Tools & Techniques of Financial Planning Leimberg, Satinsky, Doyle & Jackson Credit and Debt Management.

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Tools & Techniques of Financial Planning Leimberg, Satinsky, Doyle & Jackson Credit and Debt Management

7-2 Obtaining credit  Capacity: ability to repay debt Income, other debt payments Dependents, alimony, child support  Character: will they repay debt Pay bills on time Stability: own home; job history  Collateral: Reduce risk; reduce rate Automatic payments: lower rate

7-3 Debt ratios  Debt to income= Loan and credit card payments/gross income  Does not include mortgage payments <20% acceptable  Front-end ratio=housing expenses/gross income Housing: principal, interest, property tax, insurance  Back-end ratio=housing+other monthly payments/gross income 33/39:33 front/39 back ratio  Problems: let your creditor know Develop a budget showing how you will pay

7-4 Home equity loans  Calculation of equity Loan amount: up to X% of home value – first mortgage Interest on loan up to $100,000 deductible Generally line of credit

7-5 Bankruptcy  Chapter 13: keep property Repay over 3-5 years  Chapter 7: Only keep exempt assets  Varies by state Eliminates many debts  Not alimony/child support; IRS; student loans Can’t file again for six years

7-6 Credit Reports  Credit reports Sample credit report  Contents Payment history: pay minimum? Account balances/payment amounts Public records Inquiries  Hard/soft

7-7 Credit Reports  Correcting errors Contact credit reporting agency (CRA) in writing  Include documentation CRA investigates in 30 days  Contacts source of error  If error, contacts all other CRAs  Contact users of credit report for last 6 months If not resolved, can send letter to include in report

7-8 Credit Reports  Negative items Generally: 7 years  Late payments; default, etc. Bankruptcy: 10 years Criminal record: no limit Student loans: 7 years Judgments: 7 years

7-9 Credit Scoring  FICO Includes credit report info Also:  own home; how long home, job  maxed out cards; how long had credit; credit inquiries; type of credit Range of scores  750 excellent  Freddie Mac: above 660 accepted

7-10 Credit Scoring  FICO Factors impacting score  (35%) Payment history Most recent, more weight  (30%) Outstanding debt  (15%) Length of credit history  (10%) Recent inquiries  (10%) Type of credit E-Z Payday Loans, probably not good

7-11 Identity Theft  If it happens Contact CRA  Get free copies of credit reports Send statement to be placed in file Contact police