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Credit Abuse Resistance Education

               A program of:
   U.S. Bankruptcy Courts of West Virginia
         The West Virginia State Bar
     The WV Bankruptcy Law Committee
             Credit Card Issuer

Presentation Overview
 Different card types      BEWARE!
 Using cards wisely
 Choosing best card
  for you
 Your credit rating
 Consequences of
  credit abuse
 Avoiding credit
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
Why Do We Need This Discussion?
   People under age 25 are one of the
    fastest growing group of bankruptcy

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

   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
 What is Credit?

      is the ability to borrow
 Credit
 Borrowing   is the creation of
 Debt   is what you owe
   Make the Credit-Money
$ 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.   Emergencies
2.   Establish a credit history
3.   Identification
4.   Safety
5.   Large purchases (necessities)
6.   Facilitate other transactions
  Types of Cards

 Debit   Cards
 – When used, money is drawn
   directly from your bank account,
   just like writing a check
 – Beware: If there is no money in the
   account, you can still become
   overdrawn and incur penalties.
 – Debit cards do not extend credit
  Types of Cards

 Charge   Cards
 – Issued by retail stores to be used
   exclusively at that particular store
   (such as Macy’s, Best Buy or Sears)
 – If a balance is carried from month
   to month, the interest rate is
   usually higher than other card
  Types of Cards

 Credit   Cards
  – Involves the extension of credit by
    the card issuer
  – Credit cards are accepted at almost
    any store
  – If a balance is carried from month
    to month, interest rates are set
    forth in the cardholder agreement
  Choosing a Card
Annual Fee
Interest Rate
  --Balances v. Cash Advances
  --Fixed v. Variable
  --Default Interest
Grace Period
Method of Computation
    What is Interest?

   Interest is the amount that a lender
    charges to borrow money
   The higher the interest rate, the
    more money you pay
   Interest rates vary from company to
   18% - current avg. starting interest
    rate for students and young adults
  Costly to Maintain a Balance

$ The average American consumer has
  over $10,000 in credit card debt

$ At an average of 14%, they pay $117 a
  month in interest alone

$ If they could invest that $117 every
  month of their work life, it would grow
  to $307,103 (7% return)
Making the Minimum
Sometimes people think they
 are handling their debt by
   making the minimum
    The Minimum Payment vs.
    a Fixed Minimum Payment
   There is a BIG difference between
    making the Minimum Payment each
    month versus (4% of the principal
    balance) making a Fixed Minimum
    Payment each month (a fixed set
    amount, for example $300).
The Minimum Payment
$ For many years it was 2% of the
  balance. On most cards that was just
  ½% (.5%) going toward principal with
  the rest paying the interest owed. It
  seemed like you were paying forever.

$ Now a minimum payment is 4% of the
  balance, which makes the minimum
  payment higher (double) but balance
  goes down faster. Now it only takes
  almost forever.
Paying the Minimum on $2000
  with a 31% Interest Rate
  Amount     Minimum of 4% of balance
   Paid           (not below $10)

  Years to
  Pay Off              15.6
  Interest          $3,348.15
    Cost            $5,348.15
Paying the Minimum on $2000
  with a 18% Interest Rate
  Amount    Minimum of 4% of balance
   Paid          (not below $10)

 Years to
 Pay Off              9.5
 Interest          $1,115.69
   Cost            $3,115.69
Paying the Minimum vs.
Paying a Fixed Minimum
 On $2000 at 18%           On $2000 at 18%
       paying                     paying
   the Minimum            a Fixed Minimum of
(4% of the balance)           $80 per month

It will take 15.6 years   It will take 2.6 years
   (187 months) at a         (31 months) at a
       total cost of            total cost of
        $3,115.69                 $2477.99
        (including               (including
      $1,115.69 in        $477.99 in interest)
             Cash Vs. Credit
                 Store A   Store B   Store C

