Personal Finance: The Appropriate Use of Credit and the Fundamentals of Investing Dr. Thomas Payne Dunagan Chair of Excellence in Banking Professor of Finance Tennessee Governor’s School for the Agricultural Sciences June 2004

College Students and Credit Cards 83% of undergraduate students have at least one credit card; a 24% increase since The average credit card balance is approximately $2,500. The median credit card balance is $1,770; a 43% increase above the median in % of undergraduates who have cards, have high-level balances between $3,000 and $7,000; a 61% increase over the 2000 population. Graduating students have an average of $20,402 in combined education loan and credit card balances. Students double their average credit card debt - and triple the number of credit cards in their wallets - from the time they arrive on campus until graduation. Source: Nellie Mae (2002)

College Students and Credit Cards Credit cards can be a good tool to learn about financial responsibility and build a solid credit history- as long as students are aware of the pitfalls. Someone once said, “ We have a rule of thumb for people who say they need a card for emergencies, if you can eat it, drink it or wear it, then it’s not an emergency.” A simple equation to remember is: Credit cards + immature spending = bad debt Finally, a word of caution about debit cards, identity theft, and electronic fraud.

So, What’s the Big Deal?

Tennessee Bankruptcy Rates

Credit Scoring How Credit Scoring Works Along with the credit report, lenders can also buy a credit score based on the information in the report. The score evaluates many types of information that are on your credit report at that agency. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score estimates your expected credit risk. In order for a FICO® score to be calculated on your credit report, the report must contain at least one account which has been open for six months or greater. In addition, the report must contain at least one account that has been updated in the past six months. This ensures that there is enough information — and enough recent information — in your report on which to base a score. Source: FairIsaac

Credit Reports and Scoring So, what's in a FICO or Beacon (reported by Equifax) Score? 1) Payment History: Approximately 35% of the score 2) Amounts Owed: About 30% of your score Note: Actual balance versus credit limit 80% = high risk 3) Length of Credit History: About 15% of your score 4) New Credit: About 10% of your score 5) Types of Credit in Use: About 10% of your score Note: Number of cards…1 is better than 0; 2 is best; 3 O.K. …. 7 = high risk

How to Stay Out of Credit Trouble Symptoms of trouble - Do You… Pay bills late? Pay only the minimum payment on credit cards? Take cash advance on cards or elsewhere (check overdraft protection)? Also, note that you should never use the quick cash or “check cashing” services) “Max-out” on credit cards? Always run out of cash before the next paycheck? Borrow from one lender to pay another? If so you should: Stop charging and store your credit cards Find areas to cut from your monthly expenses Work out a realistic budget based on your income Talk to your lenders if you are in too far over your head Remember that bankruptcy is a last resort as it can cause problems for many years to come (you will have trouble getting any credit for at least 10 years in the future.

Some Good Resources

Some Basics of Interest Rates and Investing Stocks and Bonds (Wall Street Journal Examples) The Importance of Interest Rates in the Economy Why Interest Rates Matter The Role of the Federal Reserve Inflation, Productivity, Economic Growth and Stability The Concept (and mathematics) of Present Value Using your BA II Plus to calculate loan payments