DIVISION OF FIRMS

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  • All credit works on the same premise: buy what you want now, and pay for it later. It sounds like a good deal and in some cases it can be, but a lot of times there is a catch. It is important to understand what is credit, its advantages and disadvantages and how to wisely use credit
  • As we begin to talk about credit and debt. There are certain terms that you should be familiar with.
  • Used responsibly, credit cards can be helpful in an emergency and for establishing a credit history. Credit card companies will compete for your business by handing out T-shirts, coffee mugs, CDs and other enticements. Don’t fall for their gimmicks. Here are some tips on using credit wisely. Be aware of teaser rates. A lot of times those low interest rates are simply introductory rates that last for a few months and then jump to 20%. It’s important that you compare offers from several different issuers before selecting a card.
  • Stick w/ one or two credit cards. Try to avoid applying for department store credit cards. It is easier paying off one credit card at the end of each month. Just applying for multiple credit cards can hurt your credit rating. Pay in full every month. Get in the habit of paying the balance in full every month. This means you should not charge more than you can afford to pay off in one month’s time. Pay on time. Send the credit card payment several days in advance of the due date to allow for mailing time. Late penalties are costly and some companies will increase the interest rate after one or two overdue payments. Avoid cash advances. Be aware that the interest rate on cash advances can be much higher than the rates charged on purchases.
  • Stay within the limit. This will help avoid penalties and ensure that you will have credit available in the event of a true emergency. Review statements carefully. Immediately inform the credit company of any discrepancies or errors on your monthly statement. Report a lost or stolen card immediately. Keep a copy of your credit card account number and the company’s name and customer service phone number in a convenient place in case your card is lost or stolen. Protect your credit history. As soon as you start using the card, the payments—whether paid on time, late or not at all—become part of your credit history. Poor credit history can affect your ability to rent an apartment, get a job, or buy a car or house. What’s more, the mark stays on your credit record even if the bill is paid later. Protect personal information. Many of you have probably heard of the crime “Identity Theft.” You should never provide your credit card number unless making a telephone, mail order or online purchase. Also do not let anyone else use your card and do not charge purchases for other people. Learning how to use credit wisely now will help you avoid serious credit problems later.
  • Lenders look at your income and employment history. A pattern of rising or steady income gives a lender more confidence in your ability to repay the loan.
  • Lenders look at your credit record to measure your character. Paying bills on time shows personal financial responsibility.
  • In worst case scenarios when you don’t pay your bills at all, a lender might sell your personal possessions to repay the loan.
  • Avoid organizations engaging in predatory lending and credit traps . These businesses often operate in low income communities, offering financing for cars, homes, furniture, appliances and other big ticket items. Many offer exorbitant or adjustable interest rates to unaware consumers. Many require what appears to be small or weekly incremental payments, which balloon over time. Victims of these businesses often overlook the contact details, usually in small print. Victims often end up feeling trapped and overwhelmed and eventually default on loans, which result in the deterioration of credit worthiness. If you suspect you have been the victim of such business practices, immediately report your claim to your state’s attorney general and seek credit counseling assistance. All credit counseling companies are not equal. Be wary of companies that charge big upfront fees, are not accredited, or make unrealistic promises like eliminating your debt. And make sure the company doesn’t take your first months payments as its fee. Consumer Credit Counseling Service (CCCS), a nonprofit organization, provides low or no cost services (based on ability to pay), to consumers in creating a plan to repay debts and improve their credit. To find the nearest CCCS office, call toll-free, (800) 388-2227 Identity Theft is a growing problem in the United States and through the world. The internet has given thieves an additional tool to use to attempt to secure personal data. All an identity thief has to do is get personal information about you. Some thieves gather information by asking what appears to be innocent-sounding information about you or family, such as, “Where were you born?” Others may steal your wallet, go through your trash for old discarded financial records, legally read official court records of your divorce proceedings or steal your mail. Still others may craft official-looking e-mails and trick you to answer them. Dishonest employees have access to credit bureau records. A