Credit Management 1

Two – Day Seminar Day One Establishing & Maintaining Credit Credit Scoring Day Two Loan Agreement Terms & Conditions Managing Credit 2

Credit is Important Credit gives you the ability to acquire goods and services today, but pay later. When you borrow you are making a promise to repay, usually including interest. 3

4 The Three C’s Capacity Your ability to pay your debts. Character Where credit is concerned, a person’s reputation for paying bills when due. This is also referred to as your willingness and ability to pay—or credit worthiness. Collateral An asset pledged to the creditor until the credit obligation is paid. Example: If you own your home (or another car), it may be used as collateral to secure a car loan.

5 Credit Definitions Secured Credit Unsecured Credit Credit Lines Alternative Credit Installment Credit Revolving Credit Collateral

ProsCons Convenient Cover emergencies Build assets Build future credit Tempted to spend excessively May limit ability to save and invest Increases cost of item or service due to interest charges Constant drainage of financial resources 6 Pros vs. Cons of Credit

Credit Card Charge s Car Loan Stude nt Loans Consum er Loans Mortgage Loans Future Income Spent or Committed Credit Formula 7

Debt Tracker Item Bought/ Purchased Amount Owed Payment Amount Interest Rate Term of Loan Total Interest Paid Total Cost of Loan Total$ %0 8

Debt-to-Assets (liabilities divided by assets) The higher the percentage, the greater the level of risk you have. Debt-to-Limit (divide outstanding credit card balance by credit card limit) The percentage should be 30%, but no more than 50% of the credit card limit. Debt-to-Income (divide total monthly payments by net monthly income) A high debt-to-income ratio signals to lenders that you may not be able to make payments on the loan that you are seeking. Should not exceed 20% of net monthly income. Financial Ratios 9

Credit Card Management 10

11 Types of Credit Cards Bank Cards: Issued by banks, savings and loan associations, and credit unions. Charge Cards: “Travel and Entertainment” cards. Charges generally have to be paid at the end of the month.

12 Types of Credit Cards Retail Credit Cards: Issued by businesses such as department stores, gasoline companies and airlines. Credit is limited to goods or services offered by the card issuer. Secured Credit Cards: A credit card secured by a deposit in account held by the card issuer. Affinity Cards: Affinity cards issued jointly by a lending institution and some other organization such as charity or college alumni associations.

Credit Card Management An open-ended card that allows you to borrow money up to an established limit Carry-over an unpaid balance No fixed-time to repay Allows a minimum payment each month Entering into a loan agreement to repay lender Giving up the use of future money A Credit Card: 13

How Finance Charges are Calculated Annual Percentage Rate (APR): This os the cost of credit, expressed as a yearly rate. Periodic Rate: This is the interest rate used to figure the finance charge on your balance. Annual Fee: Amount you pay to be a cardholder. Similar to a membership fee. Grace Period: This is the number of days you have to pay your bill before finance charges begin to add up. Finance Charges: Most lenders calculate finance charges using an average daily account balance. Look for offers that use an adjustable balance that subtracts your payment from your beginning balance. 14

Debt-to-Limit Ratio Outstanding Credit Card Balance / Credit Card Loan Limit $300 / $1,000 = 30% $450 / $1,000 = 45% 15

Credit Card Payoff Schedule for $1,500 Debt Assumes 13.8% Interest Rate and 4% Minimum Monthly Payment Assumptions: No late fees or new purchases; monthly payments must be a minimum of $ Minimum 13.8 years; minimum+$10, 4.5 years; and $100, 1.5 years. 16

$10,000 $5,000 $2,500 $1,700 $400 $16 + $25 = $41 $ = $109 $100 + $109 = $209 $200 + $209 = $409 $400 + $409 = $809 Debt Liquidation Approach (When you can’t consolidate) 17

Some Sources to Reduce Debts Income tax refunds Gifts Increase wages or salary Inheritances Sale of personal assets 18

Questions to Ask Yourself When Making a Buying Decision Do I need it? Am I buying it because my friend bought it? Am I buying the item to impress others? Can I afford it? Am I good with my personal finances or am I certain that the credit card payments will fit within my current income? 19

Questions to Ask Yourself When Making a Buying Decision Do I pay my bills or debt payments on time each month? Do I pay off the balance each month? Will the useful life or my interest in the purchased product exceed the payment period? 20

Danger Signs of Financial Trouble Pay only monthly minimums or miss payments? Have you reached the credit limit on your credit cards? Depend on overtime or moonlighting to cover monthly bills? Depend on parents to pay your credit card bill? Borrow from friends and relatives to cover basic expenses? If you answered “yes” to any of these questions, you may be heading for financial trouble. 21

Danger Signs of Financial Trouble Find it impossible to save money or immediately withdraw money from savings to cover bills? Use credit card cash advances to pay for daily living expenses? Hope that checks you have written don’t clear the bank before you receive an allowance or before payday? If you answered “yes” to any of these questions, you may be heading for financial trouble. 22

Contact Us… Society for Financial Education and Professional Development, Inc Montgomery Street, Suite 400 Alexandria, Virginia Useful Websites