Supplement to Money Matters Reference Credit Supplement to Money Matters Reference

Disclaimer This presentation is for educational purposes only. First Command Educational Foundation (FCEF) does not endorse or favor any commercial supplier, product or service, or promote the services of a specific financial institution.

Principles to Learn Credit Credit Safety Credit Dispute Debt Management

Credit What is it? The receipt of goods, services, or money in exchange for a promise to pay a definite sum of money at a future date What is credit? Essentially, it’s a loan. You borrow money to make a purchase, and you promise to pay the loan back, usually with interest.

Credit−Good or Bad? Advantages Disadvantages Able to buy needed items now No need to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment Disadvantages Interest (higher cost of items) May incur additional fees Financial difficulties can occur if you lose track of how much has been spent each month Impulse buying is so much easier! Credit is neither good nor bad, but it can hurt you if you misuse it.

The 4 Cs of Credit Character Capacity Capital Collateral Whether you can get credit, and how much you’ll pay for it, is subject to your: Character, also known as creditworthiness, is demonstrated by developing a history of timely payment of debt. Creditworthiness is reflected in your credit score. Capacity - Refers to how much debt a borrower can comfortably handle. Credit companies look at income and legal obligations. Capital - Refers to current available assets of the borrower, such as real estate, savings, or investments that could be used to repay your debt if you cannot pay with your current income. Collateral - Refers to the value of any assets pledged as security for a debt. These are items that lenders can take possession of and use to pay off your debt if you can no longer make payments.

Two Types of Credit Revolving Credit that can be used again and again without re-approval Installment Credit with fixed number of payments, usually monthly, until debt is paid off Revolving Credit This is credit extended in advance of transaction so the borrower does not need to reapply each time credit is desired. Credit cards are a good example of revolving credit. As the principal is repaid, it can be used again. Installment Credit Installment credit has a fixed number of payments. With installment credit the borrower must repay the amount owed in a specific number of equal payments, usually monthly. Examples of installment credit: Home mortgage Auto loan Personal loan

Interest Fee charged for privilege of borrowing money Price a person pays for ability to spend money today that would otherwise require time to accumulate Credit card issuers impose a finance charge, consisting of interest and other fees, for lending their money. Most credit card companies provide a grace period during which the user may pay back the money borrowed without accruing finance charges.

Types of Interest Variable Interest Variable interest rates offered by credit card companies are based on a specific index, usually the prime rate. Banks usually set a minimum interest rate to ensure a profit if interest rates fall. If rates go up, banks do not normally set maximum limits but may take advantage of increasing rates. Be sure to read your cardholder agreement carefully for details. Fixed Interest Some credit cards offer fixed interest rates after an introductory period. This rate will not fluctuate, but credit card companies can change a fixed rate by sending written notice to cardholders 30 days prior to an increase.

Credit Card What is it? A plastic card with a coded magnetic strip−when signed, the card entitles the bearer to a revolving line of credit, with a credit limit and interest rate determined in part by the creditworthiness of the borrower Also known as a passport to poverty The widespread use of credit became popular in the early 1920s, but the first plastic credit card, as we know it today, was issued in 1951 by Diners Club.

Types of Credit Accounts Two types Secured Requires a form of collateral Unsecured No collateral required Secured Credit Account A secured account can be an effective way to build or reestablish credit history. Secured cards require a cash collateral deposit that can range from a few hundred to several thousand dollars. The available credit line is a percentage of the amount deposited. Sometimes banks will reward individuals with a good payment history by adding to the credit line without requesting additional deposits. Some characteristics of a secured credit care are: · Cash deposit · Fees: - Application fee – look for a card that does not charge one - Annual fee – fees vary dramatically - Interest rate Read the fine print Check with your local bank or credit union regarding these credit cards, and do the research.   Unsecured Credit Account Most credit accounts are unsecured. Unsecured credit cards are usually offered to individuals with an established credit history. They do not require a bank deposit and usually come with fewer restrictions and lower interest rates. The credit limit and interest rate usually depend on the applicant’s credit rating.

