1. Budget and Debt 101 Presented by Michele Jersak
Counselor and GPS LifePlan Program
Adapted from presentation by Kim Woodbury, Underrepresented Student Program - Century College
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2. Managing Credit and Debt
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3. Basic Types of Credit Service credit Loans Installment credit
Credit cards
There are four basic types of credit. By understanding how each works, you will be able to get the most for your money and avoid paying unnecessary charges.
Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. You often have to pay a deposit, and you may pay a late charge if your payment is not on time.
Loans let you borrow cash. Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount you borrowed and the finance charges are paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. You usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item you purchase may be used as security for the loan.
Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan--if you pay for the use of it in full at the end of each month.
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4. Credit Card Advantages
Emergencies/Back-up
Flexibility and Convenience
Protection against theft
Helps with money management
Helps build credit
The Case for Credit Cards
Today it’s hard to live without credit. Reasons people use credit cards include:
1. It’s a safety net. Having a credit card helps many of us handle emergencies.
2. It’s flexible. Credit cards may be used almost everywhere in the world, and sometimes seem more welcome
than a personal check, or even cash.
3. It offers protections against theft. If a card is lost or stolen, federal law limits your liability.
4. It’s leverage. Chargeback protections are helpful if you are not successful in resolving a complaint about
faulty merchandise or poor service. You can tell your credit card issuer that you refuse to pay for a service or
product that disappointed you.
5. It’s the way of the world. Credit cards guarantee reservations for hotels and rental cars and let you purchase
items by phone or over the Internet.
6. It’s convenient. It’s easier to carry one or two credit cards than a lot of cash. This is especially true when
traveling.
7. It can help with money management. You can use your monthly credit card statements to help you budget
and track expenses. Also, if you see an item on sale but lack the cash, you can take advantage of a sale price
by using credit (this benefit quickly fades if you pay interest or other fees on your credit card debt).
8. It can help you get more credit. Before granting you more credit, credit issuers like to see that you have
managed money well in the past. If you have, and your credit report reflects that you have, it will be easier to
qualify for a loan or a new credit card.

5. Credit Card Disadvantages
Costs involved
May encourage you to overspend
Rewards impulse buying
Ties up your future income
There are Disadvantages, Too
So, what’s to dispute? Credit looks easy! Charge it now, pay for it later – and just make one easy payment at the
end of the month. But if you talk to people who use credit, you’ll find that there are drawbacks. Some credit card
users find they’ve spent too much money on too many things. Some can’t pay all their credit card bills – or can’t
pay their bills on time. And, those who have trouble paying back their debts may find they can’t borrow money
when they want to make a really important purchase – like a house or car. Other disadvantages to using credit
include:
1. It almost always costs money. Credit card issuers charge many different fees, and interest payments can
really increase the true cost of your purchases.
2. It can seem too easy. Credit may encourage you to overspend.
3. It rewards the impulse for instant gratification. Credit may discourage you from comparison shopping or
bargain hunting, or delaying a purchase until your finances improve.
4. It can ruin your reputation. Overuse and a bad repayment record can hurt your ability to get credit in the
future.
5. It ties up your future income. If you have debts to repay, today’s income is paying for yesterday’s bills.

6. Understanding Your Credit Report
Personal Information
Public Records
Credit Account Information
Inquiries
1. Personal Information: Includes previous addresses, contact information, spouses name, date of birth, and drivers license #.
2. Public Records: Includes tax liens, bankruptcies, foreclosures, and judgements.
3. Credit Account Information: About all of your accounts including credit cards, loans with originating amounts, student loans, and mortgages.
4. Inquiries: List of everyone whose ever asked to see your credit report including yourself.

7. Understanding Your Credit Score
FICO = Fair Isaac Co.
300 (low)
800 (high)
Determines:
Interest you pay
Amount you can borrow
Spending limits
Cost of insurance
Get your credit report at:
Credit score is how you spend and pay back money.

8. Assessing Your Debt Do I pay my bills late?
Do I only make minimum payments on my credit card(s)?
Am I close to maxing out my credit card limit?
Do I worry about money all the time?
Have I ever needed to borrow money to pay my bills?
Are creditors calling me?
Do I pay my bills late?
Do I only make minimum payments on my credit card(s)?
Am I close to maxing out my credit card limit?
Do I worry about money all the time?
Have I ever needed to borrow money to pay my bills?
Are creditors calling me?

