Transcript You and Your Money

You & Your Money
Class 3, Part 1 – Your Credit
International Center
at Catholic Charities Community Services
April 2013
Instructor: Virginia Guilford
Class Schedule
• Class 1 - Thursday April 11, 4:00 – 5:00 PM
– Your Income
– Your Taxes
• Class 2 – Thursday April 18, 4:00 – 5:00 PM
– Your Budget
– Your Bank Accounts
• Class 3 – Thursday April 25, 4:00 – 5:00 PM
– Your Credit
– Learning More
2
Please Be Aware
• This course does not give you professional
advice
– I am not a lawyer.
– I am not an accountant.
– I am not a banker.
• This course explains the basic concepts and
vocabulary that you need for understanding
work, taxes, budgeting, banking and credit.
3
Your Credit
• A lender will generally loan you money if:
– You have a regular, verifiable source of income
– You have a good credit score.
• Sometimes, the lender also wants to have an
extra guarantee that you will pay the money
back
– Security
– Collateral
4
Managing Credit
• Good Credit vs Bad Credit
• How Much Debt is Too Much?
– No more than 28% of your gross income should
go to paying all debt for home ownership
(mortgage payment, property taxes and home
owner’s insurance).
– No more than 36% of your gross income should go
to all debt: your home ownership debt plus credit
card debt and auto loans.
5
Your Credit Score
• Your credit score is based on five
factors, each weighted
differently.
– Payment History – 35% - how
good you are at always paying
your bills on time.
– Amount Owed – 30% - how
much you owe.
– Length of Credit History – 15% how long you have been using
credit.
– New Credit – 10% - how much
credit have you recently asked
for.
– Types of Credit Used – 10% how many different types of
credit do you have.
6
Improving Your Credit Score
To improve your credit score:
• Pay your bills on time.
• Keep your credit card balances low, ideally,
below 25% of your available credit limit.
• Increase the length of your credit history by
keeping the same credit card for a long time.
• Minimize the frequency of new card requests.
Don’t sign up for a lot of new credit cards.
• Keep a combination of different types of debt
– car loans and mortgages and credit cards.
7
Credit Reporting Agencies
Credit reporting agencies are required to
provide you with a free copy of your credit
report once a year.
The three main credit reporting agencies:
• Experian
• Equifax
• TransUnion
www.annualcreditreport.com/cra/index.jsp - how to request a credit report
www.nextadvisor.com/credit_report_monitoring/index.php - compare credit monitoring services
8
Consumer Credit
•
•
•
•
Bank Credit Cards
Bank Debit Cards
Store Credit Cards
Pre-paid Debit Cards
9
Bank Credit Cards
• How do Credit Cards Work?
– Accepted widely; many locations in the US
and Worldwide
– You receive your purchase, payment is not
due until the next billing date
– If you don’t pay the whole amount, you will
owe interest on the remaining amount due
• Rewards Cards
– Frequent flier miles
– ‘Points’ good for purchases
– Cash back
10
Choosing a Credit Card
• Things to Consider When Choosing a Card
– APR (Annual Percentage Rate) or Finance Charge
• “Competitive Rates” – claims to be close to the rates that other card companies
charge. Average for all credit cards is about 14%.
• “Introductory Rate” – this may be a low rate, but it may only be good for a few
months
• “Variable Rate” – the rate you pay will be different at different times.
• “Prime Rate” – the rate that banks charge their best customers, tied to the Federal
Funds rate, which is the rate that banks charge each other.
– Fees – typically cost from $50 - $100 per year
•
•
•
•
•
•
Annual fee
Activation fee
Acceptance fee
Participation fee
Monthly maintenance fee
Account set-up fee
11
Choosing a Credit Card
• Additional Things to Consider about Cards
– Balance Calculation Method
• Average Daily Balance – you pay interest calculated on an average of all you
charges, included new purchases - best for the credit card company
• Adjusted Balance – you pay interest calculated on your balance at the beginning of
the billing cycle - best for you
– Grace Period – the amount of time between the end of the
billing cycle and when you must pay
• If you don’t pay until after the grace period is over, you will be charged finance
charges and late fees
• The Credit CARD Act of 2009 says that the card company must give you at least 21
days to make your payment
• Note – most credit card companies do not allow any grace period for cash advances
or transfers – you are charged interest on these as soon as they are made
12
Choosing a Credit Card
• Web Sites to Help You Choose the Best Card
– www.credit.com
– www.CreditCardConnection.org
– www.LowCards.com
• Web Sites to Help You Understand Credit Card
Terms and Concepts
– www.creditcards.com/glossary/
– http://creditcardforum.com/blog/
13
Credit Cards “Card Act”
• Impact of the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (the
“Card Act”)
• Intended to stop unfair practices
–
–
–
–
–
Required to give advance notice if interest rates are raised
No penalties for customers who pay on time
No ‘due date gimmicks’
Customers can fix their credit limits
No excessive fees
• Be aware - credit card issuers have made changes
to avoid these restrictions
– Inactivity fees
– New types of cards – ‘professional card’, ‘rebate card’
14
Bank Debit Cards
• Bank Debit Cards are not credit cards.
– Debit cards can be used in many places that take
credit cards.
– The payment is taken immediately from your bank
account.
