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Debt Know How

Debt Know How. A Debt Education Program created by MasterCard in partnership with the University of Minnesota Extension Service. Welcome to Debt Know How. Resource to help consumers get out of debt Includes: Website – www.debtknowhow.com Debt education workshops. Workshop Goal.

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Debt Know How

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  1. Debt Know How A Debt Education Program created by MasterCard in partnership with the University of Minnesota Extension Service

  2. Welcome to Debt Know How • Resource to help consumers get out of debt Includes: • Website – www.debtknowhow.com • Debt education workshops

  3. Workshop Goal Participants will: • Increase knowledge about debt issues • Assess personal debt • Develop action plan to pay off debt and improve credit score

  4. Debt Overview

  5. Debt in America • Consumer spending accounts for more than two-thirds of total economic activity (FDIC) • Approximately 45% of Americans carry no outstanding balance on their credit cards (Staff Working Paper, Federal Reserve 2004) • 1 in 20 American households are in high debt (MSN Money)

  6. Debt in America • Consumer credit comes from mortgage debt, home equity loans and credit cards • Consumer debt was $9.8 trillion in 2004 • Almost 80% from residential mortgages • About 8% comprised of credit card debt Source: The Nilson Report

  7. Common Reasons for Getting into Debt • Loss of job • Divorce • Medical crisis • Overspending • Unexpected home or car expenses • Bad money advice or fraud

  8. Debt Warning Signs Quiz

  9. How Did You Score? Total Points from Debt Warning Signs Quiz • 0 - Congratulations • 1 - 4 Pay attention to early warning signs • 5 - 10 Already deep in debt

  10. Assess Your Finances

  11. How Much Money Do You Earn? Calculate Total Monthly Income • Salary & wages • Tips • Commissions • Bonuses • Interest/dividends • Veteran’s benefits

  12. Where Does Your Money Go? Calculate Total Monthly Expenses • Housing • Savings & set–aside funds • Food • Health care & insurances • Transportation • Personal • Debt payments & fees • Recreation & entertainment • Past due bills & debts

  13. Where Does Your Money Go? Subtract Total Expenses from Total Income to get Total Monthly Cash Flow Total Monthly Income + _____ Total Monthly Expenses - _____ Monthly Cash Flow = _____

  14. Assess Your Finances Tips • Positive cash flow means it’s working • Negative cash flow means spend less • Use your budget to make changes • Track spending • Find money

  15. Measure Your Debt Calculate Total Monthly Non-Mortgage Debt: • Credit cards • Home equity loan • Store cards • Vehicle loan • Family loan • Past due debt

  16. Measure Your Debt www.debtknowhow.com: Budget calculator will help individuals tailor information to best suit their needs

  17. Measure Your Debt Calculate Debt Payments-to-Income Ratio: • 20 % or higher – take action to pay down debt

  18. Measure Your Debt Debt Payments-to-Income Ratio = Monthly Debt Payments Monthly Take-Home Pay Example: $1,105 $5,275 = 21% Debt-to-Income Ratio

  19. Measure Your Debt www.debtknowhow.com: Understanding your debt-to-income ratio is crucial to determining the correct path out of debt

  20. Improve Your Credit Score

  21. Credit History • Positive credit history leads to opportunities • Problems with credit leads people to action

  22. Credit History and Score • Credit reporting bureaus maintain files on borrowers • Experian, Equifax, and Trans Union • major credit reporting bureaus • Lenders use the information when making credit decisions • Order your credit report each year

  23. Request Your Credit Report To order your credit report: on-line www.annualcreditreport.com or call 1-877-322-8228 or write Annual Credit Report Request Service P. O. Box 105281 Atlanta, GA 30348-5281

  24. Access to Your Credit Report You are entitled to free credit reports at any time if: • Denied credit or employment • Victim of fraud • Receiving welfare benefits • Unemployed and looking for work

  25. What’s in Your Report? Personal Identifying Information Your Name Social Security #: 123-45-6789 123 Current Address Date of Birth: February 1, 1960 City, State 00000 Previous Address(es) 456 Former Rd., Somewhere, ST 11111 P.O. Box xxxx, Anywhere, ST 22222 Last Reported Employment: Account Manager, Any Co.

  26. What’s in Your Report? Public Record Information & Collections Lien Filed 03/03; Good CTY; Case or ID #4321; Amount $26000; Class – State; Released 07/03; Verified 07/03 Bankruptcy Filed 12/02; Northern District Ct; Case or ID #55HC44; Liabilities - $16000; Personal; Individual; Discharged; Assets- $800 Collection Reported 05/96; Assigned 09/94 to Oldcoll (800)xxx-xxxx Client – ABC Hospital; Amount-$1010; Unpaid; Balance $1010; Date of Last Activity 09/94; Individual Account; Account #2345

  27. What’s in Your Report? Credit Account Information Previous Payment History: 3 times 30 days late; 4 times 60 days late; 2 times 90+ days late Previous Status: 01/97 – I2; 02/97 – I3; 03/97 – I4

  28. What’s in Your Report? Inquiries Home Mortgage 10/10/01 Real estate loan $214,000 10 Oak Lane for state bank with 30 yr. term. Any, MN 22222 scheduled until 10/2003 07/29/98 XYZ BankCard 04/12/97 GHG Department Store 02/24/00 Department Store 05/02/00 Mortgage

  29. Dispute Errors • Make a copy of your credit report and mark items you suspect are incorrect. • Write a letter to the reporting agency and explain the disputed items. • Request an investigation and send copies of supporting documents. • Tell the creditor in writing that you dispute an item. • Keep copies of all correspondence.

