Debt Know How
A Debt Education Program
created by
MasterCard in partnership with the
University of Minnesota Extension Service
1
Welcome to Debt Know How
• Resource to help consumers get out of debt
Includes:
• Website – www.debtknowhow.com
• Debt education workshops
2
Workshop Goal
Participants will:
• Increase knowledge about debt issues
• Assess personal debt
• Develop action plan to pay off debt and
improve credit score
3
Debt Overview
4
Debt in America
• Consumer spending accounts for more than
two-thirds of total economic activity
(FDIC)
• Approximately 45% of Americans carry no
outstanding balance on their credit cards
(Staff Working Paper, Federal Reserve 2004)
• 1 in 20 American households are in high debt
(MSN Money)
5
Debt in America
• Consumer credit comes from mortgage debt,
home equity loans and credit cards
• Consumer debt was $9.8 trillion in 2004
• Almost 80% from residential mortgages
• About 8% comprised of credit card debt
Source: The Nilson Report
6
Common Reasons for
Getting into Debt
• Loss of job
• Divorce
• Medical crisis
• Overspending
• Unexpected home or car expenses
• Bad money advice or fraud
7
Debt Warning Signs Quiz
8
How Did You Score?
Total Points from Debt Warning Signs Quiz
• 0 - Congratulations
• 1 - 4 Pay attention to early warning signs
• 5 - 10 Already deep in debt
9
Assess Your Finances
10
How Much Money Do You Earn?
Calculate Total Monthly Income
• Salary & wages
• Tips
• Commissions
• Bonuses
• Interest/dividends
• Veteran’s benefits
11
Where Does Your Money Go?
Calculate Total Monthly Expenses
• Housing
• Savings & set–aside funds
• Food
• Health care & insurances
• Transportation
• Personal
• Debt payments & fees
• Recreation & entertainment
• Past due bills & debts
12
Where Does Your Money Go?
Subtract Total Expenses from Total Income
to get Total Monthly Cash Flow
Total Monthly Income
+ _____
Total Monthly Expenses
- _____
Monthly Cash Flow
= _____
13
Assess Your Finances
Tips
• Positive cash flow means it’s working
• Negative cash flow means spend less
• Use your budget to make changes
• Track spending
• Find money
14
Measure Your Debt
Calculate Total Monthly Non-Mortgage Debt:
• Credit cards
• Home equity loan
• Store cards
• Vehicle loan
• Family loan
• Past due debt
15
Measure Your Debt
www.debtknowhow.com:
Budget calculator will
help individuals tailor
information to best suit
their needs
16
Measure Your Debt
Calculate Debt Payments-to-Income Ratio:
• 20 % or higher – take action to pay
down debt
17
Measure Your Debt
Debt Payments-to-Income Ratio =
Monthly Debt Payments
Monthly Take-Home Pay
Example:
$1,105
$5,275 = 21% Debt-to-Income Ratio
18
Measure Your Debt
www.debtknowhow.com:
Understanding your debtto-income ratio is crucial
to determining the correct
path out of debt
19
Improve Your Credit Score
20
Credit History
• Positive credit history leads to opportunities
• Problems with credit leads people to action
21
Credit History and Score
• Credit reporting bureaus maintain files on
borrowers
• Experian, Equifax, and Trans Union
– major credit reporting bureaus
• Lenders use the information when making
credit decisions
• Order your credit report each year
22
Request Your Credit Report
To order your credit report:
on-line
www.annualcreditreport.com
or call
1-877-322-8228
or write
Annual Credit Report Request Service
P. O. Box 105281
Atlanta, GA 30348-5281
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Access to Your Credit Report
You are entitled to free credit reports at any
time if:
• Denied credit or employment
• Victim of fraud
• Receiving welfare benefits
• Unemployed and looking for work
24
What’s in Your Report?
Personal Identifying Information
Your Name
Social Security #: 123-45-6789
123 Current Address
Date of Birth: February 1, 1960
City, State 00000
Previous Address(es)
456 Former Rd., Somewhere, ST 11111
P.O. Box xxxx, Anywhere, ST 22222
Last Reported Employment: Account Manager, Any Co.
25
What’s in Your Report?
