Credit Card Debt & Credit Scores How to Use Them, But Not Abuse Them

Students & Credit Cards n Some recent statistics (2008) u 84% of undergraduates had at least one credit card, up from 76% in u 50% of college students have four credit cards or more u The average undergraduate owes $3,173 u 21% of undergraduates had balances of between $3,000 and $7,000 u In 2008 more than 150,000 people under the age of 25 filed for bankruptcy

More Statistics n 40% said they’ve charged items knowing they didn’t have the money to pay the bill. n Only 17 % said they regularly paid off all cards each month n 1% had parents, a spouse, or other family members paying the bill. The remaining 82 % carried balances and thus incurred finance charges each month.

Introduction to Credit WS

What is an interest rate (APR?) n APR stands for annual percentage rate. This represents the percentage on your balance that you have to pay ON TOP of what you borrowed. n The lending company is charging you for the loan.

What is the average rate for a credit card?

14.71%

What is the highest interest rate currently charged on a credit card?

41% That’s almost half!!!

Credit Cards: The Basics n Fees, fees, and more fees u Annual fee for just having the credit card u Over the limit fees, charged whenever you exceed your credit limit u Late payment fees u Transaction fees u Other miscellaneous fees F read the fine print!!!

Credit Card Debt How long will it take to pay off $2,500 at an interest rate of 17% if you pay only the minimum balance due?

# Years to Pay off $2, years and total cost would be $7,733.49

Credit Cards: The Risks n Characteristics of high-risk use u Average credit card balances over $1,000 u Owning four or more credit cards u Carrying a balance each month

What is the average # of credit cards a person holds?

14

Credit Cards: The Risks n Career choices can be limited n Some are forced to file bankruptcy (1.3 million cardholders filed for bankruptcy last year) n A few students, so overwhelmed with debt, have committed suicide

Credit Card Don’ts n Don’t get one, if you do - only get one n Don’t use them for cash advances n Don’t charge more than you can pay off in a month n Don’t let banks increase your credit limit Source: USA Funds Life Skills -Module 1

Credit Card Do’s n Limit the number of cards you have n Use a debit card vs. a credit card n Use a card that has no annual fee and lower interest rates n Know all of your card’s hidden fees n Always pay more than the minimum amount each month n Pay on time, all the time.

Credit Card ABC’s A credit card is helpful for emergencies, but emergencies rarely happen at the mall! A credit card is helpful for emergencies, but emergencies rarely happen at the mall! B uying on SALE, is still SPENDING, not SAVING! B uying on SALE, is still SPENDING, not SAVING! C redit card debt is not an investment, but it does reduce your ability to invest! C redit card debt is not an investment, but it does reduce your ability to invest! D ebt from credit cards can make it more difficult to achieve your financial goals. D ebt from credit cards can make it more difficult to achieve your financial goals.

Credit Worthiness n Before creditors lend money, they need to be assured that the funds will be repaid. u In other words, is the prospective borrower creditworthy? n Fill out the 3 C’s of Credit Web using the book

Common Reasons for Denying Credit n Too little time in current job or at current residence n Too much outstanding debt n Unreasonable purpose for requesting credit n Cosigner cannot take on additional debt liability n Errors on applicant’s credit report n Strict creditor’s standards

Improving Poor Credit n Face up to the problem u Work with creditors to maintain payment schedule n Consider consolidating debts u Make a single payment rather than several n Contact a credit counseling organization u = National Foundation for Credit Counseling n Don’t expect miracles u It takes time and patience to fix a poor credit rating

Credit Score & Report n Complete the worksheet Credit report using the books

Checking Your Report Make sure info in credit report is correct Make sure info in credit report is correct Review at least once a year Review at least once a year – If you check too often, it reduces your credit score Errors: credit reporting agency must investigate and respond to you in 30 days Errors: credit reporting agency must investigate and respond to you in 30 days Credit reporting agencies: Credit reporting agencies: – Equifax – Experian – TransUnion

How to Establish Credit n Open an individual savings and checking account in your name. u Over time your transactions demonstrate responsible money handling n Apply for a loan (Careful for costs and interest) n Apply for department store/gasoline credit cards (Easier to obtain, but choose carefully) n Patience (It takes time to establish credit) n Start slow (Be cautious, keep track of overall debt and pay on time!)

What’s In Your Credit Report?! n Identifying Information u Name, address, SS #, date of birth, employment info n Trade Lines u Your credit accounts. Lenders report on each account (bankcard, auto loan, mortgage) n Inquiries u Who, in the past 2 years, has inquires about your credit report. Report lists “Voluntary” (you) & “Involuntary” (lenders) inquiries n Public Record & Collection Items u Public record info from state and county

What factors affect your score?

What Is NOT In Your Score n Race, color, religion, national origin, sex and marital status n Age n Salary, occupation, title, employer, date employed or employment history n Where you live n Interest rates for particular accounts/credit cards n Child/family support obligations or rental agreements

How Credit Scoring Helps You n People can get loans faster n Credit decisions are fairer n Credit “mistakes” count for less n More credit is available n Credit rates are lower overall.

To Maximize Your Score... n Don’t procrastinate – pay all your bills on time n Avoid owing more than 30% of your available revolving credit n “Less is more” – keep your revolving debt as low as possible n “Older is better” – older accounts score more favorably n Minimize the opening of new revolving accounts

What is the true cost of paying the “minimum” n Suppose: u Credit card balance = $8,000 u Interest rate (APR) = 18% u Minimum payment = 2% of balance n How long would it take to pay it off? u 647 months / 54 years u Total interest paid = $22,931 u This assumes you STOP using the credit cards! It will take even longer if you don’t stop! It will take even longer if you don’t stop!