National Association of Black National Association of Black Accountants, Inc.Accountants, Inc.

Managing Credit and DebtManaging Credit and Debt

M ney M ney $$enseense

Managing CreditManaging Credit

Buy Now, Pay LaterBuy Now, Pay Later

Financial Aptitude TestFinancial Aptitude Test1.1. It’s always smart to send in the minimum payment It’s always smart to send in the minimum payment

due on a credit card bill each month and stretch out due on a credit card bill each month and stretch out the card payments as long as possible instead of the card payments as long as possible instead of paying the bill in full. T/Fpaying the bill in full. T/F

2.2. Your credit record can be a factor when you apply for Your credit record can be a factor when you apply for a loan or credit card, but cannot affect non-credit a loan or credit card, but cannot affect non-credit decisions, such as applications for insurance for an decisions, such as applications for insurance for an apartment. T/Fapartment. T/F

3.3. While one or two late payments on bills may not While one or two late payments on bills may not damage your credit record, making a habit of it will damage your credit record, making a habit of it will count against you. T/Fcount against you. T/F

4.4. There’s no harm in having many different credit There’s no harm in having many different credit cards, especially when the card companies offer free cards, especially when the card companies offer free T-shirts and other special giveaways as incentives. T-shirts and other special giveaways as incentives. The number of cards you carry won’t affect your The number of cards you carry won’t affect your ability to get a loan; what matters is that you use the ability to get a loan; what matters is that you use the cards responsibly. T/Fcards responsibly. T/F

Financial Aptitude TestFinancial Aptitude Test

5.5. A debit card may be a good A debit card may be a good alternative to a credit card for a young alternative to a credit card for a young person because the money to pay for person because the money to pay for purchases is automatically deducted purchases is automatically deducted from a bank account, thus avoiding from a bank account, thus avoiding interest charges or debt problems. T/Finterest charges or debt problems. T/F

6.6. It makes no sense for young adults to It makes no sense for young adults to put money aside for their retirement put money aside for their retirement many years away. People in their 20s many years away. People in their 20s should focus entirely on meeting should focus entirely on meeting monthly expenses and saving for monthly expenses and saving for short-term goals. T/Fshort-term goals. T/F

Financial Aptitude TestFinancial Aptitude Test

AnswersAnswers

1.1. FalseFalse

2.2. FalseFalse

3.3. TrueTrue

4.4. FalseFalse

5.5. TrueTrue

6.6. FalseFalse

Credit and DebtCredit and Debt

Terms You Should KnowTerms You Should Know

Credit Credit is time given for payment for goods is time given for payment for goods sold on trustsold on trust

DebtDebt is a condition of owing is a condition of owing

Credit TermsCredit Terms

APR: the amount it costs annually when you decide to carry a balance (not pay off your credit card in full) each month.

Can range from 0 to as high as 25% annually

Finance Charge: Actual dollar cost of using credit

Grace Period: the number of days you have to pay your bill in full before incurring finance charges (typically 25 days).

Beware of cards with no grace period! Interest accrues from the moment you charge an item.

You don’t get a grace period when you carry a balance.

Annual Fee: the amount you pay annually as a credit cardholder for the privilege of using credit

If you pay your balance each month, you should avoid cards with an annual fee.

Some annual fee cards have lower interest rates, so if you carry a balance each month you may actually save money with an annual fee card.

Credit TermsCredit Terms

Transaction Fees: You may be charged additional fees for ATM cash advances, balance transfers, late charges and exceeding your credit limit.

Some cards also charge a monthly fee for not using the card!

Late Fee: If your payment is not processed by the due date, you may be assessed a late fee of up to $35.

Avoid this expense by mailing timely payments. Remember, creditors must receive a payment at least

every 30 days.

Credit TermsCredit Terms

Minimum Payment: the least amount you must pay each month to avoid additional transaction fees (typically 2% of the balance).

Credit Limit: The maximum amount you can charge

Credit TermsCredit Terms

Type of Credit Lender Advantages Disadvantages

HOME MORTGAGE • Commercial bank• Savings and loan• Credit union

• Homes often increase in value. • Interest rates for mortgages are relatively low• The interest paid is tax-deductible.

• Mortgages are long-term commitments.• Obtaining a home loan involves extensive credit checks.

CAR LOANS • Commercial bank• Savings and loan• Credit union• Consumer finance company

• Cars can make it easier to work and earn an income.

• Cars lose their value relatively quickly. The car you purchase may have little value when the last payment is made.

COLLEGE LOANS • Commercial bank• Savings and loan• Credit union Federal governmentFederal government

• A college education is a good borrow investment. necessary.• Interest rates can be relatively low.

• Students sometimes borrow more than necessary.• New graduates can face difficulty in repaying large loans.

