DEBT MANAGEMENT Melissa Wise First Citizens National Bank

DEBT MANAGEMENT TOPICS  Credit  Credit Scores  Using Credit Wisely  Credit Cards  Debt to Income Ratio  Budgets  Debt Management Programs

 According to Citibank, “There are presently 5 to 7 million Americans who are financially overextended.”

WHAT IS CREDIT?  Credit is when goods, services, or money is received in exchange for a promise to pay a definite sum of money at a future date.

CREDIT  ADVANTAGES Convenient Convenient Useful for emergencies Useful for emergencies Often required to hold a reservation Often required to hold a reservation Ability to purchase expensive items sooner Ability to purchase expensive items sooner Eliminates the need to carry large amounts of cash Eliminates the need to carry large amounts of cash  DISADVANTAGES Paying interest Additional fees are common Temptation to overspend Can cause large amounts of debt Identity theft

CREDIT SCORES  What is a credit score or FICO® score? A prediction of how likely you are to pay your bills A prediction of how likely you are to pay your bills A number between 300 and 850 derived from many different factors A number between 300 and 850 derived from many different factors A number that drives the approval of credit extensions and the interest rate you pay on those extensions A number that drives the approval of credit extensions and the interest rate you pay on those extensions

CREDIT SCORE KEY FACTORS  The FICO ® scoring model looks at more than 20 factors in five categories. How you pay your bills (35%) How you pay your bills (35%) Amount of money you owe and the amount of available credit (30%) Amount of money you owe and the amount of available credit (30%) Length of credit history (15%) Length of credit history (15%) Mix of credit (10%) Mix of credit (10%) New credit applications (10%) New credit applications (10%)

RANGE OF CREDIT SCORES  The following are some basic guidelines for interpreting a credit score: 620 and below – Poor credit 620 and below – Poor credit – Fair credit – Fair credit – Good credit – Good credit – Good to excellent credit – Good to excellent credit – Excellent credit – Excellent credit 801 and above – Nearly perfect credit 801 and above – Nearly perfect credit

 Fair Isaac reports that the American public’s credit scores break out along these lines: CREDIT SCOREPERCENTAGE 499 and below2 percent percent percent percent percent percent percent 800 and above13 percent

 THINK OF YOUR CREDIT REPORT AS A SECOND RESUME! A credit report contains information about where you work, live, how you pay your bills, whether or not you have filed bankruptcy and even if you have ever been arrested or sued. You can check your credit score for free up to three times annually at

USING CREDIT WISELY For decades, society has promoted the idea of “BUY NOW, PAY LATER.” This is a good concept for some types of purchases and a bad concept for many purchases and a bad concept for many other types of purchases. other types of purchases.

USING CREDIT WISELY  Good Credit Purchases Buying a house on credit is a smart move as home values rise quickly and you can gain equity through appreciation. Buying a house on credit is a smart move as home values rise quickly and you can gain equity through appreciation. Financing an education is a good investment in the future. Your earning potential will eventually outweigh the cost of tuition, and educational loans are usually at a very low interest rate. Financing an education is a good investment in the future. Your earning potential will eventually outweigh the cost of tuition, and educational loans are usually at a very low interest rate. Buying a car can also be a good credit purchase. It is important to not get caught up in buying a car for more than you can afford. Buying a car can also be a good credit purchase. It is important to not get caught up in buying a car for more than you can afford.

USING CREDIT WISELY  Bad Credit Purchases Credit card debt and other consumer debt is the worst type of debt. Interest rates and fees on borrowing money this way will be the highest of all, mostly because there is rarely a tangible item as collateral. Credit card debt and other consumer debt is the worst type of debt. Interest rates and fees on borrowing money this way will be the highest of all, mostly because there is rarely a tangible item as collateral. Financing a car for longer than the life of the vehicle can also be an unwise credit decision. Financing a car for longer than the life of the vehicle can also be an unwise credit decision.

CREDIT CARDS  Credit cards are a great concept, but they end up bringing financial ruin to many people who do not use them properly.

TIPS WHEN USING CREDIT CARDS  Never use credit cards as extra money. Always allocate money from your current funds or monthly income in order to immediately payoff whatever you finance.  Read the fine print on the agreement to make sure you are getting the best terms available.