friend, relative, or roommate could steal your identity by getting information about you in your own home. The first clue that you may be the victim of identity theft may be a letter or call from a collection agency or store, wanting payment for goods you’ve never heard of. The latest trend for victims of identity theft is newborn babies and their brand new social security numbers. To prevent becoming a victim, keep a close eye on your credit history. Consider utilizing a credit monitoring service. Fortunately, federal credit fraud law, protects you from having to pay any damages over $50 as a result of being the victim of identity theft. However, repairing damage done to your credit score may prove to be an arduous and tedious process. Another new tool being used by identity thieves is the use of spyware. Spyware is software that installs itself on your computer for the purpose of spying on you. It can track every site you visit and every keystroke you make -- including passwords and personal information. About 9 out of 10 computers are infected with spyware. Spyware defenders say that they track your web surfing habits so they can make your online shopping more efficient and bring you offers and information of interest to you. Translation: They’ll spawn so many pop-up ads that you can’t use your computer, or hijack your browser and make you visit the websites they want. While they’re at it, they collect your data and send it to their henchmen. The Golden Rule = “If it sounds too good to be true, it usually is”
  • Credit can be a double edge sword. If you maintain “good” credit, you will find additional consideration when meeting financial goals. “Bad” credit can cost you in many ways, including higher interest rates on consumer lending. Bad credit can also affect your ability to obtain future credit. Maintaining “good” credit can be difficult. You must establish a track record of paying financial obligations timely or “on time”. You must also be sure to maintain a healthy debt-to-income ratio. Avoiding delinquencies, late payments, foreclosures and bankruptcy is the goal. In building a good credit history, begin with your checking and savings accounts. Do not bounce checks. Make additional deposits regardless of size on a regular basis Having to contend with “bad” credit can affect many aspects of your family’s life. And may hamper your ability to purchase the home or car of your choice, or to maintain certain lifestyles. Bad credit can also affect your ability to obtain employment in certain professions. Remember, employers may review your credit history to determine your employability. Maintaining good credit shows that you are trustworthy and responsible, characteristic employers look for in candidates. Negative ratings on your credit report can cause a lender to reject your application for a loan. Such problems include: missing or late credit card payments, defaulting on a prior loan, filing for bankruptcy in the past seven years, or not paying your taxes. Other marks on a credit report include default judgments filed against you, perhaps, for non-payment of spousal or child support or any collection-type activity. If your application for a credit card or loan is rejected, the Federal Equal Credit Opportunity Act requires that the company that rejects your application provide a written letter that explains why credit was denied. The company must also tell you which credit bureau provided your credit report. Send a written letter to the bureau within 30 days of your denial and request a copy of your report. The credit bureau must provide the credit report free of charge if you request it within 30 days of being denied credit. If credit reports contain errors, the bureau can explain how to have the mistakes corrected. A property foreclosure is one of the most damaging events in a borrower’s credit history. In terms of the effect on credit history, a deed in lieu of foreclosure or a short sale is not as adverse an event as is a forced foreclosure.
  • It is important to know exactly what is appearing on your credit report . Most states now provide individuals one free credit report annually. You may also receive free copies of your credit report if you have been declined credit within the last 30 days. Obtain credit reports and review carefully. Be sure what appears on the report is attributed to your credit history. You can request erroneous information be removed. Always check your credit report prior to applying for credit to avoid surprises. Avoid applying for credit too often in a short period of time, as, multiple credit inquires may reflect negatively on your credit worthiness or credit score. Your credit report should include: Name of Creditor Type of Account Terms Amount of the original debt or credit limit Balance outstanding Whether payments were made late during the reporting period
  • Understand and know your credit score . The score helps lenders predict the likelihood that you will pay your bills as promised. Your score will change over time as your financial situation changes. Consult with a credit counselor, or other finance professional or credit reporting agency to further understand how your score may impact your ability to obtain credit. Your credit score can affect other business transactions such as purchasing life or auto insurance.