Credit Card Debt Paying off your credit card debt $5,000 principal 18% interest 2% minimum payment 40 years to pay it off Interest paid: $13,397 American wealth has risen to an all time high in the US, yet the rate at which Americans save is at an all-time low. The median household income in the US is now more than $51K per year (2014, Wikipedia), yet the poverty rate has increased each year since 2000 and is now roughly 14.5% (2013, U.S. Census). Credit card debt accounts for $882.6 billion of total U.S. revolving debt ($906.7 billion) as of October 2014 (www.nerdwallet.com). You start out using a credit card with the intent of paying off your balance each month, or at the very least, 2 to 3 months. Great intentions. Any of you fit this description so far? Well, stuff happens and you pay only the minimum and continue to charge and perhaps start a second or third card. The balance grows and one day it’s $5,000 –you’re one of the lucky ones if it stops there. At this point you start making minimum payments. Recently, new guidelines have been issued to credit card companies to raise minimum payments so that principal, interest, and finance charges will total about 4% instead of 2%. However, this is a guideline, not a law, as many people believe. When will the bill be paid if you make 2% minimum payments, with no additional charges added? And how much did you pay?

Credit Card Cash Advance? Credit card interest rates 12%-23% Current average around 15% Cash advance cost Interest rate typically increased about 6 percentage points for cash advance Cash advance fee typically around 5% of advanced amount with $10 minimum Surcharge by ATM operator, if appropriate Interest is charged immediately; no grace period www.creditcards.com/credit-card-news/cash_advances-cost-rates1276.php Do you really want to use your credit card to get money at the ATM, or when the cashier asks you if you want cash back? If you do, it will cost you. The average national credit card rate for fixed-interest cards is currently around 15%, and rates can range from 11.6% for low-interest cards to 22.7% for those with bad credit. Using your credit card to draw cash at an ATM, or writing one of those handy checks that comes in your monthly card statement, or from the cashier can cost you plenty: about 6 percentage points more than the average interest rate cardholders pay on purchases. Oh, and don't forget the typical 5 percent fee that card companies charge for a cash advance. Banks charge higher rates for cash advances than for purchases because cash advances reflect a higher risk of not being repaid. In addition, banks routinely set a lower limit for cash advance withdrawals than the overall credit limit on their cards. If there's an upside, maybe it's that the interest and fees on credit card cash advances are less than what they would be for payday loans, whose rates, when annualized, approach 400 percent. (www.creditcards.com/credit-card-news/cash_advances-cost-rates-1276.php)

Building Solid Credit Pay all bills promptly Apply for a secured credit account and make regular monthly payments Open a savings account and make regular deposits Apply for a small loan using the savings account as collateral and pay it off as agreed Open a checking account and do not bounce checks Establish a steady work record It is important to understand that although your personal worth is not reflected by the amount of debt you have or your credit score, they are a reflection of your behavior over time. A good credit history is vital to keeping and good credit score. If you’ve had problems, these will help.

Using Credit Wisely Pay off balances in full Stop use early If serious problems arise: Pay down balances gradually Debt consolidation Credit counseling Bankruptcy

Credit Safety Actions to ensure your credit record is unblemished by mistakes and unauthorized purchases Keep passwords and PINs secret Shred material with personal information Verify who you’re providing information to Keep SSN secret unless absolutely necessary Don’t carry Social Security card SSN is not an ID number! Use only secure websites for online purchases Review credit reports regularly Report stolen or missing cards to credit card company within 24 hours Here are some tips on how to protect your information: When a credit card arrives, rather than endorsing it with your signature, write “Photo ID required” in the signature strip. Never provide your password over the phone. Keep credit cards, account numbers and statements, and passwords in a safe place. Include the expiration dates and contact information for card issuers. Shred all unwanted mail items that list any personal information, including envelopes with your address on them. Look through your credit cards regularly to ensure that none are missing. Before revealing any personal information, be sure you know who you are dealing with. Do not give credit card numbers over the phone unless it’s a company you have done business with before or if you’ve placed the call to a trusted company. Only give your Social Security number when absolutely necessary, and never carry your Social Security card in your wallet unless you need it that day. Shred all unwanted receipts and statements for bank, credit card, and investment accounts. Never keep your personal identification number (PIN) on or near your ATM or credit card. Choose a PIN that is different from other obvious numbers like your phone number or the last four digits of your Social Security number. Carry only the credit cards you need, especially when traveling. Never leave ATM or credit card receipts lying around in plain sight. When making purchases online, make sure you are on a secure website. Frequently check the accuracy of your credit report. Equifax: 1-800-525-6285 Experian: 1-800-493-1058 Transunion: 1-800-680-7289 Visit the Federal Trade Commission website to learn more about identity theft: http://www.ftc.gov/bcp/edu/microsites/idtheft/consumers/about-identity-theft.html

