The Facts on Credit Those who are wise never pay interest… they earn it!
What is Credit? • Another word for credit is loan… • 3 Main types of credit: • Sales • Credit you receive when you make a purchase and promise to pay later. • Cash • Credit you receive when you borrow cash and promise to pay it back later. • Service • Credit given for a service one receives (utilities, dentist, hospital, etc.) that will be payed for later.
How much credit can I use? • The total amount of credit should not exceed 20% of one years NET income… • How much can a person borrow that makes $36,000 net? • Answer: $7200 • (This includes your car loan…) • $7200/12 months= $600 a month!!! (not including interest)
HIDDEN COST OF LOW INTEREST CREDIT CARDS • Balance transfers usually charge 3% on principal • $30 late fees with no grace period (Considered late one day after due date) • If late, interest rate bumps up to 21% • $30 over balance fees • Convenience checks have transaction fees
Advantages of Credit • Stimulates the economy • Helps us take care of emergencies • Convenient – ordering over the phone • Establishes a credit rating • Advance notice of sales and cask back on purchases • Easier to exchange and return items • Detailed monthly bill
Disadvantages of Credit • It always costs money • Risky to spend future income • Encourages careless buying (Needs vs. wants) • Facilitates over-buying which increases sacrifice that must be made eventually • Often increases family conflict • May lead to Bankruptcy • Increases the cost of doing business
Payday Loans *The borrower requests a loan for a short period of time, usually one to four weeks. *“Payday loan fee” - Up to 360% interest. *If the borrower continues to have a financial problems and cannot pay the loan as promised, the interest keeps building on the debt.
Other Options…. • Try a small loan from a credit union • Ask for pay in advance from your employer • Consider a loan from family or friends, (be sure to have the terms of the loan in writing) • Use a credit card cash advance • Request additional time to pay the bill from your creditors. • Pawn Brokers • Or… just don’t borrow money!!!
Credit Rating/ FICO Score • A credit rating assesses the credit worthiness of an individual. Credit ratings are calculated from financial history and current assets and liabilities. • A credit rating tells a lender or investor the probability of the person being able to pay back a loan. • In recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit. • A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.
Establishing Credit • Have checking and savings accounts and manage them responsibly. (These are not reported to the credit agencies, but help individuals develop a pattern of budgeting.) • Use layaway plans at stores • Save for large down payments on cars and other purchases. • Ask someone to be a cosigner for the loan. • Always make payments for bills ON TIME!!! (cell phone, utilities, credit cards, house payment etc.)
If you are REJECTED… • Obtain a copy of your credit report to determine what the problem is. • If something is incorrect, notify the credit bureau in writing. • Fixing credit problems may take up to six months.
Bad Credit $3000 on credit card 18% interest rate If minimum payment of 2 ½% is only made… It takes 22 years and $4100 dollars in interest to pay of the debt. Total: $7100 to borrow $3000 Good Credit $3000 on credit card 4% interest rate If minimum payment of 2 ½% is only made… It takes 11 years and $400 in interest to pay off the debt. Total: $3400 to borrow $3000 Let’s talk interest rates…Bad Credit vs. Good Credit
Scary Statistics • The average American household has $9200 in credit card debt. • In 2005, 21,476 people declared bankruptcy in Utah. • At the end of 2005, Utah was ranked 3rd in the U.S. • In Utah, bankruptcies are filed at the rate of one in every 37 homes! The national average is one in every 73 homes!
Moral of the Story… • Don’t spend more than you earn!!! • Use credit wisely!!! • Don’t get into debt!!!
References • http://en.wikipedia.org/wiki/Credit • http://www.bankhs.com/teachers/utah_bankruptcy.html • http://www.utah.freebankruptcyevaluation.com/bankruptcy-statistics.html • www.Suzeorman.com • UEN Data Base