Manage DebtsIt is more important than savings/investments!

US household consumer debts statistics

Average credit card debt: ◦$7,123 (all households) ◦$15,270 (indebted households)

Average mortgage debt: $149,925Average student loan debt: $32,258Total consumer debt: $11.36 trillionTotal credit card debt: $856.9 billionTotal mortgage debt: $7.93 trillionTotal student loan: $1,049 billion

Interest payment burdenAverage credit card APR: 15%30-year fixed mortgage rate: 4.25%Student loan rate: 4% -- 8.5%Auto loan rate: 4.5%These rates are historically LOW!Compare with investment returns:

◦Average 1-year CD: 0.8%◦10-year Treasury: 2.7%◦10-year S&P 500 return: 7%Don’t forget inflation and tax!

Types of consumer debtSecured debt

◦ Protected by an asset or collateral ◦ Lien on the asset◦ Lenders hold the deed/title until the loan has been paid

in full◦ Lenders may sell the asset to repay the loan◦ Usually lower interest rate, longer term and larger

amount◦ Example: mortgage, home equity loan and auto loan

Unsecured debt◦ No collateral◦ More risky◦ 5 C – character, capacity, capital, collateral, conditions◦ Example: credit card, student loan

FICO scoresA numerical snapshot of the

information in your credit reportUsed by lenders to assess your

creditworthinessScale ranges from 300 to 850Lenders want to see a score of at least

620--the higher, the better!Three credit reporting agencies ---

Equifax, TransUnion, Experian

FICO breaks down

Improve your FICO scoresMaintain or improve payment habitsRepay collection accounts and other

outstanding debtsReduce total debtAvoid taking on new creditKeep revolving debt well under the credit

limitCorrect credit report errorsUse different types of creditBuild credit historyKeep credit cards active

Credit CardBuild credit history from credit cardsChoose the right cards

◦ Convenient user: annual fee◦ Revolving user: APR

Use credit cards responsibly◦ Pay the full amount each month◦ No cash advance◦ Pay on time to avoid late fees◦ Check statements for errors/scams◦ Report lost/stolen cards immediately◦ Protect your information to avoid identity theft

Common credit mistakesAlways use cashCancel the oldest credit cardUse only credit cardsInactive credit cardsUse more than 50% of credit card

limitsPay minimum amount onlyFrequent credit inquiries:

◦hard inquiry vs. soft inquiryNever check credit reports for error

Student loanUnsecured debtBacked by earning potential

◦ Treat the loan as a business adventure◦ Check earning potential to evaluate ability to repay

Investment for human capitalTax return/salary can be garnished to

repay the loanCannot be dischargedStudent loan interests paid can be

deducted (max. $2,500 limited by MAGI)

Average starting salary for new college graduatesCategory 2013 Average

Salary2012 Average Salary

Business $55,635 $51,541

Communications $43,835 $42,286

Computer Science $58,547 $60,038

Education $40,337 $39,080

Engineering $62,062 $60,639

Humanities & Social Sciences

$37,791 $36,824

Math & Sciences $42,731 $42,355

Overall $45,327 $44,259

http://www.payscale.com/college-salary-report-2014/majors-that-pay-you-back

MortgageYour house is used as the collateralHomeowners receive better interest rates

for other loans Interests paid are deductable (max. $1

million)Fixed mortgage vs. Adjustable-rate

mortgage (ARM)◦ Longer term more interest payments◦ Higher rate more interest payments

Short sale vs. foreclosure◦ Short sale: sold by owner but needs lender

approval◦ Foreclosure: sold by lender◦ Cause credit scores to drop by 200-300 points

Filling BankruptcyChapter 7

◦ Liquidation/straight bankruptcy

◦ Cancel most debts◦ Liquidate property to

repay creditors◦ Keep only exempt

property◦ Pass means test

Chapter 13◦ Repayment plan◦ No asset liquidation◦ The only option if not

eligible for Chapter 7◦ Avoid foreclosure◦ Keep property

Both can:1. Wipe out all/some unsecured debts2. Stop creditor harassment through “Automatic Stay”

Nondischargeable DebtsMost taxesChild supportAlimonyGovernment or court fines/penaltiesStudent loansDebt for personal injury caused by DUIDebt to tax-advantaged retirement

plansHOA duesAttorney fees for child custody/support

How does bankruptcy affect your credits?A blow to credit scoresCan stay on credit reports for 10

yearsIneligibility for loans or credit

cards for the first few yearsRejection when looking for jobsDifficult to find a decent

apartmentOther restrictions