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Money Matters Class 4, Credit

  1. Money Matters Class 4
  2. CREDIT A loan: when we use someone else’s money to pay for things with a promise to repay the loaned amount, plus interest. Used wisely, credit can enable each of us a chance at: home ownership education personal transportation other goods and services.
  3. Credit Guidelines  House: no more than 25-30% of net income  Taxes, insurance and interest  Car: no more than 10-15% of net income  Insurance, taxes, gas and maintenance  Education  Student loans often have low rates  Do not have to be repaid until the student graduates or stops going to school
  4. Establishing Credit  First, make an application  The Lender will determine your financial trustworthiness based on:  Credit history  Employment status  Income  Co-Signor
  5. Credit Terms  Credit Limit  Annual Percentage Rate, interest rate  Annual Fee  Payment Due date  Minimum payment required  Grace Period  Fees
  6. Installment Plans Lay-away  Enable you to buy something expensive and pay for it little by little over a set period of time  Fees are generally lower than credit cards  However, you must wait until the item is paid off before you can take it home.  Remember, once you have agreed to these payments, you may lose money if you do not make payments on time.
  7. AUTO Loans  Use the 10-15% of net income formula to determine how much you can spend on a car  Taxes  Insurance  Gas and Maintenance  Keep the loan term to 5 years or less  Obtain your own financing
  8. Pre-Owned Car  Buy the $20,000 car today or buy the same car used one year later for $16,400. NEW USED Car Price $20,000.00 $16,400.00 Interest Rate 7.50% 7.50% Term (months) 60 48 Monthly Payment $ 429.00 $ 425.00 Total Cost $25,740.00 $20,400.00
  9. Credit Cards  Also known as, Consumer Debt  Unsecured  Easiest type of credit to get  Higher interest rates  Never charge more than you can pay off in one year or less  Always pay at least the minimum, plus the interest payment
  10. Benefits of Using Credit Cards 1. Convenience and safety of not dealing with cash 2. Protection under the Consumer Credit Protection Act 3. Incentive Benefits 4. Cash Back Rewards Given all of the above, credit cards still cause problems for most people more often than they provide benefits
  11. How to use credit cards and stay out of DEBT  Never use your credit card for anything but budgeted purchases  Use only a small amount of the credit you have  Pay off your credit card every month and on time  Carry a balance the right way  Read the fine print
  12. Choosing a Credit Card  What kind of card is it?  Standard Card, revolving balance  Premium Credit Card, offer incentives  Charge Card, no limit / PIF  Limited purpose, gas and department store  Secured Credit Card
  13.  How are you going to use it?  Pay in full each month  Transfer balances  Carry a balance  What is the Annual Percentage Rate?  How long is the grace period?  What is the Credit limit?
  14.  What are the fees?  Annual Fees  Late Fee  Over-the-Limit Fee  Check Return Fee  Payment over the phone  How is the Finance Charge Calculated?  What are the rewards?
  15. Pay More than the Minimum  Save Money  Pay off the balance sooner  Improve your credit score  Get ready for a mortgage / car loan  Make room for more - increase your available credit
  16. Every dollar you spend for interest on credit card payments has two effects: 1. It increases the cost of current spending by adding interest to the purchase 2. It reduces the amount you can spend and save for tomorrow.
  17. DEBT  Debt is something that we owe  How do we get into debt?  Ignorance – we didn’t know how to manage money  Indulgence – we want everything, NOW!  Poor Planning – we didn’t prepare for the unexpected (job loss, illness, emergency)
  18. Guideline What is a reasonable level of debt?  The 20 percent rule.  You should avoid committing more than 20% of your monthly net income to cover your total monthly payments for auto loans, credit card purchases, installment and personal loans.
  19. Suggested Budget Percentages  Savings 10-15%  Housing 25-30%  Utilities 5-10%  Food 10-20%  Transportation 10-15%  Clothing 2 - 7%  Medical / Health 5-10%  Personal 5-10%  Recreation 5-10%  Debts 10-20%
  20. Warning Signs of Too Much Debt 1. You don’t have any savings 2. You only make the minimum payment each month 3. You continue to charge while trying to pay them off. 4. You have at least one credit at or near your credit limit. 5. You are occasionally making late payments.
