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Using CreditUsing Credit

Buy Now Pay Later

What Is Credit?What Is Credit?

• Average number of credit obligations

• Average number of credit cards

• Average available credit

Credit StatisticsCredit Statistics

www.myfico.com

Percent of consumers who carry more than $10,000 innon-mortgage debt

Credit UseCredit Use

www.myfico.com

Basic TermsBasic Terms

• Consumer Credit

• Credit – Goods, services, money received for promise

to pay later– Debt used by consumers – Expenditures other than home mortgages

Credit RuleCredit Rule

Credit Payments = no more than 15-20% of take-home pay

or

no more than 1/3 of spendable income

Take-Home Pay – Basic Needs

Spendable Income

Installment CreditInstallment Credit

• Pay for items in regular payments

• Interest varies with item

• Usually requires down payment

• Seller owns untilall payments made

Revolving CreditRevolving Credit

• Interest can be 1 – 2% monthly

• Required payment varies by card

• May pay in full or make minimum payment

• No finance charge if bill

paid in full

Credit AgreementCredit Agreement

• Annual percentage rate (APR)

• Finance charge (in dollars)

• Service charges, loan fees, life insurance premiums & interest

• Date for payment with no charge

• Balloon payments

Credit Cost VariablesCredit Cost Variables

• Interest rate

• Length of loan

• Amount of loan

Cost of TimeCost of TimeLoan = $500

Number ofMonths

Payment /Month

TotalInterest

TotalPayment

12 $44.89 $38.68 $538.68

18 $30.96 $57.28 $557.28

24 $24.01 $76.24 $576.24

30 $19.85 $95.50 $595.50

Cost of CreditCost of Credit

Simple InterestInterest Paid on Outstanding Balance Each Month

Pre-computed InterestInterest Is Calculated on Entire Loan Amount

Up Front

Simple vs. Pre-ComputedSimple vs. Pre-Computed

1 2 3 4 5 6 7 8 9 10 11 12

Simple Interest: Total Cost = $54.958.33

7.66

7.00

6.32

5.64

4.96

4.27

3.57

2.87

2.16

1.45

0.72

Pre-Computed Interest: Total Cost = $10015.39

14.11

12.83

11.54

10.26

8.97

7.69

6.41

5.12

3.84

2.56

1.28

Credit Card InterestCredit Card Interest

Average Daily Balance (ADB) =

What You Owe Each Day___________________

# Days in Month

ADB ($400) x

Monthly Periodic Interest Rate (1.5%) =

Finance Charge for Month ($6.00)

Other ConsiderationsOther Considerations

• Average daily balance, including new purchases, or

• Average daily balance, excluding new purchases (better)

• Two-cycle billing method

Reducing Credit CostsReducing Credit Costs

• Find the best price

• Make large down payment

• Shop for low APR

• Pay back as soon as you can

• Pay bills on time

• Pay extra with each payment

• Use only when needed

Credit Card FeesCredit Card Fees

• Annual

• Late Payment

• Over Credit Limit

• Cash Advance

Cash AdvancesCash Advances

• Interest begins immediately

• Service fee applies

Smart Card HabitsSmart Card Habits

• Develop system for paying

• Save receipts

• Pay card in full

• Avoid “no minimum payment due” offers

• Avoid “endless” repayment periods

Loan Amount = $1,000• Interest rate: 19.8%

• Monthly payment: 3% of balance not less than $15

• Years to pay: 8.3

Finance ChargesFinance Charges

Loan ComparisonsLoan Comparisons

Loan Amount = $1,000

Loan A Loan B Loan C

Interest Rate 8.5% 14% 19.8%

Interest Paid 1st Year

$75.06 $126.72 $183.95

Years to Pay Off 5.75 6.7 8.3

Applying for CreditApplying for Credit

1. Fill out application

2. Lender reviews and scores• Capital• Character• Capacity

3. Approval or denial

Credit BureausCredit Bureaus

• TransUnion(877) 322–8228

www.transunion.com

• Equifax(800) 685–1111

www.equifax.com

• Experian(888) 397–3742

www.experian.com

Credit BureausCredit Bureaus

• Information varies• Scoring varies• Charge for

scores and reports

Free ReportsFree Reports

• Once a year

• Do not include score

• www.annualcreditreport.com(877) 322–8228

Credit Report RecordsCredit Report Records

• Personal information

• Credit history

• Inquiries

• Public records

Personal InformationPersonal Information

• Name

• Social Security Number

• Addresses

• Birth date

• Employment history

Credit HistoryCredit History

• Your credit accounts(Delinquent accounts removed after 7 years)

• Loan and credit limits

• Loan balance

• Available credit

Credit HistoryCredit History

• Payment terms

• Payment history• Closed or inactive

accounts(Removed between 7 and 10 years)

InquiriesInquiries

• Landlords

• Lenders

• Employers

• Insurers

Public InformationPublic Information

• Bankruptcies (Removed after 10 years)

• Overdue child support payments

• Liens

Not IncludedNot Included

• Checking and saving accounts

• Marital status

• Gender

• Ethnicity

• Race

• Medical information

• Criminal record

• Religion

• Political affiliation

FICO ScoreFICO Score

• Ranges between 350 and 850

• Higher the better

• Varies by reporting bureau

• Based on Fair Isaac Corp. (FICO)www.myFICO.com

(800) 319–4433

FICO ScoreFICO Score

• Creditworthiness determined by– Credit history– Payment history– Outstanding credit– Existing accounts– Inquiries

FICO ScoreFICO Score

Payment History

Amounts Owed

Length of History

New Credit

Types of Credit

10%

35%10%

15%

30%

www.myfico.com

FICO ScoreFICO Score

FICO Score APRMonthly Payment

720 – 850 7.213% $619

690 – 719 8.120% $628

660 – 689 9.865% $644

620 – 659 11.799% $662

590 – 619 15.226% $696

500 – 589 16.092% $704

$20,000 Automobile Loan (36 months)

Aug. 8, 2007 / www.myfico.com

FICO ScoreFICO Score

FICO Score APRMonthly Payment

760 – 850 6.228% $1,843

700 – 759 6.450% $1,886

660 – 699 6.735% $1,943

620 – 659 7.548% $2,107

580 – 619 9.041% $2,423

500 – 579 9.661% $2,558

$300,000 Mortgage (30-year fixed)

Aug. 8, 2007 / www.myfico.com

Applying for a LoanApplying for a Loan

• Review all 3 credit reports beforehand

• Correct errors

• Contact reputable lender

• Compare several offers

If Denied CreditIf Denied Credit

• Ask for specifics as to why

• Reapply after resolving credit issue (e.g., pay down your debts)

• Correct false information on credit report

Debt ManagementDebt Management

1. Find out where you stand• Income• Expenses• Bills

2. Find out• Who you owe• How much you owe

Debt ManagementDebt Management

3. Decide how much you can pay back

4. Consider• Secured status of debt• Legal action that has been taken• Interest being paid• What happens if you don’t pay

Debt ManagementDebt Management

5. Set up a plan for paying back your debts

• Reduce expenses• Sell assets• Increase family income• Loan consolidation, second mortgages,

refinancing

Debt ManagementDebt Management

6. Discuss plan with creditors• Why you are behind• Your current income• Other obligations• How you will catch up

7. Stick with plan until all debts repaid

8. Revisit plan

Final ThoughtsFinal Thoughts

Pay Bills when Due!