Cash Price        $379      $388      $410
APR               27%       13%
Number of          12        12
Monthly Pmts.
Monthly Pmt.     $36.25    $35.00
Finance Charge   $56.00    $32.00
Amount Repaid     $435      $420      $410
               Comparing Loans
                  Lender 1     Lender 2     Lender 3
                  Credit Union Dealership   Bank
Amount of Loan       $5,000      $5,000       $5,000

Monthly Pmt.        $226.14     $161.34      $131.67
Number of Pmts.       24           36          48

Total Repaid       $5427.27     $5808.09    $6,320.12
Finance Charge      $427.27     $808.09     $1320.12
APR                  8.0%         10%         12%
    Your Credit Report
 Not everyone has a     Contains extensive
  credit report           information
 Getting started can    Negative info can
  be a Catch 22           result in credit
 Found at three          denial or higher
  national credit         interest charge
  reporting agencies     Negative info
 Limitation of who       reported for 7 years;
  can see your credit     bankruptcy for 10
  report                  years
What is so important
about Good Credit?
   Your history of payments, employment,
    and salary makes you a good candidate for
    a loan
   You can get a better interest rate – lower
   You will be viewed as financially
    trustworthy – better loan terms
   May help you rent an apartment and
    obtain employment – most landlords and
    prospective employers will look at your
    credit report
Consequences of
Credit Abuse
  Make it             Higher insurance
   impossible to        rates
   complete degree     Denial of a lease
  Denial of           Denial of student
   employment           loans
  Denial of credit    Emotional stress
  Higher interest     Bankruptcy
   rates               Divorce/family
  Bad credit rating    problems
Seven Steps to Avoid
   Credit Abuse
  Step # 1
  Distinguish between
    needs and wants
        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 # 3
   Pay 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 balance
    monitor it each month
    Avoid Credit Abuse
 Step # 6
  Make a monthly budget
      and follow it

Think of it as your
“Personal Financial Survival Guide”
What is a Budget?
-A conscious plan to
account for your
                                            Rent               $ 480
money.                                      Utilities             120
                                            Food                  240
- Pay needs first,                          Transportation        160
                                            Installment Payments 360
wants second.                               Insurance             120
                                            Clothing               20
                                            Laundry                20
Gross wages $2,000                          Recreation             40
Payroll deductions (400)                    Misc. Expenses         40
Net monthly pay      $1,600                 Total Expenses     $1,600
  *This budget does not include cost of medical deductible or co-pay;
  day care; student loans; or revolving debt (credit card interest) payments.
   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 it or drink it,
        don’t charge it
           Hours of Work to Pay
          Interest on $1000 Debt
                        Interest Rate

Wage     12% 15% 16% 17% 18% 19% 20% 21%
$ 5.50   22   27   29     31       33   35   36   38
$ 6.00   20   25   27     28       30   32   33   35
$ 6.50   18   23   25     26       28   29   31   32
$ 7.00   17   21   23     24       26   27   29   30
$ 7.50   16   20   21     23       24   25   27   28
$ 8.00   15   19   20     21       23   24   25   26
$ 8.50   14   18   19     20       21   22   24   25
$ 9.00   13   17   18     19       20   21   22   23
$ 9.50   13   16   17     18       19   20   21   22
$10.00   12   15   16     17       18   19   20   21
Simple Rules
to Remember
   Have a budget and live within it
   Don’t have more than one credit card
   Shop around and get the best deal
   If you can eat it, drink it, or it costs less than
    $10, don’t charge it
   Use a debit card, check or cash whenever
   Pay off the balance every month
   Never make just a minimum payment
   Understand the difference between needs
    and wants
   SAVE!!!!!
How Much Could
I Save?

 If you take $2,000 and invest
 it together with $38.45 every
 week ($2,000/year) until
 age 60, at a 7% return, you

And if the same investment
 made 10% interest, you
     would have…….
$1.16 Million!!!

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