  • Avoid organizations engaging in predatory lending and credit traps . These businesses often operate in low income communities, offering financing for cars, homes, furniture, appliances and other big ticket items. Many offer exorbitant or adjustable interest rates to unaware consumers. Many require what appears to be small or weekly incremental payments, which balloon over time. Victims of these businesses often overlook the contact details, usually in small print. Victims often end up feeling trapped and overwhelmed and eventually default on loans, which result in the deterioration of credit worthiness. If you suspect you have been the victim of such business practices, immediately report your claim to your state’s attorney general and seek credit counseling assistance. All credit counseling companies are not equal. Be wary of companies that charge big upfront fees, are not accredited, or make unrealistic promises like eliminating your debt. And make sure the company doesn’t take your first months payments as its fee. Consumer Credit Counseling Service (CCCS), a nonprofit organization, provides low or no cost services (based on ability to pay), to consumers in creating a plan to repay debts and improve their credit. To find the nearest CCCS office, call toll-free, (800) 388-2227 Identity Theft is a growing problem in the United States and through the world. The internet has given thieves an additional tool to use to attempt to secure personal data. All an identity thief has to do is get personal information about you. Some thieves gather information by asking what appears to be innocent-sounding information about you or family, such as, “Where were you born?” Others may steal your wallet, go through your trash for old discarded financial records, legally read official court records of your divorce proceedings or steal your mail. Still others may craft official-looking e-mails and trick you to answer them. Dishonest employees have access to credit bureau records. A friend, relative, or roommate could steal your identity by getting information about you in your own home. The first clue that you may be the victim of identity theft may be a letter or call from a collection agency or store, wanting payment for goods you’ve never heard of. The latest trend for victims of identity theft is newborn babies and their brand new social security numbers. To prevent becoming a victim, keep a close eye on your credit history. Consider utilizing a credit monitoring service. Fortunately, federal credit fraud law, protects you from having to pay any damages over $50 as a result of being the victim of identity theft. However, repairing damage done to your credit score may prove to be an arduous and tedious process. Another new tool being used by identity thieves is the use of spyware. Spyware is software that installs itself on your computer for the purpose of spying on you. It can track every site you visit and every keystroke you make -- including passwords and personal information. About 9 out of 10 computers are infected with spyware. Spyware defenders say that they track your web surfing habits so they can make your online shopping more efficient and bring you offers and information of interest to you. Translation: They’ll spawn so many pop-up ads that you can’t use your computer, or hijack your browser and make you visit the websites they want. While they’re at it, they collect your data and send it to their henchmen. The Golden Rule = “If it sounds too good to be true, it usually is”
  • Access to cash in an emergency – when you need money to pay for something in an emergency, having credit can allow you to meet those emergency needs. Ability to use it now – credit allow you to own or benefit from the use of large purchases now, such as a car or a house. Without credit, most families would not be able to buy a home. Safety and convenience – if you are able to charge a purchase on a credit card, you can avoid carrying large amounts of cash. Also, many purchases can be made over the phone from catalogs or internet purchases.
  • When you decide to use credit, the amount of credit that builds up becomes your debt. As discussed previously, there are benefits/advantages to having debt. However, the downside of debt is that it puts a claim on our future income and if too much debt is accumulated it can derail your financial plan.
  • Debt Ratio Your debt ratio is the amount of credit you’ve accumulated on a monthly basis compared to your income. It’s a critical number if you plan to make any major purchases, since lenders check your debt ratio to ensure you’re capable of repaying a loan. For example, mortgage lenders generally won’t approve your loan if your mortgage payment exceeds 28% of your gross income, which is the standard debt-to-income ratio.
