. What You Need To Know About Your Credit Report & Credit Score
- 8. 1) Develop Your Monthly Budget Plan 1) Make A List of All Monthly Expenses: Rent Housing Expenditures (Utilities, Phone, Cable) Food Transportation (Car Pmt, Parking, Gas) Payments (Credit Cards) Savings Clothing Entertainment Car Insurance Other Miscellaneous Expenses (hair cut, laundry, etc.) 2) Make A List of All Monthly Income: 3) Develop A Spreadsheet & Start Tracking Fixed/Non-Discretionary Variable/Discretionary Rent Food Time Warner Entertainment Utilities Clothing Cell Phone Savings
- 9. Develop Your Monthly Budget Plan 3) Subtract Income Total From Expense Total To Determine Surplus or Shortage For The Month 4) Tracking Your Spending • The key to minimize expenses & creating extra cash is to understand exactly how you spend your money • Ask for a receipt for everything you purchase and put it in an envelope, tally at end of month • Set up alerts & receive email/text message if going over Why Budgets Are Necessary • Allows you to understand where your money is going and where it needs to go • Controlling your spending leaves more money for entertainment & savings • Review expenses & determine what can be reduced
- 10. How Could You Cut Expenses Out of Your Budget? - Don’t buy unnecessary items - Go thrifting - Comparison Shop - Keep your car maintained - Don’t shop often - Do free or cheap things for - Stop buying on impulse entertainment (on campus - Wait to buy something all the better) - Break expensive habits - Don’t try to keep up with - Go out to eat less someone who has more - Use coupons than you have - Go to discount movies - Cut out fancy coffee drinks
- 11. 2) Build An Emergency Fund 1) Set Up A Savings Account • Shop around for a bank offering the least fees (Bank of America Versus Cornell Federal Credit Union) • Enroll in on-line banking, bill pay, & link up accounts 2) Save 5-10% of Monthly Income Can’t afford to? Soda at $2/bottle everyday = $730/yr Daily coffee at $3.50/cup = $910/yr. 3) Keep It Safe, Separate From Daily Living Expenses, But Easily Accessible Rule of Thumb: • If you can’t pay cash, then you can’t buy it
- 12. Advantages & Disadvantages Advantages: •Able to buy needed items now •Don’t have to carry cash •Creates a record of purchases •More convenient than writing checks •Consolidates bills into one payment Disadvantages: •Interest (higher cost of items) •May require additional fees •Financial difficulties arise if you lose track of how much you’re spending •Increased impulse buying may occur
- 13. 3) Managing Your Debt Credit Card Debt • Shop around for lowest IR credit card to transfer balances • Pay more than the minimum balance due • Pay the most toward higher IR credit cards • Pay as much as possible, even if it means less in savings • Always pay on time – Use on-line bill pay • Spend one day a month to program your bill payments for a future execution date so you never miss paying one • Once you pay off a credit card, don’t close them It hurts your “utilization ratio” – Amount you owe versus your available credit balance. Leave them open to maintain your credit score.
- 14. Managing Your Debt Balance Transfers • Move higher interest credit cards to lower ones • Offers a low or no interest guarantee during a promotional period to transfer existing credit card debt and/or a qualifying loan balance • Typically a 3% fee is assessed on the amount transferred (If it’s higher, negotiate or decline, if the 3% fee is higher than the savings gained by moving the balance, don’t do it) • Read all terms & conditions in the agreement (even the small print) • Your credit score determines your credit limit & IR • Transfer under the credit limit they offer • Inquire about what happens at the end of promotional period. New interest rate, fees, etc.
- 15. Managing Your Debt Keep In Mind: • Getting a lower IR may not save money if your refinancing/consolidation/repayment stretches out the terms of the loan for a longer period of time • You may need to lengthen the terms to decrease your pmts to an affordable level • Always make sure you work out the numbers to see if it makes financial sense by figuring the break-even point • To save the most money and get rid of debt quickly, refinance your existing debt for a lower IR and stick with the existing pay off schedule or a shorter one On-Line Calculators: Bankrate.com Dinkytown.net Rategenius.com
- 16. Charging On Your Credit Card – The True Cost How Much Is It Really Costing You? You charge $2,500 You pay $50 a month Yearly interest rate is 20% How long will it take to pay the balance? Answer: 9 Years, 1 Month Paid $2,920 In Interest Charges Total Interest Rate Paid = 116%
- 17. Credit Cards: What To Watch Out For! •Low introductory rates that increase dramatically over time •Charging an annual fee •Late payment fees as high as $35 a month plus, finance charges •Charging a transaction fee for cash advances and the interest starts immediately (no float) •Charging $35 a month for going over your credit limit, plus finance charges •You must notify the company ASAP if your card is lost or stolen in order to limit your liability •There is a difference between the stated versus effective interest rates.