PERSONAL LOANS • Commercial bank• Savings and loan• Credit union• Consumer finance company

• Personal loans allow individuals to purchase today that boat or vacation they want.

• Personal loans have relatively high interest rates.• Some young people may borrow more than their income should allow.

CREDIT CARDS • Commercial bank• Savings and loan• Department store• Oil companies • Other financial institutions, e.g., American Express

• Credit cards are convenient to use and useful in an emergency.• Credit cards provide a record of charges.

• Credit cards have relatively high interest rates.• Some young people may borrow more than their income should allow.

Managing Credit CardsManaging Credit Cards

Teaser ratesTeaser rates When you receive a credit card offer in

the mail, examine the fine print that comes with the solicitation.

Many cards will offer great introductory rates, such as 3.9% APR.

Often these rates will rise after a limited period of time (usually six months).

After the introductory time period, your APR could go up significantly. Not a good deal if you’re carrying a balance!

Managing Credit CardsManaging Credit Cards

Stick with one or twoStick with one or two Pay in full every monthPay in full every month Pay on timePay on time Avoid cash advancesAvoid cash advances

Managing Credit CardsManaging Credit Cards

Stay within the limitStay within the limit Review your statementsReview your statements Report a lost or stolen card Report a lost or stolen card

immediatelyimmediately Protect your history Protect your history Protect personal informationProtect personal information

Read your credit card contract carefully and be sure to examine any letters that subsequently arrive announcing changes to the terms of your contract. Many cards are eliminating grace periods and adding annual fees for customers who pay in full each month.

Contact your creditors if you can’t make your payment on time or at all. They may be willing to work out a deal for you if you’re in good standing.

Ask your creditor to reduce your APR if you’re being charged a high interest rate and carrying a balance. Many creditors may be willing to do this.

Managing Credit Cards

Think before you buy an item on sale with your credit card. Will you really save money? Probably not.

Remember that offers to reduce your minimum monthly payment will only cost you more in interest during the long run.

Develop a sound spending plan for yourself. This will help you avoid using credit cards to make up for any shortfalls in your cash flow.

Shop carefully for a credit card! The offer you get in the mail may not be the best deal. Check www.bankrate.com to compare credit cards and their rates.

Managing Credit Cards

So Many Credit Card Offers:What’s the Difference?

$0$0 $110 annual fee$110 annual fee

$129 set-up fee (one-time)$129 set-up fee (one-time)

4.99%4.99% 9.9% (initially)9.9% (initially)

25 days if the new balance is 25 days if the new balance is paid in full by the payment due paid in full by the payment due datedate

25 days25 days

2.5% of the new balance, 2.5% of the new balance, minimum of $15minimum of $15

$0$0

$15 if balance is less than $200$15 if balance is less than $200

$35 if balance is greater than $35 if balance is greater than $200$200

$25 and an increased APR$25 and an increased APR

3% of advance, $10 minimum3% of advance, $10 minimum

3% of balance, $5 to $50, Late3% of balance, $5 to $50, Late

$35 if over 2% over limit$35 if over 2% over limit

LOTS OF FEESLOTS OF FEES

•If you were to choose one of these credit cards, which one would it be?•What are the benefits of the card you chose? •What are some of the costs of the card you chose?

Credit Card A (Providian) Credit Card B

Annual fee

Interest rate (APR)

Grace period

Minimum payment

Late fee

Other fees

Common Lenders of Common Lenders of CreditCredit

1. Commercial banks and savings and loans Very similar in the types of financial services they

provide their customers, but regulated by different agencies

Include loans, savings accounts, and checking accounts.

2. Credit unions Not-for-profit cooperatives— enterprises owned by their

members Provide many of the same financial services as

commercial banks and savings and loans.

3. Consumer finance companies Lend money to individuals usually for things such as

automobiles or household appliances Often their customers do not qualify for bank credit and

therefore pay a higher rate of interest.

What Are Lenders What Are Lenders Looking For?Looking For?

Lenders look for certain qualities in loan applicants. These qualities are called the Four Cs of Credit: capacity, character, capital and collateral.

Capacity: the ability of the consumer to repay the debt. The basic question is: “Have you been working regularly in an

occupation that is likely to provide enough income to support your use of credit?”

✔Do you have a steady job?✔What is your salary?✔How reliable is your income?✔Do you have other sources of income?✔How many other loan payments do you have?✔What are your current living expenses?✔What are your current debts?✔How many dependents do you have?✔Do you pay alimony or child support?✔Can you afford your lifestyle?

Character: whether you possess the honesty and reliability to pay credit debts

✔Have you used credit before?✔Do you pay your bills on time?✔Do you have a good credit report?✔Can you provide character references?✔How long have you lived at your present address?✔How long have you been at your present job?