  • If you have several loans similar to the ones outlined here, try to make the minimum payments. If you are unable to make the minimum payments, send at least some money to each of your lenders. Let them know that you are sending them what you can and make arrangements with your lenders to modify payment plans if possible. The key to paying of excessive debt, is spend less than you earn. Here is where your budget comes in handy. If you spend less than you earn, the additional money can be used to pay off your debt..
  • This strategy is to continue paying on all debt. As one debt is paid off, apply that extra cash to the highest interest rate loan, not the largest balance. Keep this process going until debt is manageable or paid off. Do not get sidetracked by taking the extra cash and using it for other reasons than paying down your debt.
  • Managing your Debt Renegotiating Debt with Creditors Renegotiating with your creditors can help you buy more time or settle your debts when you can’t keep up with your bills. Be honest and explain your situation to your creditors, and they may allow you more time to pay, drop late fees, or even settle for less than the full amount owed. Creditors would rather settle than spend money trying to collect -- and possibly get nothing. Contact your creditors right away. You may be able to work out an alternative payment schedule that can help save your good credit. Ask about the following options: Due date change: Switch the monthly due date of your loan or credit card payment Deferment: Your lender may allow you to postpone a payment or two if your financial crisis is temporary Refinancing: You may be able to extend the term of your loan to produce lower The Perils of Credit and other Consumer Debt When you apply for a loan or a credit card, the creditor can only ask you questions about your credit history and your ability to pay your bills. The creditor can NOT ask about race, religion, sexual preference, or national origin, and you can’t be denied credit for not answering such questions. The Federal Equal Credit Opportunity Act makes it illegal to deny credit because of sex, marital status, race or color, religion, or age. Debt consolidation is when you roll all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments. Bankruptcy Chapter 7, the so-called straight bankruptcy doesn’t get rid of all types of debt. You’ll still be stuck with: Most taxes and customs. Any unpaid withholding. Any Social Security taxes and penalties. Student loans less than five years old. And if you have debts from fraud, embezzlement, or larceny, or from "willful and reckless acts," you’re still on the hook. Under the new bankruptcy reform, you’ll probably have to pay your car loan and more of your old credit card debt. Filing for either Chapter 7 or Chapter 13 is more difficult under the new bankruptcy reform law. To file for Chapter 7, you must pass various means tests. If you have enough income to repay your debts, you must file under Chapter 13 instead. There is also more paperwork, and your costs are likely to jump substantially. A Chapter 13 bankruptcy usually stays on your credit record for 7 years. A Chapter 7 bankruptcy can stay on your credit record for 7 to 10 years. What happens if your spouse files for bankruptcy? If you are jointly liable for most of your debts, you’ll want to file for bankruptcy together. Otherwise, the spouse who doesn’t file will end up with the debts. If you have debt in your name only, however, you can file by yourself. That way, you don’t both damage your credit history.
  • Debt Counseling All credit counseling companies are not equal. Be wary of companies that charge big upfront fees, are not accredited, or make unrealistic promises like eliminating your debt. And make sure the company doesn’t take your first months payments as its fee. Consumer Credit Counseling Service (CCCS), a nonprofit organization, provides low or no cost services (based on ability to pay), to consumers in creating a plan to repay debts and improve their credit. To find the nearest CCCS office, call toll-free, (800) 388-2227

Transcript

  • 1. National Association of Black Accountants, Inc. Managing Credit and Debt M ney $ ense
  • 2. Managing Credit Buy Now, Pay Later
  • 3. Financial Aptitude Test
    • It’s always smart to send in the minimum payment due on a credit card bill each month and stretch out the card payments as long as possible instead of paying the bill in full. T/F
    • Your credit record can be a factor when you apply for a loan or credit card, but cannot affect non-credit decisions, such as applications for insurance for an apartment. T/F
    • While one or two late payments on bills may not damage your credit record, making a habit of it will count against you. T/F
    • There’s no harm in having many different credit cards, especially when the card companies offer free T-shirts and other special giveaways as incentives. The number of cards you carry won’t affect your ability to get a loan; what matters is that you use the cards responsibly. T/F
  • 4. Financial Aptitude Test
    • A debit card may be a good alternative to a credit card for a young person because the money to pay for purchases is automatically deducted from a bank account, thus avoiding interest charges or debt problems. T/F
    • It makes no sense for young adults to put money aside for their retirement many years away. People in their 20s should focus entirely on meeting monthly expenses and saving for short-term goals. T/F
  • 5. Financial Aptitude Test
    • Answers
    • False
    • False
    • True
    • False
    • True
    • False
  • 6. Credit and Debt
    • Terms You Should Know
    • Credit is time given for payment for goods sold on trust
    • Debt is a condition of owing
  • 7. Credit Terms
    • APR : the amount it costs annually when you decide to carry a balance (not pay off your credit card in full) each month.