What if You Are a Victim? File FTC Identity Theft Complaint www.consumer.ftc.gov/articles/0277-create-identity-theft-report File a police report Provide information to the three major credit reporting agencies and to creditors Place fraud alert or credit freeze on credit reports, and review credit records Equifax: 1-800-525-6285 Experian: 1-800-493-1058 Transunion: 1-800-680-7289 Close fraudulent or compromised accounts Dispute fraudulent transactions If you find evidence that you’re a victim of credit theft, file an ID Theft Complaint with the FTC . Take the printed ID Theft Complaint when you file a police report. The ID Theft Complaint can be used to support a police report to ensure it includes the detail required. A police Identity Theft Report entitles you to certain legal rights when it is provided to the three major credit reporting agencies or to companies where the thief misused your information. An Identity Theft Report can be used to permanently block fraudulent information resulting from identity theft, such as accounts or addresses, from appearing on your credit report. It will also make sure these debts do not reappear on your credit reports. Identity Theft Reports can prevent a company from continuing to collect debts that result from identity theft, or selling them to others for collection. An Identity Theft Report is also needed to place an extended fraud alert on your credit report. - A police report is also needed to get copies of the thief’s credit application and transaction information from companies that dealt with the thief. To get this information, you must submit a request in writing, accompanied by the police report, to the address specified by the company for this purpose. A fraud alert on your credit report can help prevent an identity thief from opening any more accounts in your name. Speak to someone in the security department of each credit reporting agency, and follow up in writing. Once you place a fraud alert in your file, you're entitled to order one free copy of your credit report from each of the three consumer reporting companies. Request credit reports from credit reporting agencies and study them! Notify your legitimate creditors what has happened. Work with businesses to close fraudulent accounts.

Credit Report Disputes If you find incorrect information in your credit report, it is your responsibility to notify the credit reporting agencies Notify the creditor or other business that provided the incorrect information Correct negative information cannot be removed Disputing mistakes is a process that requires documentation, alertness and follow-through Over 70% of consumer disputes are resolved within 14 days, with a 95% satisfaction rate, according to the FTC* *www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.pdf Notify the credit agency in writing, with copies of documentation, of the error. Mail it certified, “return receipt requested.” Ask the credit agencies to flag your file with a fraud alert, including a statement that creditors must get your permission before opening new accounts in your name. Other things you may need to correct: Incorrect spelling of your name Incorrect listing of personal information (i.e., date of birth, address, etc.) Incorrect SSN http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.pdf

Credit Card Purchase Protection Credit card purchases are protected under the Fair Credit Billing Act When one has purchased poor-quality or damaged merchandise with a credit card, the law gives the cardholder the right to withhold payment Purchase must be greater than $50 and within 100 miles of home The cardholder must make a real effort to resolve the dispute with the merchant before asking the issuer to stop a credit card payment Credit card purchases are protected under the Fair Credit Billing Act. This law gives consumers the right to withhold payment on poor quality or damaged merchandise purchased with a credit card. The sale must be for more than $50 and have taken place in the consumer’s home state or within 100 miles of the home address, though few credit card issuers enforce the $50 or 100 mile rule on purchases. There is a chance that the consumer can dispute a purchase outside his/her home if the purchase was over the internet, by mail order, or by phone order. Also, you need to make a real effort at resolving the dispute with the merchant before asking the issuer to stop a credit card payment. Some credit card companies may give the customer the benefit of the doubt and issue a temporary credit to a customer’s account when a purchase is in dispute.

Credit Card Purchase Dispute Process Talk to merchant and allow an opportunity to fix the problem If no resolution, send the merchant a certified letter, with a copy to the credit card issuer If then no resolution, send certified letter to credit card issuer within 60 days of purchase at the address for billing inquiries If credit card company sides with the merchant in the dispute, the cardholder will have to pay the charge and any finance charges If something you buy is not satisfactory, or if you disagree with the way a merchant has charged your account, make sure you take action!

