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  1. Credit Unit 4 – Good Debt, Bad Debt: Using Credit Wisely

  2. Credit Card Statistics • 176.8 million credit cardholders in 2008 • The average credit cardholder has 3.5 credit cards • The average American has nearly $10,700 in credit-card debt • The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8 years • 80% of consumers currently own a debit card

  3. Credit Card Statistics ~ Students • 84% of the student population overall have credit cards • Only 2% of undergraduates had no credit history • 50% of undergraduates had 4 or more credit cards in 2008 • 76% of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt • 41% of undergrads have a credit card. Of the students with cards, about 65% pay their bills in full every month, which is higher than the general adult population

  4. What is credit? • A loan • Paid off with interest • That allows you to buy an item now but pay for it over a period of time

  5. Types of Credit

  6. Costs of Using Credit • Annual Percentage Rate (APR) – annual interest rate • Annual Fee – yearly charge you pay for the privilege of using credit • Credit Limit – maximum amount of credit a lender will extend to a customer • Finance Charge – actual dollar cost of using credit to maintain a balance • Origination Fee – charge for setting up the loan (usually seen with home loans) • Over the Limit Fee – fee for spending more than your credit limit • Late Fee – penalty for making a payment after the due date

  7. Pros and Cons of Credit Pros Cons Interest Overspending Debt Identity Theft • Convenience • Protection • Emergencies • Opportunity to Build Credit • Immediate Gratification • Special Offers • Bonuses

  8. Are you Credit Worthy? • The Four Cs of Credit • Collateral • What lenders can take from you if you don’t repay • Capital • Your net worth • Capacity • Income and employment history; ability to pay back the loan • Debt:income ratio • Character • Are you trustworthy? • Look at your credit history

  9. How to Build a Good Credit History • Pay your bills on time • Make regular deposits in your savings account • Be choosy about your credit cards and loans; only use the ones you need and keep them for a long time • Better to maintain a low balance and pay if off each month than to have no balance at all

  10. What’s Considered Good Credit? • Credit Scores prepared by 3 Credit Reporting Agencies in the US • Equifax • Experian • TransUnion FICO score is calculated statistically, with information from a consumer's credit files. The letters stand for Fair Isaac Corporation

  11. What Determines Credit Score?

  12. What Hurts your Credit Score? • Late Payments • Bouncing Checks • Having Multiple Credit Cards and Loans • Maintaining high balances on your cards • Changing credit cards frequently Stays on your credit report for 7 years!!!!

  13. Why do you need good credit? • Shelter • Mortgage • Bad credit = higher interest rate or denial • Rent • Bad credit = denied lease • Transportation • Unless you have cash to pay for car, you’ll need to get a loan • Good credit = larger loan amount and better interest rates • Employment • Background checks look at financial responsibility • Entrepreneurship • Small Business Loans • Utilities • Cable, telephone, water, even cell phones

  14. Credit Score • 64% of American adults have not ordered a copy of their credit report in the past year; this grows to (72%) among Hispanic Americans • 37% of American adults admit that they do not know their credit score • Corpus Christi, Texas, residents have America's worst credit scores • How do you get your credit score? • Contact the 3 credit reporting agencies and request it! • Entitled to a free credit score each year (report costs $15)

  15. How it can get out of hand • Overspending • Spending more than you make • Personal Issues • Divorce • Medical • Professional Issues • Business failure • Slowdown/Riding out the Storm

  16. Personal Stories • Jana, 45, college degree, married, 1 child (8) • Director of Purchasing at Ford Motor Company • Earns over $100K/year • Lived in the same home for 10 years • Daughter in private school • Drives nicest cars, wears fashionable clothes, vacations twice a year

  17. Personal Stories • Husband owned family business in automotive after-market • Business historically did well bringing in $250K+; spending habits reflected that • When auto industry went into recession, so did after-market • Business slowed, but kept expecting it to rebound • Continued to spend money on business, trying to bring in new clients ~ for 5 years • Husband’s credit destroyed, put business in wife’s name • Bills continued to pile in, but no new revenue from family business • Owe $50K to IRS in back taxes • Took out a 2nd mortgage to pay off growing debt • Husband’s substance abuse explodes • Housing market tanked, now owe more on house than it’s worth • Daughter still in private school, still buying fabulous boots/jewelry; still going to Vegas staying in luxury suites • Stress of financial worries caused marital problems; filed for divorce • Minimum payment on credit cards greater than Jana’s high paying job at Ford • Hasn’t made a house payment in over a year (playing odds with bank due to high number of foreclosures in Detroit) • Continues to pay utilities otherwise won’t have power or heat…

  18. The Dark Cloud of Debt • Jana owes more than $100,000 • Paying the monthly minimum of $1501 at 18% interest, it would take her 38yearsto pay it off • Note: paying less than $1500 per month would never pay off the balance • assumes she pays cash for all future purchases and incurs no further charges

  19. What can she do? • Put away the plastic, and stop adding to her debt • Start living entirely on a cash basis again • Make a personal commitment to repay all her debts • Start by either paying off the card with smallest amount – or – the one with the highest interest • Find out exactly how bad it is – how much does she really owe? • Create a repayment plan that she can stick with

  20. If that doesn’t work • Bankruptcy – a legal process to get out of debt when you can no longer make all your required payments • Chapter 7 • Allows you to erase most of your debt • To qualify, you typically must be unemployed or have a very low income • Must undergo financial counseling • Chapter 13 • Allows you to repay many of your debts over a period of time • Court typically oversees to make sure you do it

  21. Bankruptcy • Still have to pay student loans, child support, alimony, and any penalties and fines for crimes • Stays on your credit record for 10 years • Have to rebuild credit starting at approx. 400 • Makes it difficult to get new credit cards, buy a house, rent an apartment, etc. • when Jana finally loses her house, her parents will have to buy a condo for her and her daughter to live in… • What would happen if her parents couldn’t bail her out?!?