    • Can range from 0 to as high as 25% annually
    • Finance Charge : Actual dollar cost of using credit
  • 8.
    • Grace Period : the number of days you have to pay your bill in full before incurring finance charges (typically 25 days).
    • Beware of cards with no grace period! Interest accrues from the moment you charge an item.
    • You don’t get a grace period when you carry a balance.
    • Annual Fee : the amount you pay annually as a credit cardholder for the privilege of using credit
    • If you pay your balance each month, you should avoid cards with an annual fee.
    • Some annual fee cards have lower interest rates, so if you carry a balance each month you may actually save money with an annual fee card.
    Credit Terms
  • 9.
    • Transaction Fees : You may be charged additional fees for ATM cash advances, balance transfers, late charges and exceeding your credit limit.
    • Some cards also charge a monthly fee for not using the card!
    • Late Fee : If your payment is not processed by the due date, you may be assessed a late fee of up to $35.
    • Avoid this expense by mailing timely payments.
    • Remember, creditors must receive a payment at least every 30 days.
    Credit Terms
  • 10.
    • Minimum Payment : the least amount you must pay each month to avoid additional transaction fees (typically 2% of the balance).
    • Credit Limit: The maximum amount you can charge
    Credit Terms
  • 11. • Credit cards have relatively high interest rates. • Some young people may borrow more than their income should allow. • Credit cards are convenient to use and useful in an emergency. • Credit cards provide a record of charges. • Commercial bank • Savings and loan • Department store • Oil companies • Other financial institutions, e.g., American Express CREDIT CARDS • Personal loans have relatively high interest rates. • Some young people may borrow more than their income should allow. • Personal loans allow individuals to purchase today that boat or vacation they want. • Commercial bank • Savings and loan • Credit union • Consumer finance company PERSONAL LOANS • Students sometimes borrow more than necessary. • New graduates can face difficulty in repaying large loans. • A college education is a good borrow investment. necessary. • Interest rates can be relatively low.
    • • Commercial bank
    • • Savings and loan
    • • Credit union
    • Federal government
    COLLEGE LOANS • Cars lose their value relatively quickly. The car you purchase may have little value when the last payment is made. • Cars can make it easier to work and earn an income. • Commercial bank • Savings and loan • Credit union • Consumer finance company CAR LOANS • Mortgages are long-term commitments. • Obtaining a home loan involves extensive credit checks. • Homes often increase in value. • Interest rates for mortgages are relatively low • The interest paid is tax-deductible. • Commercial bank • Savings and loan • Credit union HOME MORTGAGE Disadvantages Advantages Lender Type of Credit
  • 12. Managing Credit Cards
    • Teaser rates
    • When you receive a credit card offer in the mail, examine the fine print that comes with the solicitation.
    • Many cards will offer great introductory rates, such as 3.9% APR.
    • Often these rates will rise after a limited period of time (usually six months).
    • After the introductory time period, your APR could go up significantly. Not a good deal if you’re carrying a balance!
