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SponsorsSponsors
Using CreditUsing Credit
Buy Now Pay Later
What Is Credit?What Is Credit?
• Average number of credit obligations
• Average number of credit cards
• Average available credit
Credit StatisticsCredit Statistics
www.myfico.com
Percent of consumers who carry more than $10,000 innon-mortgage debt
Credit UseCredit Use
www.myfico.com
Basic TermsBasic Terms
• Consumer Credit
• Credit – Goods, services, money received for promise
to pay later– Debt used by consumers – Expenditures other than home mortgages
Credit RuleCredit 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 CreditInstallment Credit
• Pay for items in regular payments
• Interest varies with item
• Usually requires down payment
• Seller owns untilall payments made
Revolving CreditRevolving 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 AgreementCredit 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 VariablesCredit Cost Variables
• Interest rate
• Length of loan
• Amount of loan
Cost of TimeCost of TimeLoan = $500
Number ofMonths
Payment /Month
TotalInterest
TotalPayment
12 $44.89 $38.68 $538.68
18 $30.96 $57.28 $557.28
24 $24.01 $76.24 $576.24
30 $19.85 $95.50 $595.50
Cost of CreditCost of Credit
Simple InterestInterest Paid on Outstanding Balance Each Month
Pre-computed InterestInterest Is Calculated on Entire Loan Amount
Up Front
Simple vs. Pre-ComputedSimple vs. Pre-Computed
1 2 3 4 5 6 7 8 9 10 11 12
Simple Interest: Total Cost = $54.958.33
7.66
7.00
6.32
5.64
4.96
4.27
3.57
2.87
2.16
1.45
0.72
Pre-Computed Interest: Total Cost = $10015.39
14.11
12.83
11.54
10.26
8.97
7.69
6.41
5.12
3.84
2.56
1.28
Credit Card InterestCredit 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 ConsiderationsOther Considerations
• Average daily balance, including new purchases, or
• Average daily balance, excluding new purchases (better)
• Two-cycle billing method
Reducing Credit CostsReducing 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 FeesCredit Card Fees
• Annual
• Late Payment
• Over Credit Limit
• Cash Advance
Cash AdvancesCash Advances
• Interest begins immediately
• Service fee applies
Smart Card HabitsSmart Card Habits
• Develop system for paying
• Save receipts
• Pay card in full
• Avoid “no minimum payment due” offers
• Avoid “endless” repayment periods
Loan Amount = $1,000• Interest rate: 19.8%
• Monthly payment: 3% of balance not less than $15
• Years to pay: 8.3
Finance ChargesFinance Charges
Loan ComparisonsLoan Comparisons
Loan Amount = $1,000
Loan A Loan B Loan C
Interest Rate 8.5% 14% 19.8%
Interest Paid 1st Year
$75.06 $126.72 $183.95
Years to Pay Off 5.75 6.7 8.3
Applying for CreditApplying for Credit
1. Fill out application
2. Lender reviews and scores• Capital• Character• Capacity
3. Approval or denial
Credit BureausCredit Bureaus
• TransUnion(877) 322–8228
www.transunion.com
• Equifax(800) 685–1111
www.equifax.com
• Experian(888) 397–3742
www.experian.com
Credit BureausCredit Bureaus
• Information varies• Scoring varies• Charge for
scores and reports
Free ReportsFree Reports
• Once a year
• Do not include score
• www.annualcreditreport.com(877) 322–8228
Credit Report RecordsCredit Report Records
• Personal information
• Credit history
• Inquiries
• Public records
Personal InformationPersonal Information
• Name
• Social Security Number
• Addresses
• Birth date
• Employment history
Credit HistoryCredit History
• Your credit accounts(Delinquent accounts removed after 7 years)
• Loan and credit limits
• Loan balance
• Available credit
Credit HistoryCredit History
• Payment terms
• Payment history• Closed or inactive
accounts(Removed between 7 and 10 years)
InquiriesInquiries
• Landlords
• Lenders
• Employers
• Insurers
Public InformationPublic Information
• Bankruptcies (Removed after 10 years)
• Overdue child support payments
• Liens
Not IncludedNot Included
• Checking and saving accounts
• Marital status
• Gender
• Ethnicity
• Race
• Medical information
• Criminal record
• Religion
• Political affiliation
FICO ScoreFICO 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 ScoreFICO Score
• Creditworthiness determined by– Credit history– Payment history– Outstanding credit– Existing accounts– Inquiries
FICO ScoreFICO Score
Payment History
Amounts Owed
Length of History
New Credit
Types of Credit
10%
35%10%
15%
30%
www.myfico.com
FICO ScoreFICO Score
FICO Score APRMonthly Payment
720 – 850 7.213% $619
690 – 719 8.120% $628
660 – 689 9.865% $644
620 – 659 11.799% $662
590 – 619 15.226% $696
500 – 589 16.092% $704
$20,000 Automobile Loan (36 months)
Aug. 8, 2007 / www.myfico.com
FICO ScoreFICO Score
FICO Score APRMonthly Payment
760 – 850 6.228% $1,843
700 – 759 6.450% $1,886
660 – 699 6.735% $1,943
620 – 659 7.548% $2,107
580 – 619 9.041% $2,423
500 – 579 9.661% $2,558
$300,000 Mortgage (30-year fixed)
Aug. 8, 2007 / www.myfico.com
Applying for a LoanApplying for a Loan
• Review all 3 credit reports beforehand
• Correct errors
• Contact reputable lender
• Compare several offers
If Denied CreditIf 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 ManagementDebt Management
1. Find out where you stand• Income• Expenses• Bills
2. Find out• Who you owe• How much you owe
Debt ManagementDebt Management
3. Decide how much you can pay back
4. Consider• Secured status of debt• Legal action that has been taken• Interest being paid• What happens if you don’t pay
Debt ManagementDebt Management
5. Set up a plan for paying back your debts
• Reduce expenses• Sell assets• Increase family income• Loan consolidation, second mortgages,
refinancing
Debt ManagementDebt Management
6. Discuss plan with creditors• Why you are behind• Your current income• Other obligations• How you will catch up
7. Stick with plan until all debts repaid
8. Revisit plan
Final ThoughtsFinal Thoughts
Pay Bills when Due!