The Facts on CreditThe Facts on Credit

Those who are wise never Those who are wise never

pay interest… they earn it!pay interest… they earn it!

What is Credit? What is Credit?

Another word for credit is Another word for credit is loanloan……

3 Main types of credit:3 Main types of credit: SalesSales

Credit you receive when you make a purchase and Credit you receive when you make a purchase and promise to pay later.promise to pay later.

CashCash Credit you receive when you borrow cash and promise to Credit you receive when you borrow cash and promise to

pay it back later.pay it back later. ServiceService

Credit given for a service one receives (utilities, dentist, Credit given for a service one receives (utilities, dentist, hospital, etc.) that will be payed for later.hospital, etc.) that will be payed for later.

How much credit How much credit can I use?can I use?

The total amount of credit should not exceed 20% The total amount of credit should not exceed 20% of one years NET income…of one years NET income…

How much can a person borrowHow much can a person borrow that makes $36,000 net?that makes $36,000 net?

Answer: $7200 Answer: $7200 (This includes your car loan…)(This includes your car loan…) $7200/12 months= $600 a month!!! $7200/12 months= $600 a month!!!

(not including interest)(not including interest)

The Cost of CreditThe Cost of Credit

PrincipalPrincipal Interest Interest (rate)(rate)

YearsYears PaymentPayment TotalTotal

InterestInterest

Total CostTotal Cost

$1,000.00$1,000.00 12% 12% 2 2 $47.07 $47.07 $129.79 $129.79 $1,129.79 $1,129.79

$1,000.00$1,000.00 21% 21% 2 2 $51.39 $51.39 $233.21 $233.21 $1.233.21 $1.233.21

$5,000.00$5,000.00 12% 12% 8 8 $70.68 $70.68 $1,785.71 $1,785.71 $6,785.71 $6,785.71

$5,000.00$5,000.00 21% 21% 30 30 $87.67 $87.67 $26,561.28 $26,561.28 $31,561.28 $31,561.28

$150,000.00$150,000.00 7% 7% 30 30 $997.00 $997.00 $209,266.00 $209,266.00 $359,266 $359,266

$150,000.00$150,000.00 7% 7% 15 15 $1,348.24 $1,348.24 $92,683.00 $92,683.00 $242,683.00 $242,683.00

$350,000.00$350,000.00 7% 7% 30 30 $2,328.56 $2,328.56 $488,279.00 $488,279.00 $838,279.00 $838,279.00

HIDDEN COST OF LOW HIDDEN COST OF LOW INTEREST CREDIT CARDSINTEREST CREDIT CARDS

Balance transfers usually charge 3% on Balance transfers usually charge 3% on principal principal

$30 late fees with no grace period $30 late fees with no grace period (Considered late (Considered late one dayone day after due date) after due date)

If late, interest rate bumps up to 21% If late, interest rate bumps up to 21% $30 over balance fees$30 over balance fees Convenience checks have transaction Convenience checks have transaction

feesfees

Advantages of CreditAdvantages of Credit

Stimulates the economyStimulates the economy Helps us take care of emergenciesHelps us take care of emergencies Convenient – ordering over the phoneConvenient – ordering over the phone Establishes a credit ratingEstablishes a credit rating Advance notice of sales and cask back Advance notice of sales and cask back

on purchaseson purchases Easier to exchange and return itemsEasier to exchange and return items Detailed monthly billDetailed monthly bill

Disadvantages of CreditDisadvantages of Credit

It always costs moneyIt always costs money Risky to spend future incomeRisky to spend future income Encourages careless buying (Needs vs. wants)Encourages careless buying (Needs vs. wants) Facilitates over-buying which increases Facilitates over-buying which increases

sacrifice that must be made eventuallysacrifice that must be made eventually Often increases family conflictOften increases family conflict May lead to May lead to BankruptcyBankruptcy Increases the cost of doing businessIncreases the cost of doing business

Payday LoansPayday Loans

*The borrower requests a loan for a *The borrower requests a loan for a short period of time, usually one to four short period of time, usually one to four weeks.weeks.*“Payday loan fee” - Up to 360% *“Payday loan fee” - Up to 360% interest.interest.*If the borrower continues to have a *If the borrower continues to have a financial problems and cannot pay the financial problems and cannot pay the loan as promised, the interest keeps loan as promised, the interest keeps building on the debt.building on the debt.

Other Options….Other Options….