- 18. 4) Understand Your Loans Understanding Your Student Loans 1) Read the terms, conditions & repayment options 2) Find out when your grace period ends & mark your calendar. Ex. Stafford Loans: 6 months after graduation 3) If you haven’t found a job, call to discuss your options. How To Repay 1) Extended Repayment – up to 25 yrs to repay w/a substantially reduced monthly pmts 2) Graduated Repayment – make lower pmts for several years followed by increased pmts for the remainder time 3) Income Sensitive Repayment – make lower pmts that gradually increase, based on your monthly income 4) Income Based Repayment – allows you to cap your loan pmt at 15% of your discretionary income due to financial hardship. Loan Deferment – allows you to temporarily stop making pmts for a set time (6 mos). Interest still accrues.
- 19. Understand Your Loans Private Loans 1) Due to credit market crunch, fewer programs available to consolidate and the underlying IRs remain variable. 2) Most private education loan programs have multiple repayment options that could decrease your pmts 3) Programs offer the ability to temporarily decrease pmts 4) Other alternatives: Outside line of credit or home equity loan. Government Consolidation Loan 1) Review loans to determine if it makes financial sense 2) Shop around – local banks, Sallie Mae (largest student loan provider), American Education Services (full svc financial aid org) 3) Read terms, conditions & fees 4) Pay on time – It’s the beginning of your credit history 5) If you don’t pay – IRS garnishes tax refunds & Dept of Education garnishes your wages.
- 20. Understand Your Loans Loan Consolidation - If you have multiple debts (loans, credit cards, etc.), combine together into one monthly pmt. - Saves money with a lower overall IR - Easier to manage your debt with one pmt date - Private & federal loans cannot be combined, must be consolidated separately - Any special repayment options of original loan agreement will be lost Refinancing - When done properly, holds the key to getting out of debt faster with the least expense - Goal: Reduce your IR - Let’s you replace a debt with another debt w/a new loan Interest Rates = Your Cost For Borrowing Money - Current Market IRs, Loan Length, Amt Borrowed, & Type
- 21. 5) What You Need To Know About Your Credit Report & Score Keys To Success Maintaining High Credit Limits Is Good • Credit scores are largely based on the amount you owe • The lower your utilization rate, the better (incl. all debts including business & employer accts in your name) Build A Strong Credit History • The longer, the better. Make every pmt count Review All 3 Credit Reports Once A Year For Accuracy • www.AnnualCreditReport.com (free once a year) • Reporting agencies: TransUnion, Experian, Equifax Check Your Credit Score Before Financing • Typically will cost you (www.creditkarma.com) A Mix of Different Credit Types Is Good • Installment loans, credit cards, mortgages • Different cards (Visa, MasterCard, Discover, AMEX)
- 22. Fixing Mistakes on Your Credit Report • Contact the creditor Many of the mistakes can be fixed over the phone • If you cannot get the problem solved, contact the credit reporting agency’s customer service representative Explain inaccuracies in writing with necessary support documents using the “Investigation Form” from the website If you cannot get the problem solve, fill out a dispute form You can put up to 100 words on your credit report explaining a situation and what you have done to try to resolve it.
- 23. What You Need To Know About Your Credit Report & Score A Bad Credit Score Impacts Everything In Your Life • Higher IRs on credit cards and loans • Credit and loan applications may not be approved • Difficulty in getting approved for an apartment • Can’t get a cell phone • Denied for employment (especially financial industry) • Higher insurance premiums (auto, life, health, renters) • Difficult to get start up money for a new business • Difficult to purchase a car (higher IR) Negative information (paying late, going to collections) stays on your credit report for 7 years (with bankruptcy it’s 10 years). It indicates your creditworthiness When a closed acct falls off your credit history, the average age of your open accts drops, so never be too quick to close accts with a positive credit history that you’ve had for a long time. Active accts stay on indefinitely
- 24. Credit scoring is a number generated by mathematical formulas which helps lenders determine if you are a good risk for credit. The most frequently used version of the credit score is the FICO score created by Fair Isaac & Company. A FICO score is a snapshot of your credit risk picture at a particular point in time. The scores can range between 300 and 850. The higher your score, the lower the risk to lenders.
