What is your gut reaction to these words?

1. What is your gut reaction to these words? • Credit cards • Debt • Bankruptcy

2. Suze Orman says… • The First Law of Money = • People first. • Then money. • Then things.

3. Investment in Consumer Durables • Most household durable goods have both investment and consumption attributes • consumption benefits are services provided and typically these largely outweigh any investment attributes • Examples of large household durables • automobile • washer • Large expense of durables necessitates that many households must either save for such purchases or finance them by going into debt.

4. Saving for the Purchase of Durables • Benefits • acquisition costs are lower • Costs • delayed gratification / loss of use • relative price may rise in interim

5. Financing the Purchase of Durables • Benefits • immediate use / gratification • establishment of credit rating (?) • purchase price known with certainty • Costs • acquisition costs are higher

7. Acquisition Costs • Financing costs • Search costs • Delivery charges • Installation charges • Education costs • Accessories

8. Then, there are operation costs… • Maintenance • repairs / service contracts • disposables • energy costs • insurance • storage • foregone interest (opportunity costs)

9. How much will that durable good really cost you? • List 3 durable goods you want to purchase some time in your life • Estimate the cost of each item • Think of your hourly wage • How many hours do you need to work to purchase each item?

10. Given substantial acquisition and operation costs, why do households continue to purchase durables? • time savings • direct utility / satisfaction • status

11. Overspending is hazardous to your wealth

12. Definition... • Consumer debt - two components • consumer installment credit • which covers most non-mortgage loans to consumers repayable in two or more payments (e.g., car loans) • revolving credit (e.g., credit cards) • Borrower may obtain funds up to a certain pre-approved limit • There is no set amortization schedule • The credit may be used repeatedly • Borrower may repay over time or all of the balance at once • Most of the time interest rates are not fixed • Mortgage debt is a separate category in credit files, even though it is either installment (traditional mortgage) or revolving (home equity line of credit)

13. Dave Ramsey says, To avoid debt, ACT YOUR WAGE

14. Where can you get credit? • Banks, S&L’s, Credit Unions • low risk, low interest rate • Sales Finance Companies (e.g. Sears, GM) • Credit Cards • Consumer Finance Companies (e.g. Advance Check shops) • Interest rates from 400-980% APR • Doesn’t always seem so high because you are charged fees • Ex. Borrow $100 for 31 days at USA Cash = $44.29 loan fee • Pawnshops • high risk, high interest rate • This shows the stratification of the credit market

15. An ad I saw once: • Use our “Easy Credit Plan” • 100% Down • $0 Monthly Payment

16. Credit Report Score • Determined by FICO (Fair Isaac Corporation) based on: • Payment history – 35% • Amount owed – 30% • Length of credit history – 15% • New credit – 10% • Types of credit in use – 10% • Check out the official website at www.myfico.com

17. Credit Reports • Each of the 3 credit reports from Experian, TransUnion, and EquiFax lists your: • Credit accounts, including all credit cards, auto loans, student loans, and mortgages in your name, with information about the: • Creditor and account number • Balance • Date opened • Payment history • Current status, such as “OK”, “Closed by customer”, “30 days late payment”, etc. • Inquiries: recent applications for new credit • Collections: when a collection agency is seeking you to repay a debt • Public Records: court judgments such as a bankruptcy, foreclosure, or tax lien • You are entitled to one free credit report from each agency every year. Access it at www.annualcreditreport.com or by calling (877)322-8228

18. Credit Report Myths • Check out the reading on this – very important to understand

19. Does one late payment really hurt me? • Survey by Experian (2005): • More than half of US consumers have a delinquent payment on their cc • More than a third have a late payment in the past year • Average score with 1 late payment = 598 credit score • Average score with no late payments = 759

20. Credit Card (a definition) • A means for buying something you don’t need, at a price you can’t afford, with money you don’t have.

21. Credit Cards • Which credit card is best for you? • Evaluate: • annual fee • periodic interest rate • how they calculate outstanding balance (grace period and loan repayment) • Do you pay off your balance every month? -OR- Do you carry a balance?

22. How long will it take to pay cc off with 2% minimum payments? • $2,500 balance, 18% interest • 244 months (>20 years) with $3365.51 in interest • $2,500 balance, 22% interest • 347 months (almost 29 years) with $6102.13 in interest

23. Credit cards, cont. • When are credit cards a good thing? • When are they a bad thing? • How can you resurrect yourself and your credit if credit cards are a bad thing for you?

24. More on Credit Cards • Need a credit card to establish credit history and for emergencies • If you can eat it, drink it, or wear it, then it's not an emergency! • Even if the lender thinks you can handle $2,000 or $5,000 or $10,000 in debt (credit limit) doesn’t mean that you should or can

25. Changes in Credit Card Rules-2009-2010 • Limited interest rate hikes • No more universal default • More time to pay bills • Clearer due dates and times • Highest interest paid first • Limits on over-the-limit fees • No double-cycle billing • Making minimum payments • Subprime card fee limits

26. Some statistics… • Among college students, • >80% have 1 cc • 15% have 4+ cc’s • 50% pay bal every month • 16% have bal >$1,000 • 5% have bal >$5,000 • In the 1990s, the bankruptcy rate for 18-25 has DOUBLED • Most filings were for revolving credit with balances <$10,000