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Out Of Hock & Out Of Debtby Harry Dahlstrom

Tom Craddock

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Easy Credit

• Most people have access to easy credit.

• You create your own credit problems–not the banks, department stores, or credit card companies.

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Hooked on Credit

• 67% of adults have at least two credit cards.

• Most people charge about $200 per month.

• Most people maintain a constant monthly balance of $1,900.

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Impulse Buying• Debt is built on impulse—it is not built on necessity or need.

• More than half of the things we buy are on the spur of the moment.

• Impulse purchases are seldom compared for cost or quality.

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Interest Rates

• Interest is a fee charged by someone for letting you use their money.

• Not all credit cards charge the same interest.

• Interest on credit cards is generally higher than on other loans.

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Default

• Over 150 million people have credit cards and 7 million of them are in default.

• Creditors are not out to get you—they simply want the payments you owe them.

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Collection Agencies

• Collection agencies are the legal agents of the people you owe money.

• Most agencies want to work with you and set up a repayment plan.

• You have rights under the Fair Debt Collections Practices Act.

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Credit Reports• If you have credit, you have a credit report.

• Your report can only be examined for legitimate business or government needs.

• You can obtain a copy of your report.

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Credit report Agencies

• Free credit report every 12 months– Experian– TransUnion– Equifax– www.annualcreditreport.com– 877-322-8228

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On your report

• Identifying Information• Credit Information• Public Record Information• Reported for 7 years• Inquiries

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Credit Scoring

• FICO scores range from 300 to 850

• One late payment on an account can lower a FICO score 100 points!!

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FICO scoring factors:

• Payment history• Utilization rate• Length of time you have used credit• Pursuit of new credit• Number of open accounts• Collections• Public Records

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How can you have a credit report if you haven’t had a credit

account?

• Factors resulting in a credit history for a minor:

– Authorized User on an account– Identity theft

Dispute Inaccurate Information now could avoid problems later.

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What do you spend?

• The average American family earns about $47,000 a year.

• Most of the money goes to housing, transportation, and food.

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What do you owe?

• A debt rate is the percentage of your monthly pay that you use to pay your debts.

• Determine your debt rate by adding up your monthly debt and dividing it by your monthly income.

• Most Americans have a debt rate of around 12 percent

Avoiding Debt Trouble:

Don’t borrow too much (Payments more than 20% of income)

Maintain Adequate Savings

Emergency fund $500-1000

At least 3 months of living expenses

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The credit agreement always means:

• Obligation to pay• Monthly payments• Their terms

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Establishing credit

• Cosigner• Apply at your bank• Obtain payment records• Apply for a secured account• Retail and gas cards are easier

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Secured Credit

• Collateral is backing the loan• What happens when a borrower fails to

make payments on an auto loan?• What important change happens to every

new car after it is purchased and driven off the lot?

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Unsecured Credit

CREDIT CARDS• Revolving Credit• Pay now or pay over time• Credit limit• Minimum payment due

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Unsecured Credit

• CHARGE CARDS– Pay in full monthly– Higher limits– Annual Fee

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New Credit Card Regulations

• No credit card accounts for consumers under age 21 unless the application show sufficient income or there is a co-signer.

• Written permission from the co-signer is required before raising the credit limit on the account if a borrower under age 21.

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Credit Cards

• How do we know how much we are allowed to spend on a credit card account?

• Can we make purchases on a credit card and avoid paying any interest?

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Credit Cards

• Why do over 50% of college students have 4 or more credit cards?

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Auto loans vs credit cards

• How is a $10,000 auto loan different from a $10,000 in credit card debt?– Interest on the auto loan stays the same– The car can be sold to pay off the debt– The auto loan has a limited loan term

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Account debit cards

• Works like a check• Easier to get• Not as widely accepted • Risk

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Student checking accounts

• Less costly for student going away for college.

• No minimum balance requirement• No monthly account fee• “Fee Free” withdrawals from ATM’s

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Prepaid debit cards

• Activation fee• Monthly fee• Inactivity fee• ATM fee• Balance inquiry fee• Customer service fee• Shortage fee

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Advantages on using credit cards

• Car rental, equipment rental, hotels, phone purchases, internet purchases

• Establishes your credit record• Helps take advantage of sales• Important in emergency situations

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Disadvantages of credit cards

• Encourage overspending• Carrying a balance is expensive• Future earnings committed• Payment problems can ruin your

credit record

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Your credit history could affect

• Auto insurance cost• Housing• Employment• Getting any loans in general

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Educational loans

• Relatively easily available• Extended payment• Government guaranteed• Can’t pay? Contact the lean servicer.

Avoid default.

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Education Loans• $865 Billion U.S. student loan debt, more than

credit card debt $693 Billion (2011)• Average is over $25,000• 2 year default rate is 8.8%• Borrow as little as possible• Consider a less costly school• It is risky to borrow more for education than what

you can realistically expect to earn in the first year after graduating.

• Salary info: Bureau of Labor Statistics– www.payscale.com

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Student Loans

• A $27,000 Stafford Loan=$311/month for 10 years. (37,320)

StudentLoans.gov FinAid.org

•Federal education loans are less expensive and less risky than private education loans. They are less available for graduate study.

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Rule of 3

• Check at least 3 sources for any major purchase

• bankrate.com• cardweb.com• creditcards.com• americaslowestrates.com

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3 C’s of Credit

• Capacity– Occupation– Salary– How reliable– Dependents– Expenses– Current debts

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3 C’s of Credit

• Character– Have you used credit before?– Do you pay bills on time?– Do you own you home?– How long have you lived at you

address?– How long have you had your current

jobs?

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3 C’s of Credit

• Collateral– Something of sufficient value to server

as payment for the loan if payments aren’t kept current.

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Get Serious

• When you go to buy something ask yourself:

– Do I really need it?

– Do I have to have it today?

– What will happen if I don’t buy it now?

– Why have I gotten along without it until now?

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If you get in trouble

• Contact your creditors

• TOP PRIORITY: – Secured debts-house, car– Utilities– Food

• Avoid cash advances and payday loans

• Contact non-profit credit counselor CCCS– Credit counselors can rebuild your relationship with your creditors.

– Counselors can develop a repayment plan.

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Bankruptcy?

• Bankruptcy stays on your record for 7-10 years.

• Bankruptcy can hurt your employment and borrowing status.

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Guidelines for credit card use

• Limit the number of cards• Limit credit payments to less than

20% of net income• Maintain adequate savings• Check you credit report