- 25. What You Need To Know About Your Credit Report & Score How To Raise Your Score Fast 1. Review yours credit reports and clear up errors 2. Always pay bills on time 3. Pay down credit card balances 4. Consider borrowing money from a friend/family members to pay down debt 5. Don’t close unused credit card accounts 6. Never max out credit cards 7. Shop around for a good loan – quickly & effectively 8. Get a gas card
- 26. FICO Scoring System Chart The percentages in the chart below reflect how important each of the categories is in determining your FICO score.
- 27. What You Need To Know About Your Credit Report & Score Your Credit Score Each creditor has their own guidelines & breakpoints 300 – 580 You’ll be denied or charged the highest IR 581 – 650 You’ll qualify and be charged the highest IR 651 – 710 You’ll qualify for credit at modest IRs 711 – 750 You’ll qualify for competitive IRs 751+ The most competitive offers and lowest IRs FICO – Fair Isaac Corp – The most well known credit score co Vantage Score – Major competitor, uses a scale from 501-990 and a letter grade. Others – Beacon, Pinnacle, Precision, Empirica
- 28. Does Your Credit Score Determine If You’ll Get Credit? Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.
- 29. Who Can See Your Report? Your credit report can legally be reviewed by: Any creditor or lender to whom you have applied for credit A prospective employer A mortgage lender, when you have applied for a home loan A property management firm, when you have applied to rent Any current employer on a need-to-know basis Any person, firm, or agency to whom you have given permission Any person, firm, or agency with a legitimate need to know An insurance company, when you have applied for insurance You, as a consumer
- 30. College Life: Freedom & Independence But Also Responsibility For The Decisions You Make! • Paying your bills on time • Making sure you have enough money each month for living expenses • Living within your means, paying credit cards in full each month and not letting debt accumulate – paying unnecessary interest charges • Doing your investigative research before making big purchasing decisions • If you get into trouble, ask for help
- 31. Top Student Financial Literacy Resources 1) CashCourse.org 2) TheMoneyClubHouse.org 3) HigherOne.com/OneForTheMoney 4) Mint.com 5) Bankrate.com 6) EducationCents.org 7) Spendster.org 8) JumpStart.org 9) MyGreatLakes.org 10) MyMoney.gov
- 32. Thank You! Questions? Sherry Auble Chartered Retirement Planning Counselor Founder, Divorce Financial Strategy & Savvy Women & Wealth divorcefinancialstrategy@gmail.com
Notas do Editor
- I’m an Alum of the School of Business, class of 93. I’ve worked in the financial services industry for 18 years, and 7 of those years I worked in NYC on Wall Street. But before I left IC, I was pretty clueless out some of the basic financial decisions and money management skills necessary to make informed decisions.Every day we are faced with tons of decisions. While most are fairly simple like “what should I wear today” or “what should I eat today”,Others are more complex such as “should I buy a car to have while I’m at school?” or “should I go skiing in Aspen over the Winter Break with friends?”As you get older, the amount of decisions you have to make increases drastically and you have to be better at making decision because the consequences can be severe if you aren’t careful. So in the short time we have together today I want to highlight some of the more important things you need to know about basic money management that will hopefully keep you from making the mistake most students are making.
