8 Benchmarks for Borrowing &

Credit Card Act of 2009

Financial Planning for Women

August 2009

Jean Lown

September 9 FPW

• Don’t give your money to Bernie… outsmarting investment fraud– Protect yourself, your parents, your kids

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8 Borrowing Benchmarks from Consumer Reports

• Severe recession creates debt problems

• Responsible borrowers lost jobs

• Someone you know needs this help

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Warning Signs of Excess Debt

• Relying on credit cards for daily purchases

• Using home equity line of credit to extend purchasing power

• Paying minimum on credit card bills

• Using cash advances to keep afloat

• Losing sleep over debts

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1. 20%

• Add up: – Monthly car payment(s) (loans & leases)– Average new charges on credit cards – Other non-mortgage debt payments

• Total should be not > 20% of gross monthly income

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2. 28%

• Monthly mortgage + property taxes & insurance – Should not > 28% of gross monthly income

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3. 36-48%

• Total monthly debt (mortgage + non-mortgage) should not > 36% of gross monthly income

• 36-48% is really scary

• > 48%: seek help

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4. 80%

• First mortgage + any second mortgage or home equity line of credit should not > 80% of property’s value

• A lower debt-to-equity ratio is better

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5. 6 points• Low teaser rates on adjustable rate

mortgages (ARMs)

• Most ARMs have 6% point cap

• If considering ARM, add 6% to the teaser rate and calculate the monthly payments– Worst-case scenario– If (with taxes & insurance) > 28% of gross

monthly income: don’t do it!

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6. 6 months

• Need 3-6 months of living expenses in reserve for emergencies– How secure is your job? – Spouse or partner’s income?– How quickly could you find a new job? – Would you have to sell house and move for

new job?

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7. 36 months

• Don’t take out vehicle loan for > 3 years

• Longer terms: upside down– Owe more than vehicle is worth– Buy used instead of new– “Cars depreciate faster than they roll downhill.”

(bankruptcy researchers Sullivan, Warren & Westbrook)

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8. Updated FICO score info

• FICO Credit Score needs to be higher to get the best rates.

• Median (mid point) FICO® score is 723

• 760-850 needed for lowest rates– http://www.myfico.com/

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How to Dig Out• Assess your finances

– Add up debts– Use PowerPay to develop a plan to repay

• Stop borrowing– Use cash or debit card for daily expenses– Use 1 credit card & pay in full each month

• Keep 1 card in reserve… in case of theft or fraud

• Call creditors before they call you.

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Credit Card Act of 2009• Limits interest rate increases & fees

– 45 day notice of rate hike

• Bans: Universal default, double-cycle billing, retroactive rate hikes

• Info on how long to repay w/ min. payments• Payment of > min. must go to highest % balance• Promo rates must last at least 6 months• Prohibits raising rates in 1st year (unless variable rate)

• Bills must be mailed 21 days before due• Limits cards to applicants < 21 years old

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Banks’ Response to New Law

• Tightening standards on new applicants– Requiring more info on $ status– Rejecting more applicants– Offering lower credit limits

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Impact on Current Cardholders

• Raising rates and fees

• Switching from fixed to variable rates

• Reducing credit lines

• Closing accounts– Good to have 2 cards

• Reducing teaser rate offers

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Future Credit Card Directions

• “Era of easy credit is over.” WSJ

• HH debt as % of disposable income: 130%

• Move towards: – No-fee, no frills cards– Premium rewards cards with annual fees

• Harder & costlier to get credit– Is this a good or bad effect?

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Check your Credit Report

• Definition:

A continuing record of a borrower’s debt commitments and how well they have been honored.

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Free Annual Credit Report• Obtain a free credit report once per

year per credit bureau – Experian, TransUnion, and Equifax

• www.annualcreditreport.com

• Ensure your report is accurate– 3 times per year:

• August: Experian• December: TransUnion• April: Equifax

Estimate your FICO Score

• Range: 300-850– http://www.bankrate.com/calculators/credit-

score-fico-calculator.aspx

• About FICO Scores: http://www.myfico.com/Default.aspx– (click on “About FICO Scores” near middle of

page)

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Housing & Financial Counseling Center

493 N. 700 E. Loganat bottom of Old Main

Hill435-797-7224

USU Family Life CenterUSU Family Life Center

Power Pay Debt Reduction Software

• www.powerpay.org– Stop borrowing until debts are paid– Make power payments

• As one debt is paid, use that $ to pay another debt rather than spending it.

– Get out of debt more quickly – Pay less interest

Questions? Comments?

• Don’t forget to respond to email regarding the FPW newsletter

• Check out the updated FPW website

• Stay tuned for emailed FPW survey

• September 9 FPW: Outsmarting investment fraud

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Managing Debt: From Credit Cards to Foreclosures

     • 50-minute Webcast presented by Marilyn

C. Dimitroff, CFP®

• http://register.webcastgroup.com/event/?wid=0770913084424

• Please feel free to leave as needed

• URL is in the August newsletter

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