1. Manage Debts It is more important than savings/investments!

2. US household consumer debts statistics Average credit card debt: ◦ $7,123 (all households) ◦ $15,270 (indebted households) Average mortgage debt: $149,925 Average student loan debt: $32,258 Total consumer debt: $11.36 trillion Total credit card debt: $856.9 billion Total mortgage debt: $7.93 trillion Total student loan: $1,049 billion

3. Interest payment burden Average credit card APR: 15% 30-year fixed mortgage rate: 4.25% Student loan rate: 4% -- 8.5% Auto loan rate: 4.5% These rates are historically LOW! Compare with investment returns: ◦ Average 1-year CD: 0.8% ◦ 10-year Treasury: 2.7% ◦ 10-year S&P 500 return: 7% Don’t forget inflation and tax!

4. Types of consumer debt Secured debt ◦ Protected by an asset or collateral ◦ Lien on the asset ◦ Lenders hold the deed/title until the loan has been paid in full ◦ Lenders may sell the asset to repay the loan ◦ Usually lower interest rate, longer term and larger amount ◦ Example: mortgage, home equity loan and auto loan Unsecured debt ◦ No collateral ◦ More risky ◦ 5 C – character, capacity, capital, collateral, conditions ◦ Example: credit card, student loan

5. FICO scores A numerical snapshot of the information in your credit report Used by lenders to assess your creditworthiness Scale ranges from 300 to 850 Lenders want to see a score of at least 620--the higher, the better! Three credit reporting agencies --- Equifax, TransUnion, Experian

6. FICO breaks down

7. Improve your FICO scores Maintain or improve payment habits Repay collection accounts and other outstanding debts Reduce total debt Avoid taking on new credit Keep revolving debt well under the credit limit Correct credit report errors Use different types of credit Build credit history Keep credit cards active

8. Credit Card Build credit history from credit cards Choose the right cards ◦ Convenient user: annual fee ◦ Revolving user: APR Use credit cards responsibly ◦ Pay the full amount each month ◦ No cash advance ◦ Pay on time to avoid late fees ◦ Check statements for errors/scams ◦ Report lost/stolen cards immediately ◦ Protect your information to avoid identity theft

9. Common credit mistakes Always use cash Cancel the oldest credit card Use only credit cards Inactive credit cards Use more than 50% of credit card limits Pay minimum amount only Frequent credit inquiries: ◦ hard inquiry vs. soft inquiry Never check credit reports for error

10. Student loan Unsecured debt Backed by earning potential ◦ Treat the loan as a business adventure ◦ Check earning potential to evaluate ability to repay Investment for human capital Tax return/salary can be garnished to repay the loan Cannot be discharged Student loan interests paid can be deducted (max. $2,500 limited by MAGI)

11. Average starting salary for new college graduates Category2013 Average Salary2012 Average Salary Business$55,635$51,541 Communications$43,835$42,286 Computer Science$58,547$60,038 Education$40,337$39,080 Engineering$62,062$60,639 Humanities & Social Sciences $37,791$36,824 Math & Sciences$42,731$42,355 Overall$45,327$44,259 http://www.payscale.com/college-salary-report-2014/majors-that-pay-you- back

12. Mortgage Your house is used as the collateral Homeowners receive better interest rates for other loans Interests paid are deductable (max. $1 million) Fixed mortgage vs. Adjustable-rate mortgage (ARM) ◦ Longer term  more interest payments ◦ Higher rate  more interest payments Short sale vs. foreclosure ◦ Short sale: sold by owner but needs lender approval ◦ Foreclosure: sold by lender ◦ Cause credit scores to drop by 200-300 points

13. Filling Bankruptcy Chapter 7 ◦ Liquidation/straight bankruptcy ◦ Cancel most debts ◦ Liquidate property to repay creditors ◦ Keep only exempt property ◦ Pass means test Chapter 13 ◦ Repayment plan ◦ No asset liquidation ◦ The only option if not eligible for Chapter 7 ◦ Avoid foreclosure ◦ Keep property Both can: 1.Wipe out all/some unsecured debts 2.Stop creditor harassment through “Automatic Stay”

14. Nondischargeable Debts Most taxes Child support Alimony Government or court fines/penalties Student loans Debt for personal injury caused by DUI Debt to tax-advantaged retirement plans HOA dues Attorney fees for child custody/support

15. How does bankruptcy affect your credits? A blow to credit scores Can stay on credit reports for 10 years Ineligibility for loans or credit cards for the first few years Rejection when looking for jobs Difficult to find a decent apartment Other restrictions