- First, I want to review the most common money mistakes most students are making today.Next, I’ll point out the reasons why it’s important that you get a handle on the topic of money managementNext, I’ll show you a neat diagram I found for making decision making easier.Lastly, I’ll go through the things you need to know to make sure you make good money management decisions, specifically: The importance of developing a monthly budget and tracking your expenses Building your Emergency Fund How to manage your debt more effectively Understanding your loans What you need to know about your credit report and credit score
- Let’s start by looking at the Most Common Money Mistake Students Are Making: NO JUDGMENT!Spending Every Penny You Have- Most people who find they have a little extra money will find something to spend it on. An alternative option: Set it aside in your savings account. Even if it’s only $10/mo, it’s still saving.Living Beyond Their Means & Racking Up Debt – A lot of people are trying to live a lifestyle that exceeds their affordability. It’s called “keeping up with the Jones’” and it’s a huge mistake. I’ve made the same mistake myself and the only thing it got me was huge debt I had to pay off. An alternative option: carefully assessing all your income and costs before making a big financial commitment.Letting Your Bills Slide & Not Paying On Time – I’ve made this mistake as well. Life gets busy, you have deadlines to meet, you get distracted, the days start blending together and all of the sudden you pop up in bed in the middle of the night and realize you forgot to pay your credit card payment. Before you know it, you’re letting the electric bill and TimeWarner slide figuring you’ll just pay them next month. A Way To Avoid This: Schedule to pay your bills at the same day of each month and just pay everything you can afford to.Spending “Extra” Student Loan Money – Even when you’ve calculated precisely how much money you will need from your student loan, often you may find yourself at the end of the semester with “extra” money that wasn’t used. It’s tempting to see that cash as “free money” you can use to go out and have a night on the town with friends. After all, you’ve worked hard and deserve it. One problem: Eventually the bill will come due and you’ll be on the hook for that amount plus the interest. Better Option: Send the money back to the lender. I know even as I’m saying this that this is the hardest thing to do, but it’s either pay now or pay later.Not Researching To Find The Best Deals – Instead of jumping to purchase something because you really want it and don’t want to wait or have to make another trip to the store, this often results in paying the highest price. The alternative: learn to comparison shop and economize on daily items such as toothpaste (cheaper at Walmart versus Wegmans). Also, buying in bulk (buying a 12 pack of paper towels at BJs, Sam’s Club or Walmart versus buying one roll at a time). Lastly, buying generic versus a brand name. For instance, I buy Ibuphron from Walmart’s equate brand and get twice as many for a lot less than I would if I bought the brand name Advil. It might not seem like a lot but if you did this with a lot of your grocery items, it adds up to significant savings. Not Keeping Track of Account Transactions & Account Balances – Balancing your checkbook isn’t fun and exciting but it beats bouncing checks at $30 each and having a mark on your credit report. All it takes is one mistake in your calculations or forgetting to add a check entry and before you know it, you have a bunch of fees to pay plus the original check that didn’t get covered. What To Do: Make it a habit to make your checkbook entries at the time you write the check and then make a point to carefully calculate the balance when you get home the same day, when you aren’t distracted. Make a pact with yourself that you won’t write another check until you’ve updated the checkbook register.So these are just some of the many money mistakes people make. It’s so easy to make costly money mistakes if you don’t know what to look for. So what’s the harm in making a few money mistakes while you’re college?
- Because what you do today, will affect your financial future.If you let your bills slide without paying on time, if you bounce checks, if you rack up debt that you have trouble paying off, if you spend every penny you have instead of saving and you lose your income - it’s all reported on your credit report and lowers your credit score.A lower credit score means you will pay more or not be able to purchase at all, things like: Rental – landlord could end up charging you more and/or ask for an extra month’s rent for a security deposit. A car loan, personal loan, business loan – turned down or charge you a much higher interest rate Car Insurance – either turned down or charged a much higher rate Mortgage – either tuned down or charged a higher rate Health/dental/vision insurance – turned down or charged higher rateAs well, a low credit score can prevent you from: getting an apartment – the landlord could see you as too high a risk and not rent to you getting a job – more and more employers are checking credit reports & credit scores before hiringSo I hope you are beginning to see how the financial decisions you are making today will affect your financial future in a wide variety of ways.
- One additional impact your financial decisions will have is on your future after you graduate and start your first job.Starting your new life after graduation will involve new expenses. At the same time that is happening, your student loan payments will begin to kick in. When you are first starting out, this can make life very tight and highly stressful. That’s why it’s so important for you to be thinking about your spending decision today.
- Financial decisions need to be weighed carefully in order to minimize your mistakes. The next time you are faced with a decision, try using this process and see how it works for you.What Are You Trying to Decide?What are you doing over winter break? Go skiing with friends in Aspen or do some temp work back home? Are you thinking about buying a used car? How much will it cost? What are the alternatives?