  30. Credit Scoring • Credit score is an evaluation of a person’s credit worthiness • Credit scores change overtime • Scores range from about 350 to more than 800 • Lenders use scores plus other information • Most well known score is FICO (Fair Isaac Corporation.)

  31. Base for Credit Scores • Payment history - 35% • Amounts owed - 30% • Length of credit history - 15% • Taking on more debt - 10% • Types of credit used - 10%

  32. Tips to Improve Your Score • Pay bills on time • Missed a payment? Get current and stay current • Keep balances low on credit cards and other revolving credit • Pay off debt rather than move it around

  33. Tips to Improve Your Score • Don’t close unused credit cards as a short term strategy • Don’t open unnecessary lines of credit • Shop for rates within a focused time (ex. auto loan, home equity loan) • It’s okay to request and check your own score

  34. Action Plan

  35. Pay Off Your DebtTake Action Now • Assess the problem • Set a goal • Generate new income • Create your plan • Track spending • Save on interest and late fees

  36. Pay Off Your DebtTake Action Now • Choose a method to pay off debt • Contact creditors • Consider a loan consolidation • Seek help if overwhelmed • Bankruptcy

  37. Pay Off Your DebtTake Action Now • Assess the problem • Determine why you are in debt • Curb spending • Determine amount of debt accumulated • Set a goal • Set smaller goals • Keep motivated

  38. Debt Reduction GoalAction Plan Overall Goal: Reduce my debt by $__________ in __________months Monthly Goals: Reduce my debt by $_________ every month Increase my income by $________ each month Reduce my expenses by $________ each month Additional action steps I will take to reach my goal: 1. 2.

  39. Pay Off Your DebtTake Action Now • Generate new income • Take a second job • Sell assets • Use money in low-interest bank accounts • Create your plan • Spending decisions • Stick to a budget • No new debt

  40. Pay Off Your DebtTake Action Now • Track spending • Find daily savings • Save on interest and late fees • Ask each credit card lender for a lower interest rate • Prioritize your debts by interest rates

  41. Pay Off Your DebtTake Action Now • Choose a method to pay off debt • Highest interest rate first • Smallest debt first • Pay more than the minimum • Contact creditors • Explain the problem • Try to work out a modified plan • Make the agreed upon payments

  42. Pay Off Your DebtTake Action Now • Consider a loan consolidation • Multiple loans consolidated into one loan • Lower interest rate • Easier to focus on one loan than several • Don’t add new debt • Seek help if overwhelmed • See a reputable credit counselor • Renegotiates loan terms • Ask about fees

  43. Pay Off Your DebtTake Action Now • Bankruptcy Bankruptcy Reform Act • Based on income and ability to pay • Chapter 7 or Chapter 13 • Means test is required • Will vary according to state average income • Must receive credit counseling before bankruptcy • Must complete debt education before being discharged

  44. Resources • Government Sites Federal Reserve Board – www.federalreserve.gov Federal Trade Commission – www.ftc.gov U.S. Department of Justice – www.usdoj.gov Cooperative Extension – www.csrees.usda.gov U.S. Bankruptcy Courts – www.uscourts.gov Financial Literacy & Education – www.mymoney.gov

  45. Resources • Debt & Credit Management Freddie Mac – www.freddiemac.com MasterCard International – www.mastercard.com MasterCard – www.debtknowhow.com Your Credit Card Companies – www.yourcreditcardcompanies.com

  46. Resources • Accessing Your Credit Report Annual Credit Report – www.annualcreditreport.com Equifax – www.equifax.com Experian – www.experian.com Trans Union – www.transunion.com MyFico, a division of Fair Isaac Corporation www.myfico.com

  47. Evaluation Help us for future trainings!

  48. Patrick DwyerMasterCard International2000 Purchase StreetPurchase, NY 10577Tel: (914) 249-6637Fax: (914) 249-3648patrick_dwyer@mastercard.com Cindy M. PetersenUniversity of MinnesotaRegional Extension EducatorFamily Resource Management980 - 2nd Avenue SEHutchinson, MN  55350Tel: (320) 234-0440 or 1-888-241-3207Fax: (320) 234-0444peter210@umn.edu For information about MasterCard’s Debt Know How program

  49. Bibliography Materials have been adapted from the following sources: Anthes, William L., Ph.D. Twelve Ways to Get Out of Serious Debt, National Endowment for Financial Education, February 3, 2003 U.S. Department of Justice and Cooperative Extension Service conference call, July 21, 2005 Bankruptcy Reform, BankruptcyAction.com MyFICO What’s in Your Credit Report, myfico.com Lifelong Money Management, Home Ownership Center, St. Paul, MN

  50. MasterCard International in partnership with the University of Minnesota Extension Service Cindy M. Petersen, M.Ed., A.F.CUniversity of Minnesota Extension Service Regional Extension EducatorFamily Resource Management In consultation with: Jean W. Bauer, Ph.D.Family EconomistUniversity of Minnesota Extension Service

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