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Money Matters Class 4, Credit


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Using Credit is part 4 of the 6-part Money Matters class, created by the Athens-Clarke County Library. Money Matters is part of Smart investing @ your library®, and is brought to you by a joint grant from the American Library Association and FINRA, the Financial Regulatory Authority Foundation.

Published in: Economy & Finance, Business
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Money Matters Class 4, Credit

  1. 1. Money Matters Class 4
  2. 2. CREDITA 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. 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. 4. Establishing Credit First, make an application The Lender will determine your financial trustworthiness based on:  Credit history  Employment status  Income Co-Signor
  5. 5. Credit Terms Credit Limit Annual Percentage Rate, interest rate Annual Fee Payment Due date Minimum payment required Grace Period Fees
  6. 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. 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. 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. 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. 10. Benefits of Using Credit Cards1. Convenience and safety of not dealing with cash2. Protection under the Consumer Credit Protection Act3. Incentive Benefits4. Cash Back RewardsGiven all of the above, credit cards still cause problems for most people more often than they provide benefits
  11. 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. 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. 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. 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. 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. 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. 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. 18. GuidelineWhat 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. 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. 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. 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. 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. 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 budget6. Curb your impulse to buy7. 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. 24. Consumer Credit Counseling ServiceFounded in 1964Non-profit and member of the National Foundation for Credit Counseling (NFCC)
  25. 25. Credit ReportEach 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. 26. Credit Report Credit Reporting Agencies:  Experian  Trans Union  Equifax Credit reporting agencies track how well you repay your loans.