- It’s so easy to get caught up in daily life and forget how much we are spending every day. If you’re finding yourself running short all the time and can’t figure out why or if you want to see if you can come up with some extra money, you need to establish your budget and start tracking your monthly expenses.First thing you need to do to set yourself up for good money habits is to establish your monthly budget.Either with paper and pen or with your computer in Excel spreadsheet. Start by entering all your monthly expenses including little incidentals that occur infrequently (like if you get your hair cut every other month, multiply out the cost for a year and divide by 12 to get a monthly figure).Next, make a list of all your income sources for the month. Subtract your monthly income from your monthly expenses to get your monthly Surplus or Shortage.You should begin tracking your monthly expenses in an Excel Spreadsheet – this will help you find trouble spots in your spending. Be sure to categorize expenses by Fixed/Non-Discretionary and Variable/Discretionary, listing the items down the left side of the spreadsheet and across the top you put the Months of the Year. Your Budget Numbers will help feed the information for your Tracking SheetIt helps to keep track of how much you are spending and on what before you set a budget. Start out by tracking your expenses for a month. Try to pinpoint potential trouble spots. For example, if you find you are spending more than you thought on clothing or dining out, cut back on those areas in your budget rather than taking an across-the-board cut.Break expenses into fixed and variable expenses (fixed expenses are set, predictable expenses and variable are expenses that fluctuate month to month and/or are expenses you can reduce/eliminate)
- Tracking Your SpendingThe key to finding trouble spots in your spending and minimizing expenses is to understand exactly how you spend your money. Start asking for a receipt for everything you purchase. When you get home, put them in an envelope so you can tally them up later. Mint.comUseful tools to link all your accounts and help you set budgets & achieve your savings goals. Set up alerts to receive an email or text message to warn you when you’re going over budget. Why Budgets Are Necessary?It allows you to better see where your money is going and where it needs to go. By controlling your spending, you will be able to save more effectively for things you want Review your expenditures and determine where you can reduce your spending
- There are a lot of different ways to cut down on your expenses, if you’re willing to look for them and do them. Here’s a list of just some of the ways you could look into that you can review later.
- Set up a savings, checking and money market account Shop around for the bank that offers the least fees (Bank of America vs Credit Union). www.checkingfinder.com – best options for your location. Enroll in online banking, bill pay, and link up your savings and checking to avoid possible overdraft fees. Save 5-10% of Your Monthly Income, If You Can& don’t touch it!Don’t think you can afford to save? Soda at $2/bottle everyday = $730/yrDaily coffee at $3.50/cup = $910/yr.This fund is for unexpected expenses (car expense, sudden trip back home,) not for a shopping spree or vacation. Keep it safe, Separate From Daily Living Expenses Account, and Easily Accessible. Rule of Thumb: "If you can't pay cash, then you can't buy it." If possible - Have one credit card for personal emergencies only and another for School expenses. Don't use them unless you absolutely need to. No matter what stage of life you’re in, building a cash emergency fund will help you breathe a little easier. No matter where you put your emergency money, set up an automatic transfer so you don’t have to think about adding to it each month
- There are advantages & disadvantages to every financial decision you make, which is why you need to do your research and make thoughtful decisions. Whenever you have to make a financial decision, it’s helpful to make an Advantages/Disadvantages or Pros/Cons list. There is something about putting it to paper that seems to make things clearer.For Example With Credit CardsAdvantages:Don’t have to wait to buy needed items – but should you?Don’t have to carry cash around Creates a record of your purchases which is really helpful for tracking your spending and for doing your taxes when the time comesVery convenientYou can pay all your bills from one payment sourceDisadvantagesIf you don’t pay in full each month, you’re paying higher prices for itemsYou may incur additional fees (annual account fee, late fee, over credit limit fee)It’s easy to bite off more than you can chew and then have trouble paying it offIt’s easier to make impulse purchases – just whip out your card.I use credit cards in this example because if you don’t stay aware of the pros & cons, this is the area that can get you into the most trouble.
- Credit Card DebtYou should always have your eye out for a lower interest rate credit card to transfer your existing balances to. Some times the banks will find you and send you offers in the mail and other times you have to be resourceful and search them out. Pay more than the minimum balance due each month Pay the most toward higher interest rate credit cards (department stores are notoriously the highest) Even if it means decreasing the amount you’re putting into savings (what’s the point of saving $100 in savings that isn’t paying hardly any interest when you’re paying more on your debt) Make sure you pay on time and are never late. Paying bills on-line – you can spend one day a month programming the payments for a future date, so you don’t risk missing them. Once you have paid off credit cards, do not close them (it works against you) Canceling/closing credit cards damages your credit score by throwing off your utilization ratio. Even though you have the same amount of debt, you’ve reduced your available credit thereby reducing your ratio.If you want to cancel some accounts, just space it out between accounts and don’t do it before plans to finance a purchase.Better off paying it off and not using it to the available balance works for you
- Another way to slash the amount of interest you pay on debt is to move it to a balance transfer credit card. Offers a low or no interest guarantee during a promotional period if you transfer existing credit card debt or a qualifying loan balance to the new card. There are fees involved so make sure you ask how much it will cost (typically 3% of the transfer amount, but usually a maximum fee is stated in the agreement. If the fee is higher, don’t do it). Make sure you understand all the terms & conditions. Your credit score determines the credit limit and interest rate you’re offered. Make sure you transfer less than your credit limit they are offering you so you don’t risk going over (penalty/fees/credit report notation) Ask them what happens at the end of the promotional period. This will determine whether this is a short term endeavor where you are just utilizing it to improve and manage your debt, or if it is an appropriate company to use long term.