  • 13. Managing Credit Cards
    • Stick with one or two
    • Pay in full every month
    • Pay on time
    • Avoid cash advances
  • 14. Managing Credit Cards
    • Stay within the limit
    • Review your statements
    • Report a lost or stolen card immediately
    • Protect your history
    • Protect personal information
  • 15.
    • Read your credit card contract carefully and be sure to examine any letters that subsequently arrive announcing changes to the terms of your contract. Many cards are eliminating grace periods and adding annual fees for customers who pay in full each month.
    • Contact your creditors if you can’t make your payment on time or at all. They may be willing to work out a deal for you if you’re in good standing.
    • Ask your creditor to reduce your APR if you’re being charged a high interest rate and carrying a balance. Many creditors may be willing to do this.
    Managing Credit Cards
  • 16.
    • Think before you buy an item on sale with your credit card. Will you really save money? Probably not.
    • Remember that offers to reduce your minimum monthly payment will only cost you more in interest during the long run.
    • Develop a sound spending plan for yourself. This will help you avoid using credit cards to make up for any shortfalls in your cash flow.
    • Shop carefully for a credit card! The offer you get in the mail may not be the best deal. Check www.bankrate.com to compare credit cards and their rates.
    Managing Credit Cards
  • 17. So Many Credit Card Offers: What’s the Difference?
    • If you were to choose one of these credit cards, which one would it be?
    • What are the benefits of the card you chose?
    • What are some of the costs of the card you chose?
    LOTS OF FEES 3% of advance, $10 minimum 3% of balance, $5 to $50, Late $35 if over 2% over limit $25 and an increased APR $15 if balance is less than $200 $35 if balance is greater than $200 $0 2.5% of the new balance, minimum of $15 25 days 25 days if the new balance is paid in full by the payment due date 9.9% (initially) 4.99% $110 annual fee $129 set-up fee (one-time) $0 Other fees Late fee Minimum payment Grace period Interest rate (APR) Annual fee Credit Card B Credit Card A (Providian)
  • 18. Common Lenders of Credit
    • 1. Commercial banks and savings and loans
    • Very similar in the types of financial services they provide their customers, but regulated by different agencies
    • Include loans, savings accounts, and checking accounts.
    • 2. Credit unions
    • Not-for-profit cooperatives— enterprises owned by their members
    • Provide many of the same financial services as commercial banks and savings and loans.
    • 3. Consumer finance companies
    • Lend money to individuals usually for things such as automobiles or household appliances
    • Often their customers do not qualify for bank credit and therefore pay a higher rate of interest.
  • 19. What Are Lenders Looking For?
    • Lenders look for certain qualities in loan applicants. These qualities are called the Four Cs of Credit: capacity, character, capital and collateral .
    • Capacity : the ability of the consumer to repay the debt.
      • The basic question is: “Have you been working regularly in an occupation that is likely to provide enough income to support your use of credit?”
    • ✔ Do you have a steady job?
    • ✔ What is your salary?
    • ✔ How reliable is your income?
    • ✔ Do you have other sources of income?
    • ✔ How many other loan payments do you have?
    • ✔ What are your current living expenses?
    • ✔ What are your current debts?
    • ✔ How many dependents do you have?
    • ✔ Do you pay alimony or child support?
    • ✔ Can you afford your lifestyle?
  • 20.
    • Character : whether you possess the honesty and reliability to pay credit debts
    • ✔ Have you used credit before?
    • ✔ Do you pay your bills on time?
    • ✔ Do you have a good credit report?
    • ✔ Can you provide character references?
    • ✔ How long have you lived at your present address?
    • ✔ How long have you been at your present job?
    • Collateral : serves as a type of insurance for the creditor
      • The creditor is interested in determining whether you have any assets that could be sold to pay off your loan in the event that you are unable to do so.
    • ✔ Do you have a checking account?
    • ✔ Do you have a savings account?