Collateral: serves as a type of insurance for the creditor The creditor is interested in determining whether you have any assets

that could be sold to pay off your loan in the event that you are unable to do so.

✔Do you have a checking account?✔Do you have a savings account?✔Do you own any stocks or bonds?✔Do you have any valuable collections or jewelry?✔Do you own your own home?✔Do you own a car?✔Do you own a boat?

What Are Lenders What Are Lenders Looking For?Looking For?

What Are Lenders What Are Lenders Looking For?Looking For?

Capital: having personal items of value.

✔Do you have a car?✔Do you have a home?

CreditCredit

Credit Reports and Credit Reports and ScoresScores

CreditCredit

How Credit Works For and Against YouHow Credit Works For and Against You

Maintaining Good CreditMaintaining Good Credit

A good rating on a credit report means that in the past bills have been paid on time.

How Bad is Bad Credit?How Bad is Bad Credit?

A poor rating indicates overdue or unpaid items.

Your Credit ReportYour Credit Report

Your ability to qualify for a loan depends on a credit report.

A credit report is a record of an individual’s personal credit history.

When a person applies for a loan, the lender will order a credit report to see how well the applicant has managed credit in the past.

A credit report will tell, in detail, how much the person has borrowed, from whom, and whether the bills have been paid on time.

Credit reports are compiled by credit bureaus, which regularly collect information on millions of consumers.

Credit bureaus get information from a variety of sources, including stores, credit card companies, banks, mortgage companies, and medical providers.

Credit Reporting AgenciesMistakes can and do occur on credit reports. For example, a credit report may containinformation about someone with the same name, or paid accounts may be listed asunpaid. The law provides individuals with a means of requesting and reviewing their

creditreport and having mistakes corrected. Under the Fair Credit Reporting Act you have

theright to get a copy of your credit report from a credit bureau. The three largest creditbureaus are:

EquifaxP.O. Box 105496Atlanta, GA 30348-5496www.equifax.com800.997.2493

Experian P.O. Box 2104Allen, TX 75013-2104www.experian.com888.397.3742

Trans UnionP.O. Box 1000Chester, PA 19022www.transunion.com

Free annual credit report: www.annualcreditreport.com (only authorized source)

Information on FICO Scores Information on FICO Scores & Credit& Credit

What’s In Your FICO ScoreWhat’s In Your FICO Score

http://www.myfico.com/CreditEducation/WhatsInYourScorehttp://www.myfico.com/CreditEducation/WhatsInYourScore.aspx.aspx

The Federal Trade CommissionThe Federal Trade Commission

http://www.ftc.gov/bcp/conline/edcams/credit/indhttp://www.ftc.gov/bcp/conline/edcams/credit/index.html\ex.html\

Other Credit ItemsOther Credit Items

Credit Traps and Predatory Credit Traps and Predatory LendingLending

Credit CounselingCredit Counseling Identity TheftIdentity Theft ““The Golden Rule”The Golden Rule”

Credit AdvantagesCredit Advantages

Access to cash in an emergencyAccess to cash in an emergency Ability to use it nowAbility to use it now Safety and convenienceSafety and convenience

DebtDebt

Debt is the entire amount of Debt is the entire amount of money you owe to lendersmoney you owe to lenders

Secured debt: the creditor has given you credit to buy an item that they can take back (repossess) if you don’t make your payments. Generally secured debt involves major purchases.

Examples of include: House or condominium, Land, Time share, Automobile, Boat

If you allow a secured debt to be repossessed for non-payment, you’ll damage your credit rating.

Unsecured debt: credit granted to you where property can’t be repossessed. Examples include:

Credit cards, Student loans, Payday loans, Medical bills not covered by insurance

TYPES OF DEBT

Good debt: Example: borrowing to pay for a home--considered good

debt because you’re purchasing a tangible asset that will generally be worth more over time.

Most secured debts are usually considered good debt but there are some exceptions. For instance, new cars lose as much as 20% of their value as soon as they are driven off the lot.

Bad debt: Most unsecured debts are considered to be bad debt

with the exception of student loans. If you complete your degree, the money you borrowed

to pay for your education will be returned to you throughout your lifetime by the type of job. You’ll obtain and the higher wages you’ll earn.

It’s never good to carry credit card debt. Interest rates can be staggering, and balances and interest costs will grow when you make irregular or minimum payments.

GOOD VERSUS BAD DEBT

A Word About DebtA Word About DebtWhat is a “debt load?” What is a safe amount of credit for you

to carry? How do creditors find out what a person’s debt load is? How do I know my own debt load?

DEBT/INCOME RATIO

This debt/income ratio is figured with monthly amounts To figure this ratio: add all of your non-housing monthly

payments except for your utilities or taxes. Then compare that total with your total gross annual wages divided by 12. If you don’t have fixed monthly payments on revolving debts such as credit cards, estimate your monthly payments at 4% of the total amount you owe.