- Getting a lower interest rate may not save money if your refinancing deal stretches out the terms of the loan further into the future. You may need to lengthen the terms of your loan just to decrease your payments, but it will cost you more over the long term, unless you come into some money down the road and can pay off the debt faster. There are fees involved in doing a refinance as well as equity requirements for home loans, so speak with your lender and shop around to find the best deal for you. To save the most money and pay your debt off as quickly as possible, refinance it for a lower interest rate using the existing pay off schedule or a shorter one.On-Line Calculators: Crunch the numbers and take a closer look at whether refinancing makes sense for your situation.Bankrate.comDinkytown.com (break-even refinancing)Rategenius.com (auto and loan refinancing) Bottom Line: Figure the financial break-even point when you fully recover the costs and start to benefit from the deal.
- So let’s look at an example to illustrate how ineffective credit cards can be if you don’t manage them effectively.Let’s say you decide to buy a new lap top computer because you just had to have it now. But since you didn’t have the cash to pay for it, you decide to charge it. A month later you receive your VISA bill, but because you’re a little low on cash, you are only able to pay the minimum payment of $50. The rate on this card is 20% (not unheard of by the way if you don’t have a clean credit report and high credit rating right now)If times continue to be rough for you financially and you can only afford to pay the minimum each month, and assuming you haven’t charged anything else on the card, it will take you just over 9 years to pay off that laptop purchase for which you paid $2,920 just in interest charges alone. That means your laptop really cost you $5,420 at a total interest rate of 116%. And now it’s time to buy a new laptop!
- When you’re shopping around for a credit card, you need to be on careful watch:Low intro rates that increase dramatically down the roadLate payment fees as high as $35/moHigh transaction fee for cash advances – have done this in a pinch and it’s not worth it!Over credit limit $35/moKnow what the coverage limit is you have if your card is stolen and notify them ASAP.Stated versus effective interest rate – Stated interest is the specified rate on your account. Effective interest is the true rate you pay which takes into account that you are paying interest on interest if the account is not paid in full each month. There is a difference because a stated interest rate does not take into account the effect of "compounding," which increases the rate you pay.
- Understand your LoansMake sure you understand all the terms, conditions and various repayment options. Call the company now so you fully understand. Find out when your grace period ends and mark that date in red on your calendar so you know when you have to start making payments. Ex. Stafford Federal Loans – You have until 6 months after graduation to start making payments. If you haven’t landed a job or find that your loan payments are too high relative to your income, look into your alternatives. How to RepayThere may be up to 4 repayment options available for certain federal, private or consolidated student loans: Extended Repayment – gives you up to 25 years to repay a loan with a substantially reduced monthly payment.Graduated Repayment – allows you to make very low payments for several years, followed by increased principal and interest payments for the remaining term of the loan. PRO: You can still pay off the loan within the time frame of the loan CON: You pay 5% more than you would have under the normal repayment plan.Income sensitive Repayment – like the Graduated Repayment plan, you get to pay lower monthly payments that gradually increase. The payment plan follows your salary, so it’s a bit more flexible. CON: Repayment takes 15 years vs 10 years so you pay more interest in the long run. You Choose a loan payment amount between 4% - 25% of your monthly gross income. You have to be approved for this repayment plan each year.Income Based Repayment (IBR) – when you can prove a financial hardship, it allows you to cap your monthly loan payment at 15% of your discretionary income. After paying 25 years, if you aren’t able to repay the entire loan, you may be eligible for loan forgiveness from the federal govt. In case you’re looking for other ways to lower the cost of your loans, some lenders have payment incentive programs that will cut your rate by as much as two percentage points after making a set number of payments. If your lender doesn’t allow for any other alternative methods, then try another lender. Loan Deferment – the lender allows you to temporarily stop making payments for a set period of time (typically 6 months). Interest may still accrue depending on the type of loan you have. Helps you out if you are experiencing a financial rough patch due to illness, disability or job loss. Contact your lender to discuss your situation and ask for a Deferment Application. If you choose to use an alternative payment arrangement for student loans, it will cost you more in interest over the long term. Even though you make lower monthly payments in most plans, you’ll end up pay interest for a longer period of time, which really adds up.