    • ✔ Do you own any stocks or bonds?
    • ✔ Do you have any valuable collections or jewelry?
    • ✔ Do you own your own home?
    • ✔ Do you own a car?
    • ✔ Do you own a boat?
    What Are Lenders Looking For?
  • 21. What Are Lenders Looking For?
    • Capital : having personal items of value.
    • ✔ Do you have a car?
    • ✔ Do you have a home?
  • 22. Credit
    • Credit Reports and Scores
  • 23. Credit
    • How Credit Works For and Against You
    • Maintaining Good Credit
    • A good rating on a credit report means that in the past bills have been paid on time.
    • How Bad is Bad Credit?
    • A poor rating indicates overdue or unpaid items.
  • 24. Your Credit Report
    • Your ability to qualify for a loan depends on a credit report.
    • A credit report is a record of an individual’s personal credit history.
    • When a person applies for a loan, the lender will order a credit report to see how well the applicant has managed credit in the past.
    • A credit report will tell, in detail, how much the person has borrowed, from whom, and whether the bills have been paid on time.
    • Credit reports are compiled by credit bureaus, which regularly collect information on millions of consumers.
    • Credit bureaus get information from a variety of sources, including stores, credit card companies, banks, mortgage companies, and medical providers.
  • 25. Credit Reporting Agencies
    • Mistakes can and do occur on credit reports. For example, a credit report may contain
    • information about someone with the same name, or paid accounts may be listed as
    • unpaid. The law provides individuals with a means of requesting and reviewing their credit
    • report and having mistakes corrected. Under the Fair Credit Reporting Act you have the
    • right to get a copy of your credit report from a credit bureau. The three largest credit
    • bureaus are:
    Free annual credit report: www.annualcreditreport.com (only authorized source) Trans Union P.O. Box 1000 Chester, PA 19022 www.transunion.com Experian P.O. Box 2104 Allen, TX 75013-2104 www.experian.com 888.397.3742 Equifax P.O. Box 105496 Atlanta, GA 30348-5496 www.equifax.com 800.997.2493
  • 26. Information on FICO Scores & Credit
    • What’s In Your FICO Score
    • http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx
    • The Federal Trade Commission
    • http://www.ftc.gov/bcp/conline/edcams/credit/index.html
  • 27. Other Credit Items
    • Credit Traps and Predatory Lending
    • Credit Counseling
    • Identity Theft
    • “The Golden Rule”
  • 28. Credit Advantages
    • Access to cash in an emergency
    • Ability to use it now
    • Safety and convenience
  • 29. Debt
    • Debt is the entire amount of money you owe to lenders
  • 30.
    • Secured debt : the creditor has given you credit to buy an item that they can take back (repossess) if you don’t make your payments.
      • Generally secured debt involves major purchases. Examples of include:
        • House or condominium, Land, Time share, Automobile, Boat
      • If you allow a secured debt to be repossessed for non-payment, you’ll damage your credit rating.
    • Unsecured debt : credit granted to you where property can’t be repossessed. Examples include:
        • Credit cards, Student loans, Payday loans, Medical bills not covered by insurance
    TYPES OF DEBT
  • 31.
    • Good debt:
      • Example: borrowing to pay for a home--considered good debt because you’re purchasing a tangible asset that will generally be worth more over time.
      • Most secured debts are usually considered good debt but there are some exceptions. For instance, new cars lose as much as 20% of their value as soon as they are driven off the lot.
    • Bad debt:
      • Most unsecured debts are considered to be bad debt with the exception of student loans.
      • If you complete your degree, the money you borrowed to pay for your education will be returned to you throughout your lifetime by the type of job. You’ll obtain and the higher wages you’ll earn.
      • It’s never good to carry credit card debt. Interest rates can be staggering, and balances and interest costs will grow when you make irregular or minimum payments.
