Personal Finance

The Basics:

• What is credit, anyway?• Establishing credit• Credit cards• Budgeting• Saving• Auto loans

• Credit – the amount of money available to you through lenders

• Debt – the amount of credit you’re using at any given time

• Creditor – any person / business that extends credit

Important definitions:

• Based on trust

• Checks & balances– Federal Trade Commission

– Federal Reserve Board

– local Better Business Bureau

– local Chamber of Commerce

– trade associations

– consumer advocacy groups

– credit reporting agencies

Our credit system

• Credit Reporting Agencies– Equifax

– TransUnion

– Experian

• Credit report– Reputation

– Past history is an indicator of future performance

– 7 years of info

Your Credit

• 3 national credit reporting agenciesEquifax (800) 685-1111 www.equifax.com

TransUnion (800) 888-4213 www.transunion.com

Experian (888) 377-3742www.experian.com

• Check your report:– Once a year

– Before major borrowing decisions

– Any time you are denied credit

– If you suspect fraud

Obtaining your credit report

• Secured vs. Unsecured– collateral

– risk

• Installment vs. Revolving – Installment: has set period of time

• auto loan

• mortgage

– Revolving: open line of credit• credit card

Types of Debt

Establishing credit• 3 possible situations

– Good credit history

– Bad credit history

– Insufficient credit history

• Getting started – Credit cards

– Co-signed loans

– Start small

– Start with familiar institution

• Good or bad?

• Unsecured loans

• Higher risk = higher rates & fees

Credit cards

Choosing your first card

• APR– Lower is better

– Read the fine print!

• Fees

• Perks

• Balance Calculation Method– Average Daily Balance

– Two-Cycle Avg. Daily Balance (avoid!)

• Evaluating– bankrate.com

– cardweb.com

“Unlike student loans, which are designed for students, credit cards are designed for people with income.”

(Nellie Mae)

Guidelines for using credit cards:

• Intended for short-term borrowing– Not for carrying a balance long-term

– Have a repayment plan in mind beforehand

• Always pay more than the minimum! – Pay off every month when possible

– Pay at least 2x the minimum

• Always pay on time!– Avoid late fees

– Pay by phone or online for convenience

© 2006 ACA International all rights reserved

• Bankrate.com CalculatorBalance: $2,748

APR: 18%

Typical min. payment: $68

• How long to pay off…?

the minimum payment trap…

the minimum payment trap…

• At minimum payment: 257 months (21 ½ years!)

$3,791 in interest

• At $93/month (min. + $25/month at start)

40 months (3 ½ years)

$910 in interest

vs.Durable goodsMp3 playerSnowboardNew tires for car

Consumable goodsConcert ticketsGasolineGroceriesDining out

Budgeting

• A budget is:– Not about restriction

– About getting what YOU want!

– The best tool you have for financial success

– Continuous

– Flexible

– Individual

– About the future

Prioritize• Needs

– Should always come before wants

– Reflected in your budgeting & bill paying habits– Examples: savings, housing, reliable transportation, insurance

coverage, groceries, clothing, utilities, existing financial obligations.

• Wants– cable/satellite TV– Toys: boats, snow mobiles, expensive jewelry, cell phones

– Vacations

– Dining out

Live Within your Means• Paying for living expenses on credit

– denial

• Savings

• Lifestyle changes are difficult– Justification

– Entitlement

• See the “big picture”– Set goals

Debt: How much is too much?

• How much of your monthly budget is going to debt payments?

• Add up payment amounts for all loans, excluding mortgages (ex: auto loans, student loans, furniture loans, credit cards, personal loans, etc.)

• Divide by monthly gross income

• 20% or higher = potential problem • Ex: $275 car payment

$ 55 Visa card

$ 30 Discover card

$ 70 student loan

+ ________________

$430

$430 ÷ $2,000 = 0.215or

21.5% avoid taking on more debt!

Warning Signs• no budget plan

• no savings

• denied for a loan

• debt increasing month after month

• total monthly debt payments ≥ 20% gross income

• making only minimum payments

• hiding purchases from others

• cash advances/payday loans

• late fees, over limit fees

• creditors/collectors calling

Saving• “Pay Yourself First”

• 10% of gross income

• Long term– Over 5 yrs

– Retirement

– Children’s education

• Short term– 1 to 5 yrs

– Vacation fund

– Down payment for a house

Auto Loans

• Borrow conservatively

• It’s just a car– Not a status symbol

– Practical

– Avoid emotion

• Shop for the loan carefully– Find the financing before you find the car

– Know your credit score

– The shorter the term, the better• Depreciation

• “Upside down”

Auto Loans

Auto Loans

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

1 13 25 37 49 61

Month

book value

loan balance

Depreciation:

Buying a car

• New vs. used

• Negotiate!

• Consider all the costs before you buy– Insurance

– Reliability/maintenance

– Gas mileage

Conclusion

• Questions?

• Thank you!