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The Basics:
• What is credit, anyway?• Establishing credit• Credit cards• Budgeting• Saving• Auto loans
• Credit – the amount of money available to you through lenders
• Debt – the amount of credit you’re using at any given time
• Creditor – any person / business that extends credit
Important definitions:
• Based on trust
• Checks & balances– Federal Trade Commission
– Federal Reserve Board
– local Better Business Bureau
– local Chamber of Commerce
– trade associations
– consumer advocacy groups
– credit reporting agencies
Our credit system
• Credit Reporting Agencies– Equifax
– TransUnion
– Experian
• Credit report– Reputation
– Past history is an indicator of future performance
– 7 years of info
Your Credit
• 3 national credit reporting agenciesEquifax (800) 685-1111 www.equifax.com
TransUnion (800) 888-4213 www.transunion.com
Experian (888) 377-3742www.experian.com
• Check your report:– Once a year
– Before major borrowing decisions
– Any time you are denied credit
– If you suspect fraud
Obtaining your credit report
• Secured vs. Unsecured– collateral
– risk
• Installment vs. Revolving – Installment: has set period of time
• auto loan
• mortgage
– Revolving: open line of credit• credit card
Types of Debt
Establishing credit• 3 possible situations
– Good credit history
– Bad credit history
– Insufficient credit history
• Getting started – Credit cards
– Co-signed loans
– Start small
– Start with familiar institution
Choosing your first card
• APR– Lower is better
– Read the fine print!
• Fees
• Perks
• Balance Calculation Method– Average Daily Balance
– Two-Cycle Avg. Daily Balance (avoid!)
• Evaluating– bankrate.com
– cardweb.com
“Unlike student loans, which are designed for students, credit cards are designed for people with income.”
(Nellie Mae)
Guidelines for using credit cards:
• Intended for short-term borrowing– Not for carrying a balance long-term
– Have a repayment plan in mind beforehand
• Always pay more than the minimum! – Pay off every month when possible
– Pay at least 2x the minimum
• Always pay on time!– Avoid late fees
– Pay by phone or online for convenience
© 2006 ACA International all rights reserved
• Bankrate.com CalculatorBalance: $2,748
APR: 18%
Typical min. payment: $68
• How long to pay off…?
the minimum payment trap…
the minimum payment trap…
• At minimum payment: 257 months (21 ½ years!)
$3,791 in interest
• At $93/month (min. + $25/month at start)
40 months (3 ½ years)
$910 in interest
vs.Durable goodsMp3 playerSnowboardNew tires for car
Consumable goodsConcert ticketsGasolineGroceriesDining out
Budgeting
• A budget is:– Not about restriction
– About getting what YOU want!
– The best tool you have for financial success
– Continuous
– Flexible
– Individual
– About the future
Prioritize• Needs
– Should always come before wants
– Reflected in your budgeting & bill paying habits– Examples: savings, housing, reliable transportation, insurance
coverage, groceries, clothing, utilities, existing financial obligations.
• Wants– cable/satellite TV– Toys: boats, snow mobiles, expensive jewelry, cell phones
– Vacations
– Dining out
Live Within your Means• Paying for living expenses on credit
– denial
• Savings
• Lifestyle changes are difficult– Justification
– Entitlement
• See the “big picture”– Set goals
Debt: How much is too much?
• How much of your monthly budget is going to debt payments?
• Add up payment amounts for all loans, excluding mortgages (ex: auto loans, student loans, furniture loans, credit cards, personal loans, etc.)
• Divide by monthly gross income
• 20% or higher = potential problem • Ex: $275 car payment
$ 55 Visa card
$ 30 Discover card
$ 70 student loan
+ ________________
$430
$430 ÷ $2,000 = 0.215or
21.5% avoid taking on more debt!
Warning Signs• no budget plan
• no savings
• denied for a loan
• debt increasing month after month
• total monthly debt payments ≥ 20% gross income
• making only minimum payments
• hiding purchases from others
• cash advances/payday loans
• late fees, over limit fees
• creditors/collectors calling
Saving• “Pay Yourself First”
• 10% of gross income
• Long term– Over 5 yrs
– Retirement
– Children’s education
• Short term– 1 to 5 yrs
– Vacation fund
– Down payment for a house
Auto Loans
• Borrow conservatively
• It’s just a car– Not a status symbol
– Practical
– Avoid emotion
• Shop for the loan carefully– Find the financing before you find the car
– Know your credit score
– The shorter the term, the better• Depreciation
• “Upside down”
Auto Loans
Auto Loans
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
1 13 25 37 49 61
Month
book value
loan balance
Depreciation:
Buying a car
• New vs. used
• Negotiate!
• Consider all the costs before you buy– Insurance
– Reliability/maintenance
– Gas mileage