The Dangers of Credit Avoiding the Pitfalls

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					The Dangers of Credit
Provided by: The Credit Education Bureau

585-256-6080

Purpose: To learn the right way to handle credit and avoid credit pitfalls

What Can be Learned?


How credit affects our lives The cost of credit Common credit traps Ways to keep good credit







1. How Credit Affects our Lives
Understanding the importance of having a good history.

Credit:




An arrangement for deferred payment of a loan or purchase. A credit report is a collection of information about your credit use.

A Credit Report:
4 Basic Elements:
•Personal identification
•Public records/ collections

•Payment history •Inquiries

Reporting Limits:
 
  

Inquiries- 2 years Collections, judgments, late payments- 7 years Paid collections and judgments- 5 years in NYS. Bankruptcies- 10 years Unpaid student Loans- No limit

State Time Limit 7 Years

The Good News…


You Can Get a Copy!



Call one of the three major credit bureaus:
– Experian: 800-422-4879 – Trans Union: 800-916-

8800 – Equifax: 800-685-1111


Each copy is $8.50.

When Your Credit Report is Free




   

Recently denied credit Recently denied employment or insurance Suspect fraud Unemployed but seeking a job Welfare Certain states

Who Cares About Credit Reports?
 

  

Finance companies Mortgage lenders Landlords Insurance companies Employers

Good Credit Vs. Bad Credit


A good credit history will show:
– little to no unsecured debt – A record of timely payments



A bad credit history will show:
– Large sums of unsecured

debt – Unpaid bills – A large number of accounts – A large number of inquiries

Summary
1. How Credit Affects our Lives  Credit:  Reporting Limits:  The Good News…  Who Cares About Credit Reports?  Good Credit Vs. Bad Credit.


2. The Cost of Credit
Understanding the expense of borrowing

Common Costs:


Interest (Expressed as APR)
– Fixed – Variable



Fees
– – – – –

Application Annual Cancellation Late Over limit

It’s All About the APR!
APR stands for Annual Percentage Rate.  It’s the average total cost of the interest, principal and finance charges over a one year period.


Here’s How it Adds Up:







Lets say your credit card has an APR of 18% You spend up to your limit of $1000 You only pay the minimum payment of $20 (2% of your balance) The interest owed would be $15
– The APR of 18% = 1.5% interest

per month





You still owe $995 It will take 8years

Cost of Paying the Minimum
Item Price APR Interest Paid
How Much You Really Pay

Years to Pay Off

TV

$500

18%

$439

$939

8

Computer

$1,000

18%

$1,899

$2,899

19

Furniture

$2,500

18%

$6,281

$8,781

34

Summary
2. The Cost of Credit  Common Costs:  It’s All About the APR!  Here’s How it Adds Up:


3. Common Credit Traps
Understanding how to avoid problems

Credit Trap # 1 Borrowing to Extend Income


Purchasing items on credit which could not be afforded otherwise
– Debt will snowball



Multiple store credit cards
– No need – Very high interest

Credit Trap # 2 Borrowing to Pay Debts


Cash advances
– Higher interest – Extra fees are

charged



Debt consolidation loans
– You can’t borrow you

way out of debt – Can be more expensive

Credit Trap # 3
Borrowing Against Future Income Increases


Tickler interest rates
– Interest will be

backdated on unpaid balances



Delayed payment plans
– All interest will be

backdated if not paid in full

Summary
3. Common Credit Traps  Borrowing to Extend Income  Borrowing to Pay Debts  Borrowing Against Future Income Increases


4. Ways to Keep Good Credit
Understanding the basics of credit management

Establishing a Credit History


You have to be at least 18 years of age. Have a regular source of income. Open a checking and savings account.





# 1 Establish a Credit History


First, consider a “secured” credit card.
– Requires a bank

account as security. – Your limit is your deposit.

# 2 Avoid Unnecessary Borrowing
 

Develop a budget A budget helps you:
– Know how much your

expenses are each month – Know how much income you take home each month – Know where to control your spending

Tips for Budgeting:
 


Keep it simple.
– Round off amounts.

Keep it flexible.
– Round up expenses.

Be realistic.
– Project income on the

low end. Include All expenses.

Fixed and Flexible Expenses:




Fixed expenses are things we need that we pay the same amount for each month. Flexible expenses are things we don’t necessarily need or that may vary in amount.

Needs and Wants:


 
    

Need: Food. Want: McDonald’s. Need: transportation. Want: PT Cruiser. Need: entertainment. Want: cable TV. Need: clothes. Want: leather coat.

Creating a Budget




First, write down everything you actually spend your money on in one month. Second, write down your actual take home pay for one month.

Evaluating Your Finances
Personal
Entertainment Saving Housing $50

$800
$200 $15 $50 $25

Gifts & Contributions Family

$50

$300

Food

$400

Credit Obligations
$300

Transportation

$75 $10

Educational

$50

Insurance

$75

Total

$2400 $2300 $2300 $2400

Clothing
Health Care

$-100

Using a Payment Calendar
Rent $800 Day Care $75

1
8

2
9

Phone $50

3

4

5

6
Groceries $100

7
Day Care $75

10 17 24

11 18 25
Cable $50 Car $300

12 19 26
Gas/Elec. $200

13
Groceries $100

14 21
Groceries $100

Car Ins. $75 Day Care $75

15 22

16
Credit Card $50

20 27
Groceries $100

23 30

Day Care $75

28
Day Care $75

29

Using a Payment Calendar
Rent $800 Day Care $75

1
8

2
9

Phone $50

3

4

5

6

Income $575 Groceries $100 Income $575 Groceries $100 Income $575 Groceries $100

7
Day Care $75

Income $100

10 17 24

11 18 25
Cable $50 Car $300

12 19 26
Gas/Elec. $200

13 20 27

14 21

Car Ins. $75 Day Care $75

15 22

16
Credit Card $50

23 30

Day Care $75

Income $575 Groceries $100

28
Day Care $75

29

$50 balance pay $1900 left be checkbook $1150 still to after expenses $800 balance in received are met

Figuring it out:
Rent $800 Day Care $75

1
8

2
9

Phone $50

3

4

5

6

Income $575 Groceries $100 Income $575 Groceries $100 Income $575 Groceries $100

7
Day Care $75

Income $100

10 17 24

11 18 25
Cable $50 Car $300

12 19 26
Gas/Elec. $200

13 20 27

14 21

Car Ins. $75 Day Care $75

15 22

16
Credit Card $50

23 30

Day Care $75

Income $575 Groceries $100

28
Day Care $75

29

Summary
4. Ways to Keep Good Credit  Establish a Credit History  Avoid Unnecessary Borrowing  Tips for Budgeting  Fixed and Flexible Expenses  Needs and Wants  Creating a Budget


Final Summary


How credit affects our lives
– Understanding the importance of having a good

credit history.



The cost of credit
– Understanding the expense of borrowing

 

Common credit traps
– Understanding how to avoid problems

Ways to keep good credit
– Understanding the basics of credit management


				
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posted:11/6/2009
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