Transcript DEBT MANAGEMENT - www.mansfield.edu

DEBT MANAGEMENT
Melissa Wise
First Citizens National Bank
DEBT MANAGEMENT TOPICS
 Credit
 Credit
Scores
 Using Credit Wisely
 Credit Cards
 Debt to Income Ratio
 Budgets
 Debt Management Programs
 According
to Citibank, “There are
presently 5 to 7 million Americans
who are financially overextended.”
WHAT IS CREDIT?
 Credit
is when goods,
services, or money is
received in exchange
for a promise to pay a
definite sum of money
at a future date.
CREDIT

ADVANTAGES





Convenient
Useful for emergencies
Often required to hold a
reservation
Ability to purchase
expensive items sooner
Eliminates the need to
carry large amounts of
cash

DISADVANTAGES





Paying interest
Additional fees are
common
Temptation to
overspend
Can cause large
amounts of debt
Identity theft
CREDIT SCORES

What is a credit score or FICO® score?
 A prediction of how likely you are to pay your
bills
 A number between 300 and 850 derived from
many different factors
 A number that drives the approval of credit
extensions and the interest rate you pay on
those extensions
CREDIT SCORE KEY FACTORS
 The
FICO® scoring model looks at more
than 20 factors in five categories.
 How you pay your bills (35%)
 Amount of money you owe and the
amount of available credit (30%)
 Length of credit history (15%)
 Mix of credit (10%)
 New credit applications (10%)
RANGE OF CREDIT SCORES
 The
following are some basic guidelines
for interpreting a credit score:

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620 and below – Poor credit
621-690 – Fair credit
691-720 – Good credit
721-750 – Good to excellent credit
751-800 – Excellent credit
801 and above – Nearly perfect credit
 Fair
Isaac reports that the American
public’s credit scores break out along
these lines:
CREDIT SCORE
PERCENTAGE
499 and below
500-549
550-599
600-649
650-699
700-749
750-799
800 and above
2 percent
5 percent
8 percent
12 percent
15 percent
18 percent
27 percent
13 percent
 THINK
OF YOUR CREDIT REPORT
AS A SECOND RESUME!
A credit report contains information about where
you work, live, how you pay your bills, whether or
not you have filed bankruptcy and even if you
have ever been arrested or sued.
You can check your credit score for free up to three times
annually at http://wwwannualcreditreport.com!!
USING CREDIT WISELY
For decades, society has promoted the idea
of “BUY NOW, PAY LATER.”
This is a good concept for some types of
purchases and a bad concept for many
other types of purchases.
USING CREDIT WISELY
 Good



Credit Purchases
Buying a house on credit is a smart move as
home values rise quickly and you can gain
equity through appreciation.
Financing an education is a good investment
in the future. Your earning potential will
eventually outweigh the cost of tuition, and
educational loans are usually at a very low
interest rate.
Buying a car can also be a good credit
purchase. It is important to not get caught up
in buying a car for more than you can afford.
USING CREDIT WISELY
 Bad


Credit Purchases
Credit card debt and other consumer debt is
the worst type of debt. Interest rates and fees
on borrowing money this way will be the
highest of all, mostly because there is rarely a
tangible item as collateral.
Financing a car for longer than the life of the
vehicle can also be an unwise credit decision.
CREDIT CARDS
 Credit
cards are a great concept, but
they end up bringing financial ruin to
many people who do not use them
properly.
TIPS WHEN USING CREDIT CARDS
 Never
use credit cards as extra money.
Always allocate money from your current
funds or monthly income in order to
immediately payoff whatever you finance.
 Read the fine print on the agreement to
make sure you are getting the best terms
available.
 American
consumers ages 20-29 carry an
average of $5,781 in revolving debt.
 This would take 11 years and 4 months to
pay off assuming an average interest rate
of 13% and that minimum payments are
made.
A credit card is a responsibility. The choices
you make now will affect how much you pay
for a car, your home, and any other loans or
credit cards you apply for.
DEBT TO INCOME RATIO
 Debt
to income ratios look at how much
you owe in comparison to how much you
earn.
 It usually gives a good picture of your
financial well being.
 The lower your debt to income ratio, the
more money you have to spend on things
other than your monthly bills.
DEBT TO INCOME CALCULATION
 Take
the amount of money that goes to
paying monthly obligations (loans, credit
cards, rent, etc.)
 Divide that amount by your gross monthly
income (this is the amount before taxes are
taken out)
Monthly debt payment / gross monthly income = D/I
DEBT TO INCOME RATIO
 Most
experts recommend that no more
than 28% of your gross monthly income be
used to pay for your housing expenses
(including mortgage or rent, taxes and
insurance).
 They also recommend that your total D/I
be no more than 36% when paying all of
your recurring debt.
 It
is important to keep these D/I ratios in
mind when acquiring new credit to ensure
you are always an attractive credit risk to
any financial institution.
 Don’t
find yourself being declined because
you have taken on too much debt.
BUDGETS
A
BUDGET HELPS YOU ORGANIZE
YOUR SPENDING BY:



telling you what money comes in, what money
goes out, and where it goes
helping you identify expenses that aren’t as
important to you so you can free up money for
those that are
showing you where some changes might be
needed
BUDGETING PITFALLS
There are three main reasons budgets fail.
1. Negative attitude – Try not to think of a
budget as a financial diet. Try to think of it
as a means to an end.
2. Lack of motivation – The best motivators are
generated internally. It is important to
honestly believe that budgeting can help you
meet your goals.
3. Unrealistic expectations – The reality is that
budgeting is an endurance event. Those
who stick with it through thick and thin will
come out ahead financially.
TIPS FOR CREATING A BUDGET

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Use a template
Add/delete categories as applicable
Plan on paying more on higher interest rate
credit cards or loans
Prioritize your spending by determining wants
versus needs
Have both a positive attitude and a positive
ending balance
Put any annual payments into monthly payment
figures
 Hypothetical

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budget assuming:
Salary of $35,000
Average credit card debt of $5,781 with a
minimum payment of $231
Student loan debt of $18,000 with a payment
of $147
Rent of $400
Car payment of $315
DEBT MANAGEMENT PROGRAMS
 If
you do get yourself into a financial
nightmare, there are ways to get back on
track successfully and without ruining your
credit forever.
 Debt management programs, which are
also known as credit counseling agencies,
can save you a lot of money and years of
paying on your credit cards if you choose
a good one.
DEBT MANAGEMENT PROGRAMS
A good debt management company is a
third party who will contact your creditors to:

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Lower your interest rate
Negotiate a payment structure with the
creditor that you can afford
Determine a realistic amount of time for your
debt to be eliminated
KEYS TO DEBT MANAGEMENT PROGRAMS
Key factors to keep in mind when selecting a
good debt management program:
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Your current creditors lower your interest rate
and not just your payment.
It is very important you continue to receive
your statements to ensure no payments are
past due.
It is not a loan. The company collects the
payment from you and allocates it to your
creditors.
DEBT MANAGEMENT PROGRAMS
 For
someone who gets into a bad financial
position, these programs can be the key to
getting back on track.
 Most programs structure your payments to
eliminate your debt in 4-5 years.
 They make it so no new revolving
accounts can be opened while
participating in the program so once you
have paid the debts off, you can have a
fresh start.
 Learning
to make wise decisions with
your purchases, investments, and
debt can be the key to your success.
RESOURCES
http://ezinearticles.com
http://www.saukvalley.com
http://www.bankrate.com
http://en.wikipedia.org
http://www.moneyinstructor.com
http://www.citibank.com
http://www.mortgagenewsdaily.com
http://www.takechargeamerica.org