Monthly debt payments/Total monthly income = monthly non-housing debt/income ratio. It’s usually expressed as a percentage so move the decimal point 2 places to the right and add the “%” sign.

Rule of ThumbRule of Thumb A conservative rule of thumb: the “20-10

Rule.” Total household debt including your housing

payments shouldn’t exceed 20% of your net household income.

Remember your net income is how much you “bring home” in your paycheck and monthly payments on the debt shouldn’t exceed 10% of net monthly income.

Another conservative rule of thumb for mortgage debt is the “28/36” rule. Your non-housing debt shouldn’t exceed 28% of your

gross (your total) income, and your total debt — consumer debt plus housing debt — shouldn’t exceed 36% of your gross income.

How Much Debt Can You How Much Debt Can You Afford?Afford?

Example:Example: Yearly income after taxes and Yearly income after taxes and

deductions: $28,000deductions: $28,000 Monthly income: $2,333 ($28,000/12)Monthly income: $2,333 ($28,000/12) Amt. of consumer pmts. per month you Amt. of consumer pmts. per month you

can afford:can afford:

(15-20% of your after tax income) : (15-20% of your after tax income) :

$2,333 * .15 = $$2,333 * .15 = $355355 to $2,333 * .20 = to $2,333 * .20 = $$467467

HOW TO REDUCE YOUR DEBT

So you’ve got a bunch of debt. What do you do? Add up your debts and find out where you stand. You can’t make payoff decisions without a clear picture of what you owe. Look at the amounts owed

and determine how much you are paying to all of your creditors.

Amt. Amt. OwedOwed

APRAPR Monthly Monthly Pmt.Pmt.

Payoff Payoff GoalGoal

VISAVISA $2,500 18.0% $40 5 yearsDentistDentist $150 5.0% $25 6 monthsStudent Student LoanLoan

$25,000 8.2% $340 10 years

CarCar $10,000 9.0% $200 5 years

TotalTotal $37,650

$605

Paying $605 every month is going to pay off your debt. The secret to getting rid of debt is to keep paying at least $605 a month until the debt is gone. In six months when the dentist is paid off, take the extra $25 and apply it to the Visa card since it has the highest interest rate.

Keep the payments at $605. To quickly reduce your debt, apply any extra cash to high interest debt. Using this payment strategy, the debt in this example would be paid off in less than 10 years.

Manage Your DebtManage Your Debt

Managing DebtManaging Debt

Negotiating with CreditorsNegotiating with Creditors The Perils of Credit Card and other The Perils of Credit Card and other

Consumer DebtConsumer Debt Debt Consolidation OptionsDebt Consolidation Options The IRSThe IRS

Tips: How to Get Out of Tips: How to Get Out of DebtDebt

Don’t wait to actDon’t wait to act Create a plan to get out of debtCreate a plan to get out of debt Cut expensesCut expenses Honestly assess your ability to pay and take Honestly assess your ability to pay and take

appropriate actionappropriate action Try to increase incomeTry to increase income Keep making payments when debt is paid offKeep making payments when debt is paid off Consolidate loansConsolidate loans Limit the number of credit cards you ownLimit the number of credit cards you own Try to stop most credit card offers from arriving Try to stop most credit card offers from arriving

in the mail (call (888) 5OPT-OUTin the mail (call (888) 5OPT-OUT Debt CounselingDebt Counseling

Financial literacy isn’t just a matter of knowing what you

have and knowing your options. It is a matter of planning for

life’s milestones.

Financial literacy isn’t just a matter of knowing what you

have and knowing your options. It is a matter of planning for

life’s milestones.

Thank You!Thank You!

National Association of Black National Association of Black Accountants, Inc.Accountants, Inc.

M ney $enseM ney $ense

For more information visit www.nabainc.orgFor more information visit www.nabainc.org

360 Degrees of Financial 360 Degrees of Financial LiteracyLiteracy

360 Degrees of Financial Literacy is a national 360 Degrees of Financial Literacy is a national effort of the CPA profession to improve the effort of the CPA profession to improve the financial understanding of Americans. It financial understanding of Americans. It provides a comprehensive approach to financial provides a comprehensive approach to financial education, focusing on the information education, focusing on the information Americans need at every life stage, from Americans need at every life stage, from childhood to retirement. CPAs volunteer their childhood to retirement. CPAs volunteer their time and expertise to educate members of their time and expertise to educate members of their communities about financial issues.communities about financial issues.

Visit Visit www.360financialliteracy.orgwww.360financialliteracy.org for tools to for tools to help you make sound financial decisions.help you make sound financial decisions.