Credit Cards Heaven or Hell?

Would you borrow money from these guys… If you wanted to buy a new Mercedes-Benz? If you wanted to buy a new Mercedes-Benz? Why or why not? Why or why not? Creditors are like the mafia: Creditors are like the mafia: Creditors are like the mafia Creditors are like the mafia They expect to be paid on time They expect to be paid on time They expect to be paid on time They expect to be paid on time They punish you for not paying up They punish you for not paying up They punish you for not paying up They punish you for not paying up

American Express

Can you recognize the slogan? Long Live Dreams. Do More. It pays to _____. Wherever it takes you, the future takes _____. Don't Leave Home Without It. There are some things money can't buy. For everything else there's _____. It's Everywhere You Want To Be. Could be cheap. Could be expensive._____. All you need.

In a Nutshell They’re nice and convenient (maybe) They’re nice and convenient (maybe) Banks (and other financial institutions) issue the cards and are the ones who are actually buying the merchandise we charge. Banks (and other financial institutions) issue the cards and are the ones who are actually buying the merchandise we charge. The banks buy the merchandise, then we have to pay back the money we “borrowed.” The banks buy the merchandise, then we have to pay back the money we “borrowed.” The interest rate: The interest rate: Average interest rate – 19% Average interest rate – 19% Popular cards – above 21% Popular cards – above 21%

Let’s do the math! Average credit card balance for an individual - $8,000 Average credit card balance for an individual - $8,000 $8,000 x 19% = $1,520 per year more than people who pay for the same items with cash and/or debit cards. $8,000 x 19% = $1,520 per year more than people who pay for the same items with cash and/or debit cards. Alternative scenario: $1,000 per year into a stock fund at 12% after 10 years = over $17, 500. Certainly, can you think of better ways to use $17, 500? Alternative scenario: $1,000 per year into a stock fund at 12% after 10 years = over $17, 500. Certainly, can you think of better ways to use $17, 500?

Don’t get carried away. Have only one credit card and keep it. Have only one credit card and keep it. 58% of Americans own three to six different credit cards 58% of Americans own three to six different credit cards Make sure that the limit does not exceed your one month’s salary. Make sure that the limit does not exceed your one month’s salary. Average student credit limit - $1,000 Average student credit limit - $1,000 Forget about those fancy platinums and golds. Forget about those fancy platinums and golds.

Don’t get carried away (Cont’d) You don’t need a department store credit card. You don’t need a department store credit card. Avoid the following: Avoid the following: Having more than one card Having more than one card A balance of more than the national average - $8,000 A balance of more than the national average - $8,000 A debt that is more than you can pay off in three months A debt that is more than you can pay off in three months

Getting out of the Trap If you get caught in the trap, there is still a way out. If you get caught in the trap, there is still a way out. Transferring balances to lower interest rate cards Transferring balances to lower interest rate cards Debt consolidation programs Debt consolidation programs Pros: Rolls all debt into one manageable payment & easier way of making payments Pros: Rolls all debt into one manageable payment & easier way of making payments Cons: High interest rates & long payment terms Cons: High interest rates & long payment terms

Avoiding the Trap Keep the credit card away as possible. Keep the credit card away as possible. Don’t use it for recurring expenses, such as gas, utilities, and groceries. Don’t use it for recurring expenses, such as gas, utilities, and groceries. Check your credit report at least every few years. Check your credit report at least every few years. Experian Credit Bureau Experian Credit Bureau TransUnion Credit Bureau TransUnion Credit Bureau EquiFax Credit Bureau EquiFax Credit Bureau

Credit Scores Fair Isaac Corporation (FICO): ≤ 550 = Awful ≤ 600 = Relatively high risk; credit problems that need to be addressed 620 = Dividing line between good and bad credit; cutoff for prime loans 640 = Pretty good ≥ 700 = Excellent 770 – 850 = Perfect credit