Credit and Debt

1. Credit and Debt • www.lifethenfinance.com www.lifethenfinance.com

3. What is credit ? • Credit is a loan from a bank, store or company. • The lender makes the purchase for you and overtime you must pay them back. • A credit card is the tool used to make purchase. • The lender of your credit card, charges interest each month until you pay them back in full. • When you use a credit card, if you do not pay off the card in full each month you are paying more than what you purchased the item for because of fees. www.lifethenfinance.com

4. Credit : Cont…. • Many credit cards offer bonuses like gifts and airline miles with each purchase. • Credit card users that pay their bills off in full each month can reduce the cost of other purchases. • In some cases, credit cards have a more streamlined process incases of fraudulent charges. www.lifethenfinance.com

5. What is a debit card? • This card is linked to a bank account. • Automatically deducts purchase amount from your bank account • Cannot make a purchase for more than the balance in your account • If you have $400 in your account and want to make a $500 purchase you can’t not with a debit card www.lifethenfinance.com

6. Debit card: Cont…. • Exception: • If you have overdraft protection on your account, you can overdraw your account up-to the maximum amount allowed by your overdraft protection policy. • A debit card is an alternative to carrying cash. • When you use a debit card at some stores you can ask for cash back with your purchase. www.lifethenfinance.com

7. What is a credit report or credit history? • Credit Report: • A detailed report about a person’s credit history, which outlines payback history, debt owed and paid; to help lenders determine credit worthiness for future lending. www.lifethenfinance.com

8. Importance of a good credit score • Credit Score: • A measure of credit risk determined from one’s credit history using a standard form of measurement. • For example: • A score of a 740 equals a grade ‘A’, where as a score of a 550 equals a grade ‘F.’ www.lifethenfinance.com

9. Financial Reputation: • The worthiness of a person’s personal financial payback history; the lower the reputation the less likely one-will payback debts. www.lifethenfinance.com

10. Good Credit: • Purchases $1000 • Interest Rate 7% • Monthly Payment $10 • Years to Pay off amount 12 months • Interest Paid $440 • Actual Cost $1,440 www.lifethenfinance.com

11. Bad Credit: • Purchases $1000 • Interest Rate 27% • Monthly Payment $23 • Years to Pay off amount 12 months • Interest Paid $2,312 • Actual Cost $3,312 www.lifethenfinance.com

12. Buying with Cash: • Purchases $1000 • Amount Saved each month $125 • Months to save up $1000 [8] • Interest Earned the money in savings $30 • Actual Cost $970 www.lifethenfinance.com

13. Interest Rates: • A rate that is charged for borrowing money from a lender; usually in the amount of a percentage of your total balance owed. • Interest: • The fee that is charged by a lender for borrowing money; this amount is usually determined from an interest rate. • Lender: • A company, organization or person that lends money to a consumer. • Grace Period: • The time a lender allows between your purchase and payment where they do not charge you any interest. This is typically around 30 days. www.lifethenfinance.com

14. What is considered Good Debt ? • Home Loans: • Purchasing a home may be a good investment because, in many locations, the value can increase over-time • Business Loans: • For entrepreneurs looking to expand and grow their business • Education Loans: • Student loans and other investments that finance one’s education. www.lifethenfinance.com

15. What is considered Bad Debt ? • Credit Cards: • Any type of credit card is considered a bad debt. Credit cards carry high interest rates, finance charges and other charges. • Personal Loans: • Cash loans from a bank or company. They carry high interest rates. • Pay Day Loans: • These are similar to personal loans, in most cases you • guarantee to pay it off with your next paycheck. • Auto Loans: • Since a car declines in value and offers no income this classifies it as bad debt. www.lifethenfinance.com

16. Auto/Car Loan • A car loan is considered a bad debt since the value of the car declines in value and no income is received (unless driving a limo, cab or bus) • ** Your credit report score determines the type of car loan you will qualify for. The better the credit the better the loan you will be able to get** www.lifethenfinance.com

17. What is identity theft ? • This is when someone who uses your personal identifying information to commit fraud or other crimes, usually for personal gain. www.lifethenfinance.com

18. Personal Identifying information: • Examples: • Social Security Number/ Taxpayer ID number • Driver’s License Number or State Identification Card Number • Credit Card Numbers • Bank Account Information www.lifethenfinance.com

19. Incase of identity theft.... • Contact: • The three credit bureaus: Trans Union, Equifax, Experian • The Federal Trade Commission • The IRS • Internet Crime Complaint • Local Police department • ** You can check it at www.annualcreditreport.com for free once per year** www.lifethenfinance.com

20. What is collateral ? • Collateral: • Lenders estimate the value of the collateral offered to reduce their risk. • if you are purchasing a car and get an auto loan—your collateral would be the car. • If you don’t pay back the loan the lender will take the car. www.lifethenfinance.com

21. Determining the value of the collateral ? • The collateral is determined by calculating the difference between the cars’ value and how much a person pays down. • For example: • if someone purchases a $20,000 car and puts down $10,000—the lender would have $10,000 in collateral—a safer loan. www.lifethenfinance.com

22. High and low risk loan • Low-risk loan: • A friend borrows $200 but gives you his laptop valued at $400 until he repays you. • …If he doesn’t repay you then you can sell the laptop and get your $200 back plus make some money. • High-risk loan: • A friend borrowed $250 and gave you a bike valued at $50 even if you sold the bike at full value you would still lose $200. www.lifethenfinance.com

23. Finding a mortgage that’s right for you … • How long do you plan to keep the property? • What are your real estate market predictions over that time? • What payments can you afford? • What is your risk tolerance? • If it’s a rental property, what kind of cash flow are you looking to achieve? • Are you trying to pay down the principle balance? • How does this property fit into your overall financial plans? www.lifethenfinance.com

24. What lenders are looking for? • Credit: • Maintain an excellent credit status and qualifying for a home loan will be much easier. • Equity: • On a home purchase, equity is equal to the amount of money you put down on a property. • Assets • Lenders want to see on average at least three months of mortgage payments in an account. www.lifethenfinance.com

25. What lenders are looking for? Cont… • Debt to Income Ratio • Shows the lenders you have the ability to afford monthly loan payments. • If you make $3500 per month and your mortgage payment is $3000, that doesn’t look good for you. • The lender will be thinking, “How can they afford to pay me??” This is why you make a sensible budget plan—to avoid getting into indebted situations. www.lifethenfinance.com