What is Debt Management? Debt management is the practice of keeping debt under control and monitoring spending to ensure the accrued debt does not become overwhelming

What is Debt? Debt is the money you owe, an obligation Unsecured debts are those such as credit cards, personal loans, lines of credit, department store cards, medical bills, etc., that are not guaranteed by collateral Mortgages and car loans are considered secured because the lender can repossess the house or car (collateral) if the debt is not paid

Methods to Eliminate Debt Debt reduction schedule Debt consolidation Credit counseling One of the worst aspects of excessive debt is feeling trapped, like there is no way out; but there are options. A debt reduction schedule is designed to take all current debt information and project a possible solution to eliminate debts using a preplanned schedule instead of merely making the same current payments. Debt consolidation loans are designed to take all or most of an individual’s current debt and combine it into a single new loan. Credit counseling services can assist in providing workable solutions for financial problems when you need more structured assistance.

Debt Reduction Schedule Prioritize existing debt Highest to lowest balance Highest to lowest interest rate Lowest to highest balance When you have identified you debt and determined how much you can allocate to it, prioritize which debt needs to be paid first. As shown on the slide, there are various ways that you can prioritize your existing debt.

FCEF Command Debt Terminator There are many tools available to help you calculate how long it will take to fully pay off your debt. The First Command Educational Foundation website (www.fcef.com) has a very handy Debt Reduction Calculator you can use. Go to the FCEF.com Financial Tools and Calculators page, and scroll down to Command Debt Terminator Debt Reduction Calculator. (www.firstcommand.org/mfr/startPage.do) Click on the link to open the calculator. www.firstcommand.org/mfr/startPage.do

Debt Reduction Calculator Command Debt Terminator A free tool you can use! The “Command Debt Terminator” is a free debt reduction calculator that does not require a login or ask for personal information. Based on the amount of debt you currently have and the order you choose to pay off the debt (i.e. highest balance first, highest interest rate, lowest balance first), the Command Debt Terminator will calculate the exact date of payoff and the total interest paid. The Debt Terminator will also show how quickly you can reduce your debt by adding additional money to your monthly payments. Because this calculator does not require you to log in, it does not store your information, so you must print your debt schedule before closing it out. www.firstcommand.org/mfr/startPage.do No login required or personal information retained

Debt Consolidation (Loan) Goals Lower overall interest rate Lower total payment CAUTION! It requires discipline and commitment Make payments Save the difference Avoid new debt! A debt consolidation loan is designed to take all or most of an individual’s current debt and combine it into a single new loan. How does it work? A consolidation loan is found that has a lower overall interest rate than the combined existing debts. The lower rate and the single payment make consolidation loans appealing. They may result in lower overall payments and less interest paid on the loan. Banks and credit unions typically have lower interest rates than credit cards–sometimes much lower. Therefore, it may be an option to get a new loan from a bank or credit union, pay off the credit cards, and save. A debt consolidation loan also requires a change in behavior and a commitment. Success assumes that you will make the payments on the new loan on time, put the difference in payments into savings, and avoid running up new debt.

Credit Counseling Non-profit organizations Confidential Professional Alternative to bankruptcy Ensures payments made on schedule Demonstrates good-faith effort to pay debts If you are considering using a credit counseling service, do some research. An ideal service will offer confidential and professional debt counseling. They will focus on helping people currently experiencing financial difficulties or who anticipate future problems. These programs should serve as an alternative to bankruptcy. Under these programs, the customer often agrees to turn over his paycheck to the credit counselors, who then ensure that the payments are made on schedule. They will also ensure that the consumer receives financial education that provides tools for behavioral change. Credit counseling shows a “good faith” effort to creditors because the debtor has taken proactive steps to ensure that the debt is repaid. A nonprofit credit counseling service can provide workable solutions for financial problems. On the other hand, there are companies that claim to offer credit counseling services, but actually do nothing more than collect fees from debtors in exchange for negotiating an easy monthly payment debt reduction plan. These companies are often connected with other companies that offer debt consolidation loans and do not provide counseling services at all. Be sure the counseling service you choose is legitimate.

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