15
Store Credit Cards
• Can only be used in the store that issued the
card.
• Don’t open a store credit account unless you
really need it and will use it.
• Too many store credit card accounts may
reduce your Credit Score.
16
Prepaid Debit Cards
• Examples
– Green Dot Visa or MasterCard
– Rush Visa
– Net Spend Visa or MasterCard
• Technically, not credit cards at all
• You purchase the card with cash, and
then use the card until it is empty.
• Most Prepaid debit cards charge a
monthly fee.
17
Other Kinds of Credit
• Mortgages
• Auto Loans
• Student Loans
18
Collateral or Security for Loans
• Most loans require more than just a promise
from you that you will pay back the money
• You may be required to set aside an asset as
‘collateral’ or ‘security’ for the loan
– For a mortage, the house will be your collateral
– For a car loan, the car will be your collateral
– For a loan of cash, stocks or bonds or other assets
might be your collateral
• If you stop making your payments on the loan,
the lender then can take back the collateral
19
Mortgages
•
•
•
•
•
Down Payment
Term Length
Mortgage Rate – Fixed or ARM
Interest or Principal
Risk of Foreclosure
20
Mortgage Down Payment
• Down Payment – a percentage of the value of
the home paid in cash
– The down payment proves to the bank that you
are disciplined enough to be able to save money
– A bigger down payment means less that you need
to borrow with the mortgage
21
Mortgage Term Length
• Term Length – the amount of time that you
have to pay back the mortgage
– A mortgage usually gives you a longer time than
other kinds of debt
• 15 years
• 20 years
• 30 years
22
Mortgage Rate
• Mortgage Rate – Fixed
– Rate is fixed for the entire term of the mortgage
– Is good if you want to know for sure how much you will have to pay
each month
• Mortgage Rate – ARM
–
–
–
–
ARM – Adjustable Rate Mortgage
Rate is adjustable and can change.
Often starts at a low rate, but can increase
Some ARMs have a limit on the amount of increase, or when the first
increase can occur
– Might be good if you are only planning to live there for one or two
years
23
Mortgages – Interest & Principal
• Interest – the amount you are paying extra as a
charge for the loan
• Principal – the basic amount that you borrowed
• Each mortgage payment will include some payment
for interest, and some payment against the principal.
– The balance between principal and interest in each
payment will change over the life of the mortgage.
– If you ever get extra money, you might make an extra
mortgage payment. But make sure that the payment goes
toward paying off the principal that you owe.
24
Mortgages - Foreclosure
• Your home is your collateral for your mortgage
• Risk of Foreclosure
• If you stop making your mortgage payments,
or if you don’t make your payments on time,
the bank can foreclose (take back) your home.
– You can no longer live in your home
– You lose all the payments you have made so far
25
Auto Loans
• Your Car is your Collateral
– If you miss some car loan payments, or if your payments are late, the
lender can ‘repossess’ the car
– You will lose the car
– You will lose any of the payments you have made up to that date
• Auto Loan from a Bank
– Check out the cost of an auto loan at your bank
• A bank auto loan may have a lower rate
• Knowing what you qualify for helps in negotiations
• Auto Loan from the Car Dealership
– Dealers sometimes offer a special rate, but you won’t know if it is a
good deal or not unless you can compare it to your bank’s offer
26
Student Loans
• Types of Student Loans
– Federal
– Private
– Available from a bank, credit union, or directly from the government
• Repayment of Student Loans
– Repayment does not start until you have left school
– Missing one semester may trigger the start of repayment
• Student Loans and Bankruptcy
– Your earning potential is the collateral for your student loan
– You cannot use bankruptcy to avoid paying back your student loan
27
You & Your Money
Class 3, Part 2 – Learning More
International Center
December 2012
Instructor: Virginia Guilford
Learning More
• This course cannot be the final word about
your finances.
• Banks and Credit Card companies are always
changing.
29
Evaluating Information & Advice
• Credible Information
– Believable information.
– Trustable information.
• Disinterested Advice
– Advice from someone who will not be affected by
what you choose to do.
30
General Sources
• finance.yahoo.com/personal-finance
• money.cnn.com/pf/
• www.nytimes.com/pages/yourmoney/index.html
• www.forbes.com/
• www.kiplinger.com/
• www.bloomberg.com/
31
Financial Institutions & Organizations
• www.bankofamerica.com/studentbanking/
• www.schwabmoneywise.com/home/index.php
• https://online.citibank.com/US/JRS/pands/detail.
do?ID=PlanningOverview
• www.findabetterbank.com/
32
Loans & Credit Cards
•
•
•
•
•
•
www.finaid.org/calculators/loanpayments.phtml
www.annualcreditreport.com/cra/index.jsp
www.credit.com
www.CreditCardConnection.org
www.LowCards.com
www.nextadvisor.com/credit_report_monitoring/
index.php
33
Government Sites
•
•
•
•
http://www.fdic.gov/quicklinks/consumers.html
http://www.occ.treas.gov/
www.tax.state.ny.us/
www.irs.gov
34
You & Your Money Glossary
• A list of commonly used financial terms with
definitions.
• Go to www.virginiaguilford.com and download
the Glossary from the “Docs and Links” page.
(The PowerPoint presentations used in this
class are also available there)
• Or send your request to
[email protected]
35