  21. 6. You don’t even know how much debt you have. 7. You use cash advances from your credit cards to pay other bills. 8. You bounce checks or overdraw your bank accounts. 9. You have been denied credit. 10. You lie to friends or family about your spending and debt.
  22. Breaking Free of Debt! 1. Acknowledge that you are in debt. 2. Stop any form of borrowing no matter what. 3. Determine where you are in debt. 4. If you owe a few creditors – call them and try to negotiate for a smaller payment.  ALWAYS call before you miss a payment.
  23. 5. If you owe many creditors, it may be time for outside help.  Consumer Credit Counseling - a national non-profit agency who can work with your creditors to set-up a repayment plan. 5. Develop a budget 6. Curb your impulse to buy 7. Try to find ways to increase your income.  DO NOT ignore bills and past-due notices. A poor credit rating will follow you for years.
  24. Consumer Credit Counseling Service Founded in 1964 Non-profit and member of the National Foundation for Credit Counseling (NFCC) 1.800.251.2227
  25. Credit Report Each credit report lists your:  Credit accounts, including credit cards, auto loans, student loans, and mortgages  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
  26. Credit Report  Credit Reporting Agencies:  Experian  Trans Union  Equifax  Credit reporting agencies track how well you repay your loans.

Notas do Editor

  1. Credit encompasses any form of deferred payment.
  2. The key is to keep the amount of the things we buy on credit within certain limits of our income. Lenders often offer more credit than a person can actually comfortably afford. It is up to us, the consumer, to know our income and our expenses and what we can reasonably afford. A family with $30,000 in net income could spend $750-900 per month on housing and $300-450 a month on a car. 10% savings; 10-15% debt repayment (credit cards, student loans, installment debt)
  3. Credit History – Record of how a consumer has paid credit accounts in the past, used as a guide to determine whether the consumer is likely to pay accounts on time in the future. Co-Signor – The lender may require that someone who does have favorable credit agree to be a co-signor on your account. Being a co-signor makes that person responsible for repaying debt if the borrower defaults. Tips to Establish Credit: Have bank account and apply through your bank try department store cards with low limits secured card
  4. Credit Limit – The maximum amount of money you can charge on your account APR – The cost of credit. The interest. Annual Fee – A yearly fee charged by credit grantors, credit card companies, for the privilege of using a credit card. Grace Period – The period allowed to avoid any finance charges by paying off the balance in full before the due date. Fees – include late payment, over credit limit, etc.
  5. Pros of Layaway Cost is spread over several payments, no need to come up with all the funds at once. Layaway fees (often) are much cheaper than interest paid on credit card over couple cycles. Set aside major purchases or Christmas gifts without worrying it’ll be out of stock. You can beat the Christmas rush and shop before the stores get too crowded. It can help impulsive buyers come to their senses and return items (minus fees). Take advantage of sales even if you cannot afford to buy the item outright. If you fail to make payments it will not hurt your credit report. You can plan ahead for special occasions such as weddings. Cons of Layaway If the item is low in value the layaway fee could translate to a relatively high “interest rate”. You may loose out on savings if the price of the item goes down (some stores set a limit on “price adjustment). Layaway fees can be hefty; some plans come with fees to participate, from $5 to $100. It may lead undisciplined shoppers to spend a lot more than they can afford. If the store goes out of business you may be out of luck in getting your item or money back. If you miss payments you could lose all the money you have paid. If you cannot afford the item should you be really buying it?
  6. Purchasing a car is one of the first credit experiences most of us have. It is important to determine two things before going to purchase a car. $20,000 net income after taxes ($2000 – 3000 per year) or ($167 - $250 per month) Remember the more expensive the car, the higher the taxes and insurance will be. Find out before you buy how much these things will be You can usually find better deals on car loans at credit unions and banks, unless you have perfect credit or want to purchase a car that is being replaced by a newer model.