9. Paying Off Your Debt
Order your debts from highest interest rate to lowest
Pay the minimum to all debts every month (except one on top)
Send all extra available money to highest interest rate card
Repeat ever month
The simple calculation for the Debt Avalanche requires only the interest rates for each debt account. This assumes that all debt accounts have the same tax liability, but if that’s not the case, determine your interest rate after taxes for this calculation.
Step 1. Order your debts from highest interest rate to lowest. You may find credit cards at the top of the list. It’s typical to see interest rates from 10% to 20% or more. Credit cards offered by stores often have the highest interest rates, so you might find these at the very top. Watch out for promotional rates ending, which they may do on the date promised when you enrolled, or earlier. Card issuers also re-evaluate their customers every so often, and will not think twice about raising your rates midstream. Note that if your credit improves, they will not magically lower your rates. While lenders will notify you if they intend to raise your rates, you may have missed the notice.
Your mortgage and home equity loan may be the next debts in line. It’s important for your list to capture every debt for which you make a monthly payment. Student loans may be the last on the list, particularly if you qualify for tax credits. The Debt Avalanche formula won’t work properly if it covers only a portion of your debt, so consider all accounts.
Order your list from the highest interest rate (after tax) to the lowest. You may have noticed we didn’t factor in your account balances in the above formula. That is because your individual account balances are irrelevant. The issue solved by the Debt Avalanche is the best way to pay off your total debt with all available funds.
Step 2. Pay the minimum to all debts every month. If you’re writing down your list, or using a spreadsheet like Excel, add a column next to each debt to list its minimum monthly payment. This is the amount you will pay towards each debt, except for the one account listed at the top of the list.
Another column should list the payment due date if it is relatively static from month to month. For example, my credit card payment is due on the last date of almost every month, so I would write “30.” This would indicate to me the last date of every month. Your payments should always arrive before the due date. In fact, in some cases, you can reduce your total interest paid by paying weeks in advance of your due date.
Step 3. To your debt with the highest interest, send all extra available cash. If you have an emergency fund, this step is simple. Since it’s unlikely that you can earn more in savings than you can “earn” (reclaim) by paying off your debt, all your unused income after paying expenses (necessary and discretionary as you see fit) should be dedicated towards the debt account with the highest interest rate.
Step 4. Repeat every month. You cover all your bases by ensuring every creditor receives the minimum payment, but you hone in on only your debt with the highest interest. Once a debt account has been eliminated — and it may not be the account at the top of the list if other balances are smaller — remove it from the list and re-order if interest rates have changed.
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10. Creating a Budget

11. Budgets have a bad name
Having a budget doesn't mean cutting out all the fun
A sensible budget leaves room for “fun” spending but allows you to control your money better
Interactive Budget Tools

12. Where does your money go?
For at least one month track all expenses
Get a small spiral notebook or worksheet
Keep all receipts
Allows you to see where your money goes
Little things add up
Pick a money day
Balance checkbook
Look at your budget and see if you are on track

14. Priorities
After you have kept track of your expenses for a month, organize!
Organize everything in an excel spread sheet
Determine what you really need
Espresso everyday?
Do you spend 5 extra dollars every time you go in to pay for gas?

16. Determine your goals
Studies have proven goals that are written down have a better chance of success than those just talked or thought about
Pay off credit card, save for vacation pay off car loan, start an investment fund…
Have a one year financial goal
Have a five year financial goal

18. Pay yourself first
No matter how small, always have an amount set aside for savings
Experts recommend 2-3 months of salary
It’s ok if you don’t have it now- make it one of your goals!

19. Write down your goals!

20. Income Pay check from regular job Student Loans Child support Etc.
Take home
Student Loans
Child support
Etc.

21. Expenses List your expenses Incidentals All your bills Gas Food
Entertainment

22. Balance Income minus expenses Don’t be discouraged
Many people are spending more than they make, with a budget you can better control where your money goes

23. references http://add.about.com/od/adultadd/a/budget.htm