C.A.R.E.Credit Abuse Resistance Education

A program of:

U.S. Bankruptcy Court, Western Missouri & Kansas DistrictsThe Kansas City Bankruptcy Bar Association

University of Missouri Extension Service

Why ? People under age 25 are fastest growing

group of bankruptcy filers

One out of five young adult households are in debt hardship (over 40% of income goes to debt payments each month)

In last decade, youngest adults (18-24) saw credit card debt increase 104%

Graduating college students average $20,402 of debt-- $3,262 on credit cards

Individuals seeking credit counseling have average annual salary of $29,425; average debt excluding mortgage or rent of $23,184

Credit Education Badly Needed

68% teens report never discussing responsible credit card use with any family member

31% teens, 18-19, have credit card in own name

71% of young adult card holders revolve their balances compared to 55% of all cardholders

Presentation Overview

Different card types

Using cards wisely Choosing best card

for you Your credit rating Consequences of

credit abuse Avoiding credit

problems

Make the Credit-Money Connection

$ When you pay by credit card, you still have to pay for the purchase with “real” money.

$ If you cannot afford to buy something with cash, you likely can’t afford it using credit.

$ Using credit means paying for today’s purchases with tomorrow’s income.

Reasons for Having a Credit Card

1. Emergencies2. Large purchases (necessities)3. Establish a credit history4. Facilitate other transactions5. Identification6. Safety

Types of Cards

Debit

Charge cards

Credit cards

Choosing a Card Annual Fee Interest Rate --Introductory --Balances v. Cash Advances --Fixed v. Variable --Default Interest Grace Period Method of Computation Rewards

Costly to Maintain a Balance

$ In 2001 average family carried a balance of $7000; now up to $9200

$ At 20% interest, pay $153 a month in interest alone

$ That’s $73,440 from age 25 to 65 that could be used for other things

$ If you saved/invested the $153 instead – at 5% return equals $233,481; at 7% it would be $401,600

Making the Minimum Payment

Sometimes people think they are handling their

debt by making minimum payment

Minimum PaymentMinimum Payment

$ For many years it was 2% of the For many years it was 2% of the balance. On most cards that was balance. On most cards that was just .5% going toward principal just .5% going toward principal with the rest paying interestwith the rest paying interest

$ Now minimum payment will be 4% Now minimum payment will be 4% of the balance. Makes minimum of the balance. Makes minimum payments higher (double) but payments higher (double) but balance will go down fasterbalance will go down faster

Paying the Minimum on $2000

AmountPaid

Minimum Payment of 2%

(not below $15)

New Minimum of4% (not below

$15)

Years to Pay Off 23 8.2

Total Interest

Paid$4,069.93 $1,073

Total Purchase

Cost $6,069.93 $3,073

Cash v. Credit

Store A Store B Store C

Cash Price $379 $388 $410

APR 27% 13% 12%

Number of Monthly Pmts.

12 12 12

Monthly Pmt.

$36.25 $35.00 $36.50

Finance Charge

$56.00 $32.00 $28.00

Amount Repaid

$435 $420 $438

Comparing Loans

Lender 1Lender 1

Credit Credit UnionUnion

Lender 2Lender 2

DealershipDealershipLender 3Lender 3

BankBank

Amount of Amount of LoanLoan

$4,200 $4,200 $4,200

Monthly Pmt.Monthly Pmt. $192.84 $110.60 $135.05

Number of Number of Pmts.Pmts.

24 48 36

Total RepaidTotal Repaid $4,628.16

$5,308.80 $4,861.80

Finance Finance ChargeCharge

$428.16 $1,108.80 $661.80

APRAPR 9.5% 12% 9.75%

Your Credit Report

Not everyone has a credit report

Getting started can be a Catch 22

Found at three national credit reporting agencies

Limitation of who can see your credit report

Contains extensive information

Negative info can result in credit denial or higher interest

Negative info reported for 7 years; bankruptcy for 10 years

Consequences of Credit Abuse

Make it impossible to complete degree

Denial of employment

Denial of credit Higher interest

rates

Higher insurance rates

Denial of a lease

Denial of student loans

Emotional stress

Seven Steps to AvoidCredit Abuse

Step # 1

Distinguish between needs

and wants

You Fail When:

You sacrifice what you want most for what you

want now!

Avoid Credit Abuse

Step # 2

Have only one credit card

To Further Control Your Credit Use:

Opt for a low credit limit on your one card

Avoid Credit Abuse

Step # 3Pay off your balance

each month

A Good Way to Do This:

Don’t charge anything unless there is already

money in the bank to pay for it.

Avoid Credit Abuse

Step # 4

Never make only the minimum payment

Avoid Credit Abuse

Step # 5

If you must carry a If you must carry a balancebalance

monitor it each monthmonitor it each month

If you find you are getting deeper in debt:

Stop digging the hole!

Avoid Credit Abuse

Step # 6Make a monthly

budget and follow it

Don’t Like the Word “Budget”?

Think of it as your“Personal Financial Survival

Guide”

Avoid Credit Abuse

Step # 7

Use cash or a debit card whenever

possible

Two Personal Rules

$ Don’t use a credit card for any purchase less than $10$ If you can eat or drink it, don’t charge it