    GOOD VERSUS BAD DEBT
  • 32. A Word About Debt
    • What is a “debt load?” What is a safe amount of credit for you to carry? How do creditors find out what a person’s debt load is? How do I know my own debt load?
    • DEBT/INCOME RATIO
    • This debt/income ratio is figured with monthly amounts
    • To figure this ratio: add all of your non-housing monthly payments except for your utilities or taxes. Then compare that total with your total gross annual wages divided by 12. If you don’t have fixed monthly payments on revolving debts such as credit cards, estimate your monthly payments at 4% of the total amount you owe.
    • Monthly debt payments/Total monthly income = monthly non-housing debt/income ratio. It’s usually expressed as a percentage so move the decimal point 2 places to the right and add the “%” sign.
  • 33. Rule of Thumb
    • A conservative rule of thumb: the “20-10 Rule.”
      • Total household debt including your housing payments shouldn’t exceed 20% of your net household income.
      • Remember your net income is how much you “bring home” in your paycheck and monthly payments on the debt shouldn’t exceed 10% of net monthly income.
    • Another conservative rule of thumb for mortgage debt is the “28/36” rule.
      • Your non-housing debt shouldn’t exceed 28% of your gross (your total) income, and your total debt — consumer debt plus housing debt — shouldn’t exceed 36% of your gross income.
  • 34. How Much Debt Can You Afford?
    • Example:
      • Yearly income after taxes and deductions: $28,000
      • Monthly income: $2,333 ($28,000/12)
      • Amt. of consumer pmts. per month you can afford:
      • (15-20% of your after tax income) :
      • $2,333 * .15 = $ 355 to $2,333 * .20 = $ 467
  • 35. HOW TO REDUCE YOUR DEBT
    • So you’ve got a bunch of debt. What do you do? Add up your debts and find out where you stand. You can’t make payoff decisions without a clear picture of what you owe. Look at the amounts owed and determine how much you are paying to all of your creditors .
    $605 $200 $340 $25 $40 Monthly Pmt. $37,650 Total 5 years 9.0% $10,000 Car 10 years 8.2% $25,000 Student Loan 6 months 5.0% $150 Dentist 5 years 18.0% $2,500 VISA Payoff Goal APR Amt. Owed
  • 36.
    • Paying $605 every month is going to pay off your debt. The secret to getting rid of debt is to keep paying at least $605 a month until the debt is gone. In six months when the dentist is paid off, take the extra $25 and apply it to the Visa card since it has the highest interest rate.
    • Keep the payments at $605. To quickly reduce your debt, apply any extra cash to high interest debt. Using this payment strategy, the debt in this example would be paid off in less than 10 years.
    Manage Your Debt
  • 37. Managing Debt
    • Negotiating with Creditors
    • The Perils of Credit Card and other Consumer Debt
    • Debt Consolidation Options
    • The IRS
  • 38. Tips: How to Get Out of Debt
    • Don’t wait to act
    • Create a plan to get out of debt
    • Cut expenses
    • Honestly assess your ability to pay and take appropriate action
    • Try to increase income
    • Keep making payments when debt is paid off
    • Consolidate loans
    • Limit the number of credit cards you own
    • Try to stop most credit card offers from arriving in the mail (call (888) 5OPT-OUT
    • Debt Counseling
  • 39. Financial literacy isn’t just a matter of knowing what you have and knowing your options. It is a matter of planning for life’s milestones.
  • 40. Thank You! National Association of Black Accountants, Inc. M ney $ense For more information visit www.nabainc.org
  • 41. 360 Degrees of Financial Literacy
    • 360 Degrees of Financial Literacy is a national effort of the CPA profession to improve the financial understanding of Americans. It provides a comprehensive approach to financial education, focusing on the information Americans need at every life stage, from childhood to retirement. CPAs volunteer their time and expertise to educate members of their communities about financial issues.
    • Visit www.360financialliteracy.org for tools to help you make sound financial decisions.