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Financial Smarts. For Teachers. Sponsors. Using Credit. What Is Credit?. Buy Now Pay Later. It’s a business transaction!. Credit Statistics. Average number of credit obligations Average number of credit cards Average available credit. 13. 9. $19,000. www.myfico.com. Credit Use.

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Presentation Transcript
slide1

Financial Smarts

For Teachers

what is credit
What Is Credit?

Buy Now Pay Later

It’s a business

transaction!

slide5

Credit Statistics

  • Average number of credit obligations
  • Average number of credit cards
  • Average available credit

13

9

$19,000

www.myfico.com

slide6

Credit Use

Percent of consumers who carry more than $10,000 innon-mortgage debt

37%!

www.myfico.com

basic terms
Basic Terms
  • Consumer Credit
  • Credit
    • Goods, services, money received for promise to pay later
    • Debt used by consumers
    • Expenditures other than home mortgages
credit rule
Credit Rule

Credit Payments =

no more than 15-20% of take-home pay

or

no more than 1/3 of spendable income

Take-Home Pay

– Basic Needs

Spendable Income

installment credit
Installment Credit
  • Pay for items in regular payments
  • Interest varies with item
  • Usually requires down payment
  • Seller owns untilall payments made
revolving credit
Revolving Credit
  • Interest can be 1 – 2% monthly
  • Required payment varies by card
  • May pay in full or make minimum payment
  • No finance charge if bill

paid in full

credit agreement
Credit Agreement
  • Annual percentage rate (APR)
  • Finance charge (in dollars)
  • Service charges, loan fees, life insurance premiums & interest
  • Date for payment with no charge
  • Balloon payments
credit cost variables
Credit Cost Variables
  • Interest rate
  • Length of loan
  • Amount of loan
cost of time
Cost of Time

Loan = $500

cost of credit
Cost of Credit

Simple Interest

Interest Paid on Outstanding Balance Each Month

Pre-computed Interest

Interest Is Calculated on Entire Loan AmountUp Front

credit card interest
Credit Card Interest

Average Daily Balance (ADB) =

What You Owe Each Day

___________________

# Days in Month

ADB ($400) x

Monthly Periodic Interest Rate (1.5%) =

Finance Charge for Month ($6.00)

other considerations
Other Considerations
  • Average daily balance, including new purchases, or
  • Average daily balance, excluding new purchases (better)
  • Two-cycle billing method
reducing credit costs
Reducing Credit Costs
  • Find the best price
  • Make large down payment
  • Shop for low APR
  • Pay back as soon as you can
  • Pay bills on time
  • Pay extra with each payment
  • Use only when needed
credit card fees
Credit Card Fees
  • Annual
  • Late Payment
  • Over Credit Limit
  • Cash Advance
cash advances
Cash Advances
  • Interest begins immediately
  • Service fee applies

Avoid!

smart card habits
Smart Card Habits
  • Develop system for paying
  • Save receipts
  • Pay card in full
  • Avoid “no minimum payment due” offers
  • Avoid “endless” repayment periods
finance charges
Finance Charges

Loan Amount = $1,000

  • Interest rate: 19.8%
  • Monthly payment: 3% of balance not less than $15
  • Years to pay: 8.3

Total Finance Charge: $843

loan comparisons
Loan Comparisons

Loan Amount = $1,000

applying for credit
Applying for Credit
  • Fill out application
  • Lender reviews and scores
    • Capital
    • Character
    • Capacity
  • Approval or denial
credit bureaus
Credit Bureaus
  • TransUnion

(877) 322–8228

www.transunion.com

  • Equifax

(800) 685–1111

www.equifax.com

  • Experian

(888) 397–3742

www.experian.com

credit bureaus1
Credit Bureaus
  • Information varies
  • Scoring varies
  • Charge for scores and reports
free reports
Free Reports
  • Once a year
  • Do not include score
  • www.annualcreditreport.com(877) 322–8228
credit report records
Credit Report Records
  • Personal information
  • Credit history
  • Inquiries
  • Public records
personal information
Personal Information
  • Name
  • Social Security Number
  • Addresses
  • Birth date
  • Employment history
credit history
Credit History
  • Your credit accounts

(Delinquent accounts removed after 7 years)

  • Loan and credit limits
  • Loan balance
  • Available credit
credit history1
Credit History
  • Payment terms
  • Payment history
  • Closed or inactive accounts(Removed between 7 and 10 years)
inquiries
Inquiries
  • Landlords
  • Lenders
  • Employers
  • Insurers
public information
Public Information
  • Bankruptcies

(Removed after 10 years)

  • Overdue child support payments
  • Liens
not included
Not Included
  • Checking and saving accounts
  • Marital status
  • Gender
  • Ethnicity
  • Race
  • Medical information
  • Criminal record
  • Religion
  • Political affiliation
fico score
FICO Score
  • Ranges between 350 and 850
  • Higher the better
  • Varies by reporting bureau
  • Based on Fair Isaac Corp. (FICO)

www.myFICO.com

(800) 319–4433

fico score1
FICO Score
  • Creditworthiness determined by
    • Credit history
    • Payment history
    • Outstanding credit
    • Existing accounts
    • Inquiries
fico score2

10%

10%

35%

15%

30%

FICO Score

Payment History

Amounts Owed

Length of History

New Credit

Types of Credit

www.myfico.com

fico score3
FICO Score

$20,000 Automobile Loan (36 months)

Aug. 8, 2007 / www.myfico.com

fico score4
FICO Score

$300,000 Mortgage (30-year fixed)

Aug. 8, 2007 / www.myfico.com

applying for a loan
Applying for a Loan
  • Review all 3 credit reports beforehand
  • Correct errors
  • Contact reputable lender
  • Compare several offers
if denied credit
If Denied Credit
  • Ask for specifics as to why
  • Reapply after resolving credit issue

(e.g., pay down your debts)

  • Correct false information on credit report
debt management
Debt Management
  • Find out where you stand
    • Income
    • Expenses
    • Bills
  • Find out
    • Who you owe
    • How much you owe
debt management1
Debt Management
  • Decide how much you can pay back
  • Consider
    • Secured status of debt
    • Legal action that has been taken
    • Interest being paid
    • What happens if you don’t pay
debt management2
Debt Management
  • Set up a plan for paying back your debts
    • Reduce expenses
    • Sell assets
    • Increase family income
    • Loan consolidation, second mortgages, refinancing
debt management3
Debt Management
  • Discuss plan with creditors
    • Why you are behind
    • Your current income
    • Other obligations
    • How you will catch up
  • Stick with plan until all debts repaid
  • Revisit plan