Try a small loan from a credit unionTry a small loan from a credit union Ask for pay in advance from your employerAsk for pay in advance from your employer Consider a loan from family or friends, (be sure Consider a loan from family or friends, (be sure

to have the terms of the loan in to have the terms of the loan in writingwriting)) Use a credit card cash advanceUse a credit card cash advance Request additional time to pay the bill from Request additional time to pay the bill from

your creditors.your creditors. Pawn BrokersPawn Brokers Or… just don’t borrow money!!!Or… just don’t borrow money!!!

Credit Rating/ FICO ScoreCredit Rating/ FICO Score

A A credit ratingcredit rating assesses the assesses the credit worthiness of an of an individual. Credit ratings are calculated from financial individual. Credit ratings are calculated from financial history and current assets and liabilities. history and current assets and liabilities.

A credit rating tells a lender or investor the probability A credit rating tells a lender or investor the probability of the person being able to pay back a loan. of the person being able to pay back a loan.

In recent years, credit ratings have also been used to In recent years, credit ratings have also been used to adjust insurance premiums, determine employment adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or eligibility, and establish the amount of a utility or leasing deposit.leasing deposit.

A poor credit rating indicates a high risk of defaulting A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.refusal of a loan by the creditor.

Establishing CreditEstablishing Credit

Have checking and savings accounts and Have checking and savings accounts and manage them responsibly. (These are not manage them responsibly. (These are not reported to the credit agencies, but help reported to the credit agencies, but help individuals develop a pattern of budgeting.)individuals develop a pattern of budgeting.)

Use layaway plans at storesUse layaway plans at stores Save for large down payments on cars and Save for large down payments on cars and

other purchases.other purchases. Ask someone to be a cosigner for the loan.Ask someone to be a cosigner for the loan. Always make payments for bills ON TIME!!! Always make payments for bills ON TIME!!!

(cell phone, utilities, credit cards, house (cell phone, utilities, credit cards, house payment etc.)payment etc.)

If you are REJECTED…If you are REJECTED…

Obtain a copy of your credit report to Obtain a copy of your credit report to determine what the problem is.determine what the problem is.

If something is incorrect, notify the credit If something is incorrect, notify the credit bureau in writing.bureau in writing.

Fixing credit problems may take up to six Fixing credit problems may take up to six months.months.

Let’s talk interest rates…Let’s talk interest rates…Bad Credit vs. Good CreditBad Credit vs. Good Credit

Bad CreditBad Credit $3000 on credit card$3000 on credit card 18% interest rate18% interest rate If minimum payment of 2 If minimum payment of 2

½% is only made…½% is only made… It takes 22 years and It takes 22 years and

$4100 dollars in interest $4100 dollars in interest to pay of the debt.to pay of the debt.

Total: Total:

$7100 to borrow $3000$7100 to borrow $3000

Good CreditGood Credit $3000 on credit card$3000 on credit card 4% interest rate4% interest rate If minimum payment of If minimum payment of

2 ½% is only made…2 ½% is only made… It takes 11 years and It takes 11 years and

$400 in interest to pay $400 in interest to pay off the debt.off the debt.

Total: Total:

$3400 to borrow $3000$3400 to borrow $3000

Scary StatisticsScary Statistics

The average American household has $9200 The average American household has $9200 in credit card debt.in credit card debt.

In 2005, 21,476 people declared bankruptcy in In 2005, 21,476 people declared bankruptcy in Utah.Utah.

At the end of 2005, Utah was ranked 3rd in the At the end of 2005, Utah was ranked 3rd in the U.S.U.S.

In Utah, bankruptcies are filed at the rate of In Utah, bankruptcies are filed at the rate of one in every 37 homes!one in every 37 homes!

The national average is one in every 73 The national average is one in every 73 homes!homes!

Moral of the Story…Moral of the Story…

Don’t spend more than you earn!!!Don’t spend more than you earn!!!

Use credit wisely!!!Use credit wisely!!!

Don’t get into debt!!!Don’t get into debt!!!

ReferencesReferences

http://en.wikipedia.org/wiki/Credithttp://en.wikipedia.org/wiki/Credit http://www.bankhs.com/teachers/http://www.bankhs.com/teachers/

utah_bankruptcy.htmlutah_bankruptcy.html http://http://

www.utah.freebankruptcyevaluation.com/www.utah.freebankruptcyevaluation.com/bankruptcy-statistics.htmlbankruptcy-statistics.html

www.Suzeorman.comwww.Suzeorman.com UEN Data BaseUEN Data Base