8 Benchmarks for Borrowing & Credit Card Act of 2009 Financial Planning for Women August 2009 Jean Lown

September 9 FPW Don’t give your money to Bernie… outsmarting investment fraud –Protect yourself, your parents, your kids 2

8 Borrowing Benchmarks from Consumer Reports Severe recession creates debt problems Responsible borrowers lost jobs Someone you know needs this help 3

Warning Signs of Excess Debt Relying on credit cards for daily purchases Using home equity line of credit to extend purchasing power Paying minimum on credit card bills Using cash advances to keep afloat Losing sleep over debts 4

1. 20% Add up: –Monthly car payment(s) (loans & leases) –Average new charges on credit cards –Other non-mortgage debt payments Total should be not > 20% of gross monthly income 5

2. 28% Monthly mortgage + property taxes & insurance –Should not > 28% of gross monthly income 6

% Total monthly debt (mortgage + non- mortgage) should not > 36% of gross monthly income 36-48% is really scary > 48%: seek help 7

4. 80% First mortgage + any second mortgage or home equity line of credit should not > 80% of property’s value A lower debt-to-equity ratio is better 8

5. 6 points Low teaser rates on adjustable rate mortgages (ARMs) Most ARMs have 6% point cap If considering ARM, add 6% to the teaser rate and calculate the monthly payments –Worst-case scenario –If (with taxes & insurance) > 28% of gross monthly income: don’t do it! 9

6. 6 months Need 3-6 months of living expenses in reserve for emergencies –How secure is your job? –Spouse or partner’s income? –How quickly could you find a new job? –Would you have to sell house and move for new job? 10

7. 36 months Don’t take out vehicle loan for > 3 years Longer terms: upside down –Owe more than vehicle is worth –Buy used instead of new –“Cars depreciate faster than they roll downhill.” (bankruptcy researchers Sullivan, Warren & Westbrook) 11

8. Updated FICO score info FICO Credit Score needs to be higher to get the best rates. Median (mid point) FICO® score is needed for lowest rates – 12

How to Dig Out Assess your finances –Add up debts –Use PowerPay to develop a plan to repay Stop borrowing –Use cash or debit card for daily expenses –Use 1 credit card & pay in full each month Keep 1 card in reserve… in case of theft or fraud Call creditors before they call you. 13

Credit Card Act of 2009 Limits interest rate increases & fees –45 day notice of rate hike Bans: Universal default, double-cycle billing, retroactive rate hikes Info on how long to repay w/ min. payments Payment of > min. must go to highest % balance Promo rates must last at least 6 months Prohibits raising rates in 1 st year (unless variable rate) Bills must be mailed 21 days before due Limits cards to applicants < 21 years old 14

Banks’ Response to New Law Tightening standards on new applicants –Requiring more info on $ status –Rejecting more applicants –Offering lower credit limits 15

Impact on Current Cardholders Raising rates and fees Switching from fixed to variable rates Reducing credit lines Closing accounts –Good to have 2 cards Reducing teaser rate offers 16

Future Credit Card Directions “Era of easy credit is over.” WSJ HH debt as % of disposable income: 130% Move towards: –No-fee, no frills cards –Premium rewards cards with annual fees Harder & costlier to get credit –Is this a good or bad effect? 17

Check your Credit Report Definition: A continuing record of a borrower’s debt commitments and how well they have been honored. 18

Free Annual Credit Report Obtain a free credit report once per year per credit bureau –Experian, TransUnion, and Equifax Ensure your report is accurate –3 times per year: August: Experian December: TransUnion April: Equifax

Estimate your FICO Score Range: – score-fico-calculator.aspxhttp:// score-fico-calculator.aspx About FICO Scores: –(click on “About FICO Scores” near middle of page) 20

Housing & Financial Counseling Center 493 N. 700 E. Logan at bottom of Old Main Hill USU Family Life Center

Power Pay Debt Reduction Software –Stop borrowing until debts are paid –Make power payments As one debt is paid, use that $ to pay another debt rather than spending it. –Get out of debt more quickly –Pay less interest

Questions? Comments? Don’t forget to respond to regarding the FPW newsletter Check out the updated FPW website Stay tuned for ed FPW survey September 9 FPW: Outsmarting investment fraud 23

Managing Debt: From Credit Cards to Foreclosures Managing Debt: From Credit Cards to Foreclosures 50-minute Webcast presented by Marilyn C. Dimitroff, CFP ®Marilyn C. Dimitroff, CFP ® wid= http://register.webcastgroup.com/event/? wid= Please feel free to leave as needed URL is in the August newsletter 24