- Private LoansDue to the credit markets crunch, there are few programs currently for you to consolidate private education loans, and the interest rates on the underlying loans remain variable. Most private education loan programs have multiple repayment options that could decrease your monthly payments, but check with your local banks to compare whether it is better than what they could offer. These programs give you the ability to temporarily decrease your monthly payments for a given period of time. Other alternatives to refinancing private education loans would be through an outside line of credit or a home equity loan. Government Consolidation LoanReview your student loans and determine if it makes financial sense to consolidate them into one payment, providing you with a better overall interest rate than you current ones. Shop around by contacting local banks, Sallie Mae (largest provider of students loans) and American Education Services (full service financial aid organization) Read through the terms and fees to make sure you are making an education decision about whether loan consolidation makes sense. Make sure you pay on time since this will be the start of you building a very important credit history and will be taken into consideration when you go to buy a car and later a house. By owing less interest and having a lower monthly payment, you are able to put more money away into savings, route the savings into an emergency account to help cover your monthly expenses and make your new life a little easier If you don’t pay: The IRS has the authority to garnish your tax refunds and the Department of Education has the authority to garnish your wages.
- Loan ConsolidationIf you have multiple debts (student loans, credit cards) you might want to look into consolidating everything into one loan. It can save you money when the interest rate is reduced and also makes managing the debt easier because you only have one payment each month. Private and federal student loans cannot be combined so they must be consolidated separately. Any special repayment options included in your original student loan agreement may be cancelled/lost if you consolidate. RefinancingHolds the key to getting out of debt faster. Don’t let debt become a burden. Manage it effectively. The goal of refinancing is to reduce your interest rate. It allows you to replace a debt with another debt, giving you a brand new loan. This can come from your existing lender or a different one. Your interest rate on your credit cards and loans reflects your cost for borrowing the money from the lender. It’s a measure of: Current Market Interest Rates Length of Your Loan Amount You Borrowed The Type of Credit Account When to look into it:-When interest rate offers today are better than the one on your existing debt
- Maintain High Credit LimitsCredit scores are largely based on the amounts you owe, including your “utilization rate” (the amount of debt you have compared to your available credit limits). The lower your utilization rate, the better for you. (add all debt balances on revolving accounts (credit cards, store cards, lines of credit) and divide by total credit limits on those accounts. Balances on business credit cards or employer issued cards also affect your score if in your name. You are penalized for having a high utilization ratio because it’s a red flag to creditors. They figure if you can’t pay down your balances, you must be spending too much and are a high credit risk. Build A Strong Credit HistoryThe longer your credit history, the better. One of the reasons younger people struggle to build credit is because they have a short credit history. It takes time to build your credit history, but you can make things better for yourself just by making sure you pay your bills on time. Your credit history will stick with you for up to 10 years. Review Your Credit Reports Once A YearProgram a yearly reminder into your electronic calendar to alert you to get a copy of your credit reports.www.AnnualCreditReport.com (once a year is free) Review to make sure there are no mistakes and make necessary corrections. There are 3 reporting agencies: TransUnion, Experian, Equifax Check Your Credit Score Before FinancingTypically you will be charged for it. www.creditkarma.com – enroll for a free credit scoreKeep A Mix of Different Credit Types:Credit scoring models look at a variety of factors including whether your accounts are paid on time, your utilization ratio and the length of your credit history. The number and types of credit accounts you have is also important. To raise your credit scores you need to demonstrate that you can handle different kinds of credit, like installment loans, mortgages, and credit cards. If you only have credit cards, your credit history could be considered too thin.Never close a credit card if it’s your only one, even if it is a bad one. You need at least one credit card to round out your credit file. Ideally you should have a total of 2-3 credit cards that come from different issuers (Visa, MasterCard, American Express, & Discover)
- Each year you must get an updated copy of your credit reports so you can check to make sure it’s clear of any mistakes. I usually do mine in January. If you do spot a mistake, or error, you have to take care of it immediately because there IS usually a short window of opportunity to get them corrected.
- Your credit score impacts virtually all major financial occurrences in your life. Higher IR on Credit Cards & LoansIt will play a role in your ability to rent an apartment, qualify for a loan, buy a house or even get a job. It can also affect how much you’ll pay on interest charges, insurance and even cell phone contracts. What causes it? Maxing out your credit cards, ignoring bills, paying lateHigher interest rates on credit cards and loansCredit and loan applications may not be approvedDifficulty in getting approved for an apartmentCan’t get a cell phoneDenied for employment (especially in the financial industry)Higher insurance premiums (auto, life, health)Difficult to start a new businessDifficult to purchase a car (higher interest rate)Negative information stays on your credit report for 7 years (if bankruptcy it’s 10 years) IMPORTANT – when a closed account falls off your credit history, the average age of your open accounts drops which makes your credit score go down. Don’t be quick to close unused account that have a positive credit history, especially if you’ve had it for a long time. It helps you. Active accounts stay on your report indefinitely.