 American consumers ages carry an average of $5,781 in revolving debt.  This would take 11 years and 4 months to pay off assuming an average interest rate of 13% and that minimum payments are made.

A credit card is a responsibility. The choices you make now will affect how much you pay for a car, your home, and any other loans or credit cards you apply for.

DEBT TO INCOME RATIO  Debt to income ratios look at how much you owe in comparison to how much you earn.  It usually gives a good picture of your financial well being.  The lower your debt to income ratio, the more money you have to spend on things other than your monthly bills.

DEBT TO INCOME CALCULATION  Take the amount of money that goes to paying monthly obligations (loans, credit cards, rent, etc.)  Divide that amount by your gross monthly income (this is the amount before taxes are taken out) Monthly debt payment / gross monthly income = D/I

DEBT TO INCOME RATIO  Most experts recommend that no more than 28% of your gross monthly income be used to pay for your housing expenses (including mortgage or rent, taxes and insurance).  They also recommend that your total D/I be no more than 36% when paying all of your recurring debt.

 It is important to keep these D/I ratios in mind when acquiring new credit to ensure you are always an attractive credit risk to any financial institution.  Don’t find yourself being declined because you have taken on too much debt.

BUDGETS  A BUDGET HELPS YOU ORGANIZE YOUR SPENDING BY: telling you what money comes in, what money goes out, and where it goes telling you what money comes in, what money goes out, and where it goes helping you identify expenses that aren’t as important to you so you can free up money for those that are helping you identify expenses that aren’t as important to you so you can free up money for those that are showing you where some changes might be needed showing you where some changes might be needed

BUDGETING PITFALLS There are three main reasons budgets fail. 1. Negative attitude – Try not to think of a budget as a financial diet. Try to think of it as a means to an end. 2. Lack of motivation – The best motivators are generated internally. It is important to honestly believe that budgeting can help you meet your goals. 3. Unrealistic expectations – The reality is that budgeting is an endurance event. Those who stick with it through thick and thin will come out ahead financially.

TIPS FOR CREATING A BUDGET  Use a template  Add/delete categories as applicable  Plan on paying more on higher interest rate credit cards or loans  Prioritize your spending by determining wants versus needs  Have both a positive attitude and a positive ending balance  Put any annual payments into monthly payment figures

 Hypothetical budget assuming: Salary of $35,000 Salary of $35,000 Average credit card debt of $5,781 with a minimum payment of $231 Average credit card debt of $5,781 with a minimum payment of $231 Student loan debt of $18,000 with a payment of $147 Student loan debt of $18,000 with a payment of $147 Rent of $400 Rent of $400 Car payment of $315 Car payment of $315

DEBT MANAGEMENT PROGRAMS  If you do get yourself into a financial nightmare, there are ways to get back on track successfully and without ruining your credit forever.  Debt management programs, which are also known as credit counseling agencies, can save you a lot of money and years of paying on your credit cards if you choose a good one.

DEBT MANAGEMENT PROGRAMS A good debt management company is a third party who will contact your creditors to: Lower your interest rate Lower your interest rate Negotiate a payment structure with the creditor that you can afford Negotiate a payment structure with the creditor that you can afford Determine a realistic amount of time for your debt to be eliminated Determine a realistic amount of time for your debt to be eliminated

KEYS TO DEBT MANAGEMENT PROGRAMS Key factors to keep in mind when selecting a good debt management program: Your current creditors lower your interest rate and not just your payment. Your current creditors lower your interest rate and not just your payment. It is very important you continue to receive your statements to ensure no payments are past due. It is very important you continue to receive your statements to ensure no payments are past due. It is not a loan. The company collects the payment from you and allocates it to your creditors. It is not a loan. The company collects the payment from you and allocates it to your creditors.

DEBT MANAGEMENT PROGRAMS  For someone who gets into a bad financial position, these programs can be the key to getting back on track.  Most programs structure your payments to eliminate your debt in 4-5 years.  They make it so no new revolving accounts can be opened while participating in the program so once you have paid the debts off, you can have a fresh start.

 Learning to make wise decisions with your purchases, investments, and debt can be the key to your success.

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