C.A.R.E. 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 Uneducated consumer Presentation Overview Different card types BEWARE! Using cards wisely Choosing best card for you Your credit rating Consequences of credit abuse Avoiding credit problems 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 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 What is Credit? is the ability to borrow Credit money Borrowing is the creation of debt Debt is what you owe 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. 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 issuers 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 --Introductory --Balances v. Cash Advances --Fixed v. Variable --Default Interest Grace Period Method of Computation Rewards 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 company 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 Payment Sometimes people think they are handling their debt by making the minimum payment 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 Total Interest $3,348.15 Paid Total Purchase 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 Total Interest $1,115.69 Paid Total Purchase 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) 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 payments 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 EXPENSES* account for your Rent $ 480 money. Utilities 120 Food 240 - Pay needs first, Transportation 160 Installment Payments 360 wants second. Insurance 120 Clothing 20 INCOME 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 possible 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 have....... $470,074.22 And if the same investment made 10% interest, you would have……. $1.16 Million!!!