  7. Note: Numbers are rounded and sales tax is included Most cars lose 18% of their value in their first year. Buying a factory certified per-owned car can be a big savings. In addition a certified pre-owned car comes with the added security of the car’s condition and often includes warranties and other perks A $20,000 car one year later is worth $16,400. A great value to you. SAVINGS of $5,340 !!
  8. Unsecured – meaning there is no property backing up the debt. If you use your credit card to eat out or take a trip. There is no property for the lender to repossess, take back, if you don’t pay your bill. Because credit cards are unsecured the interest rates are higher than a home or a car loan that are backed by the property. If you fail to pay your car loan, the bank will come and take back your car and sell it to pay the debt. The same with a home loan. Credit is a tool, if used wisely it can enable you to afford things now that you may not have been able to get otherwise, but it is also very dangerous if used without restraint.
  9. Advantages Purchase power and ease of purchase: buying on line, credit only purchases, etc. Protection of Purchases: insurance, errors, etc. Building a Credit History Emergencies Benefits/Rewards Consumer Credit Protection Act includes Truth in Lending Provisions Wage garnishment limits and protections Anti-discrimination provisions Credit Card billing protection: provisions to challenge erroneous charges Credit Reporting Provisons – can see credit history and how reported Debt Collection Protections and Others
  10. Part of your credit score is determined by the percentage of the total amount of your available credit you are using. A good guideline is 30%. Use any more than that and it will negatively affect your credit rating. Example $1000 credit limit, keep a balance of no more than $300 at a time. Carry a balance the right way by making more than the minimum payment each month Know and understand the interest rate and credit terms
  11. Charge Card - pay in full; example (American Express) Secured credit card – with this kind of credit card, you can make yourself a small loan and pay it off to establish your good credit. (As compared to pre paid card which doesn’t report payments to credit bureaus) You deposit money in a bank account, say $500 The bank gives you a credit card and charges you a fee to use the card. The credit limit is usually equal to or less than the amount of money you put into the account. You pay off credit charges each month. The bank pays you a little interest on your account. The bank fee to use the card probably is more than you will earn in interest. Usually higher interest rates than other credit cards because of risks
  12. Grace Period = It is a window of time you have where you will not accrue interest charges on new purchases, if you pay them off in full Federal Regulation requires a minimum of 21 days. Does not apply to cash advances or convenience checks
  13. Other Fees balance transfers and cash advance fees Application Fee (many secured cards) Finance Charge Method of Calculation Adjusted Balance The adjusted balance method uses the balance at the beginning of the billing cycle and subtracts any payments you made. Purchases are not included in the balance. This is the least expensive method of calculating finance charges. Average Daily Balance The average daily balance method uses the average of your balance during the billing cycle. Each day's balance is added together and divided by the number of days in the billing cycle This is the most common way finance charges are calculated. Daily Balance The daily balance method uses the balance each day of your billing cycle. Each day's balance is multiplied by the daily rate and added together. Ending Balance The ending balance method uses your beginning balance minus payments plus charges made during the billing cycle. The number of days in the billing cycle doesn't affect the amount of the finance charge. Previous Balance The previous balance method uses the balance at the beginning of the billing cycle which is also the ending balance of the last billing cycle. No payments or charges are included. The number of days in the billing cycle doesn't affect the amount of the finance charge. REWARDS May have high fees and interest rates as well as reward limitations. Examine closely to see if right for you
  14. If you saved $70.00 a month, you would have $840 in 1 year and $2,520 in 3 years.
  15. *This does not include housing debt Example: $2,000 net monthly income. $100 month student loan. $80.00 credit card payment. $250.00 car payment. Is this reasonable amount of debt? 20% = $400 Total debt = $430
  16. Because of the delinquencies and charge-offs, the banking industry is in crisis and it is impacting everyone. Banks in an effort to reduce risks are closing a record number of credit card accounts and reducing millions of dollars in credit lines. So how does this affect us as we go about our business.