Transcript Credit
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 176.8 million credit cardholders in 2008 The average credit cardholder has 3.5 credit cards The average American has nearly $10,700 in credit-card debt The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8 years 80% of consumers currently own a debit card Number of Credit Cards in U.S. ~ 2009 Provider Credit Debit Visa 270M 382M MasterCard 203M 125M American Express 48.9M n/a Discover 54.4M n/a 84% of the student population overall have credit cards Only 2% of undergraduates had no credit history 50% of undergraduates had 4 or more credit cards in 2008 76% of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt 41% of undergrads have a credit card. Of the students with cards, about 65% pay their bills in full every month, which is higher than the general adult population A loan Paid off with interest That allows you to buy an item now but pay for it over a period of time Type of Credit Features Credit Card Some cards can be used anywhere (Visa); others only at a specific place (Gap) No payoff deadline Monthly minimum payments vary based on the balance Usually has the highest rate Installment Loan Typically used for large purchases such as a car Loan term can vary from a few months to many years Monthly payment amounts are often set for the life of the loan Usually has a lower interest rate then a credit card Student Loan Used for tuition and other college expenses Some programs let you delay payments until you graduate Loan term is usually up to 10 years May provide an income tax break Mortgage Usually repaid over 15-30 years Monthly payments are set for the life of the loan Usually has a lower interest rate than an installment loan May provide an income tax break Annual Percentage Rate (APR) – annual interest rate Annual Fee – yearly charge you pay for the privilege of using credit Credit Limit – maximum amount of credit a lender will extend to a customer Finance Charge – actual dollar cost of using credit to maintain a balance Origination Fee – charge for setting up the loan (usually seen with home loans) Over the Limit Fee – fee for spending more than your credit limit Late Fee – penalty for making a payment after the due date PROS CONS Convenience Protection Emergencies Opportunity to Build Credit Immediate Gratification Special Offers Bonuses Interest Overspending Debt Identity Theft The Four Cs of Credit Collateral ▪ What lenders can take from you if you don’t repay Capital ▪ Your net worth Capacity ▪ Income and employment history; ability to pay back the loan ▪ Debt:income ratio Character ▪ Are you trustworthy? ▪ Look at your credit history Pay your bills on time Make regular deposits in your savings account Be choosy about your credit cards and loans; only use the ones you need and keep them for a long time Better to maintain a low balance and pay if off each month than to have no balance at all Credit Scores prepared by 3 Credit Reporting Agencies in the US Equifax Experian TransUnion Credit Score Description 730-850 Excellent 700-729 Great 670-699 Good 585-669 Average 300-584 Bad FICO score is calculated statistically, with information from a consumer's credit files. The letters stand for Fair Isaac Corporation Late Payments Bouncing Checks Having Multiple Credit Cards and Loans Maintaining high balances on your cards Changing credit cards frequently Stays on your credit report for 7 years!!!! Shelter Mortgage ▪ Bad credit = higher interest rate or denial Rent ▪ Bad credit = denied lease Transportation Unless you have cash to pay for car, you’ll need to get a loan Good credit = larger loan amount and better interest rates Employment Background checks look at financial responsibility Entrepreneurship Small Business Loans Utilities Cable, telephone, water, even cell phones 64% of American adults have not ordered a copy of their credit report in the past year; this grows to (72%) among Hispanic Americans 37% of American adults admit that they do not know their credit score Corpus Christi, Texas, residents have America's worst credit scores How do you get your credit score? Contact the 3 credit reporting agencies and request it! Entitled to a free credit score each year (report costs $15) Overspending Spending more than you make Personal Issues Divorce Medical Professional Issues Business failure Slowdown/Riding out the Storm Jana, 45, college degree, married, 1 child (8) Director of Purchasing at Ford Motor Company Earns over $100K/year Lived in the same home for 10 years Daughter in private school Drives nicest cars, wears fashionable clothes, vacations twice a year Husband owned family business in automotive after-market Business historically did well bringing in $250K+; spending habits reflected that When auto industry went into recession, so did after-market Business slowed, but kept expecting it to rebound Continued to spend money on business, trying to bring in new clients ~ for 5 years Husband’s credit destroyed, put business in wife’s name Bills continued to pile in, but no new revenue from family business Owe $50K to IRS in back taxes Took out a 2nd mortgage to pay off growing debt Husband’s substance abuse explodes Housing market tanked, now owe more on house than it’s worth Daughter still in private school, still buying fabulous boots/jewelry; still going to Vegas staying in luxury suites Stress of financial worries caused marital problems; filed for divorce Minimum payment on credit cards greater than Jana’s high paying job at Ford Hasn’t made a house payment in over a year (playing odds with bank due to high number of foreclosures in Detroit) Continues to pay utilities otherwise won’t have power or heat… Jana owes more than $100,000 Paying the monthly minimum of $1501 at 18% interest, it would take her 38 years to pay it off Note: paying less than $1500 per month would never pay off the balance assumes she pays cash for all future purchases and incurs no further charges Put away the plastic, and stop adding to her debt Start living entirely on a cash basis again Make a personal commitment to repay all her debts Start by either paying off the card with smallest amount – or – the one with the highest interest Find out exactly how bad it is – how much does she really owe? Create a repayment plan that she can stick with http://money.cnn.com/video/pf/2012/03/30/pf-hd-100K_debt.cnnmoney/ Bankruptcy – a legal process to get out of debt when you can no longer make all your required payments Chapter 7 ▪ Allows you to erase most of your debt ▪ To qualify, you typically must be unemployed or have a very low income ▪ Must undergo financial counseling Chapter 13 ▪ Allows you to repay many of your debts over a period of time ▪ Court typically oversees to make sure you do it Still have to pay student loans, child support, alimony, and any penalties and fines for crimes Stays on your credit record for 10 years Have to rebuild credit starting at approx. 400 Makes it difficult to get new credit cards, buy a house, rent an apartment, etc. ▪ when Jana finally loses her house, her parents will have to buy a condo for her and her daughter to live in… ▪ What would happen if her parents couldn’t bail her out?!?