- What is your credit score?It’s a number each of the 3 credit reporting agencies generates to determine whether they consider you a good risk for credit.TransUnion, Experian and Equifax all provide a score, but the most widely used scoring system used is called the FICO Score.Your FICO score is a snapshot of your credit risk picture at a particular point in time. It can range between 300-850 – the higher your score, the lower the risk to lenders.
- So if you have had a few blemishes on your credit report and you want to work at trying to improve your credit score, there are things you can do: Review your credit reports and clear up errors Always pay bills on time (on-line bill pay is the best, spend one day a month programming in your payments) Communicate with creditors when you have a money shortage. Pay down credit card balances – effective way to jack up your credit score Consider borrowing money from a friend/family member to pay down debt. Don’t close unused credit card accounts (use older credit cards occasionally so the issuer doesn’t stop reporting your information to the credit bureaus, but make sure you pay it off as soon as you can) Never max out credit cards (keep balances below 30% of your credit limit). Better to have two credit cards with lower balances than one with a high balance. Do Loan Shopping Quickly and Effectively (try to shop around on line and make calls to get information. Your credit score gets pulled when you shop for a loan and actually submit an application to a potential lender, so be choosy) Having a lot of credit score inquiries decreases your score, but the system won’t treat a cluster of credit inquiries within a short time period unfavorably (for a car or home loan). Get a Gas CardThey are fairly easy to get, saves you money on gas, enables you to make small purchases and pay them off each month, establishing a good payment history.
- Your FICO Score is based on 5 different factors: The percentages in this diagram will help to show the importance of each category in determining your FICO score35% Payment History 30% Amount You Owe (relative to the amount of credit you have available)15% Length of Your Credit History (the shorter, the lower your FICO Score)10% New Credit (# of new accounts, # of new account inquiries, 10% types of Credit You Use (Student Loan, Personal Loan, Credit Card, Department Store Credit, Lines of Credit, etc.)The FICO® Score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Score is calculated.Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score.A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates
- It’s like a report card for grown ups. It’s a 3 digit grade on a scale of 300-850. The higher the betterScoringEach creditor has their own guidelines and breakpoints for doling out credit. 300 – 580 You’ll be denied credit or will only be approved for the very highest, most costly interest rates (charged IRs 3-4 percentage points higher than someone in the 751+ category). This results in thousands of dollars more in interest payments. 581 – 650 You’ll qualify for credit at the highest interest rates 651 – 710 You’ll qualify for credit at modest interest rates 711 – 750 You’ll qualify for competitive interest rates 751+ The most competitive offers and lowest interest rates FICO – Fair Isaac Corp – The most well known credit score companyVantage Score – Major competitor to FICO that uses a scale from 501-990 and a letter grade.Others – Beacon, Pinnacle, Precision, Empirica
- FYI - About The Overall Determination of Granting You CreditIt isn’t your score alone that influences a lender. They also look at the amount of debt they think you can handle given how much income you have, the stability of your work history, and your credit history. So even if you score is a little low but these other criteria are within their acceptable range, they still may extend credit to you.
- Another important thing to point out about your credit report that you should know is Who Is Accessing It!Who Does?When you apply for credit, the creditor/lenderThe employer where you apply for workMortgage lender when you apply for a home loanProperty Mgt Co when you apply for a rentalCurrent employer can access it as they feel necessaryAnyone who you have granted permission toInsurance Co when you apply for insuranceYouThe issue, along with the fact that your whole life is on display and is no longer private, is that every time someone makes an inquiry on your credit report, it can lower your credit score (except you).
- College life comes with a lot of freedom and independence but also a lot of responsibility for making good financial decisions.Just to recap:What ever you do, try to pay your bills on timeMake sure you have enough money to cover your monthly living expensesIf you use a credit card to make purchases, try to pay them off in full each month.Make sure you shop around before making purchase decisions to save yourself moneyIf you get in trouble with paying your bills or need help in making an important financial decision, don’t be too proud to ask for help.
- For those of you who are interested in continuing your learning, I’ve included some of the best places on the interest where you can get more information on money matters.