Public Record Information & Collections
Lien Filed 03/03; Good CTY; Case or ID #4321; Amount $26000;
Class – State; Released 07/03; Verified 07/03
Bankruptcy Filed 12/02; Northern District Ct; Case or ID #55HC44;
Liabilities - $16000; Personal; Individual; Discharged; Assets- $800
Collection Reported 05/96; Assigned 09/94 to Oldcoll (800)xxx-xxxx
Client – ABC Hospital; Amount-$1010; Unpaid; Balance $1010;
Date of Last Activity 09/94; Individual Account; Account #2345
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What’s in Your Report?
Credit Account Information
Company Name
Account
Number
Whose
Account
Date
Opened
Months
Reviewed
Date of
Last
Activity
High
Credit
Terms
Items as of date reported
Department
Store
32514
J
10/86
36
9/97
$950
$0
R1
10/97
Bank
1004735
A
11/86
24
5/97
$750
$0
I1
4/97
Oil Company
541125
A
6/86
12
3/97
$500
$0
O1
4/97
Auto Finance
529778
I
5/85
48
12/96
$1100
I5
7/97
Balance
$50
$300
Past
Due
$200
Status
Date
Reported
Previous Payment History: 3 times 30 days late; 4 times 60 days late; 2 times 90+ days late
Previous Status: 01/97 – I2; 02/97 – I3; 03/97 – I4
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What’s in Your Report?
Inquiries
Home Mortgage
10/10/01
Real estate loan $214,000
10 Oak Lane
for state bank with 30 yr. term.
Any, MN 22222
scheduled until 10/2003
07/29/98
XYZ BankCard
04/12/97
GHG Department Store
02/24/00
Department Store
05/02/00
Mortgage
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Dispute Errors
1. Make a copy of your credit report and mark items
you suspect are incorrect.
2. Write a letter to the reporting agency and explain the
disputed items.
3. Request an investigation and send copies of
supporting documents.
4. Tell the creditor in writing that you dispute an item.
5. Keep copies of all correspondence.
29
Credit Scoring
• Credit score is an evaluation of a person’s
credit worthiness
• Credit scores change overtime
• Scores range from about 350 to more
than 800
• Lenders use scores plus other information
• Most well known score is FICO (Fair Isaac
Corporation.)
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Base for Credit Scores
• Payment history -
35%
• Amounts owed -
30%
• Length of credit history -
15%
• Taking on more debt -
10%
• Types of credit used -
10%
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Tips to Improve Your Score
• Pay bills on time
• Missed a payment? Get current and stay
current
• Keep balances low on credit cards and other
revolving credit
• Pay off debt rather than move it around
32
Tips to Improve Your Score
• Don’t close unused credit cards as a short
term strategy
• Don’t open unnecessary lines of credit
• Shop for rates within a focused time (ex. auto
loan, home equity loan)
• It’s okay to request and check your own score
33
Action Plan
34
Pay Off Your Debt
Take Action Now
• Assess the problem
• Set a goal
• Generate new income
• Create your plan
• Track spending
• Save on interest and late fees
35
Pay Off Your Debt
Take Action Now
• Choose a method to pay off debt
• Contact creditors
• Consider a loan consolidation
• Seek help if overwhelmed
• Bankruptcy
36
Pay Off Your Debt
Take Action Now
• Assess the problem
– Determine why you are in debt
– Curb spending
– Determine amount of debt accumulated
• Set a goal
– Set smaller goals
– Keep motivated
37
Debt Reduction Goal
Action Plan
Overall Goal:
Reduce my debt by $__________ in __________months
Monthly Goals:
Reduce my debt by $_________ every month
Increase my income by $________ each month
Reduce my expenses by $________ each month
Additional action steps I will take to reach my goal:
1.
2.
38
Pay Off Your Debt
Take Action Now
• Generate new income
– Take a second job
– Sell assets
– Use money in low-interest bank accounts
• Create your plan
– Spending decisions
– Stick to a budget
– No new debt
39
Pay Off Your Debt
Take Action Now
• Track spending
– Find daily savings
• Save on interest and late fees
– Ask each credit card lender for a lower
interest rate
– Prioritize your debts by interest rates
40
Pay Off Your Debt
Take Action Now
• Choose a method to pay off debt
– Highest interest rate first
– Smallest debt first
– Pay more than the minimum
• Contact creditors
– Explain the problem
– Try to work out a modified plan
– Make the agreed upon payments
41
Pay Off Your Debt
Take Action Now
• Consider a loan consolidation
– Multiple loans consolidated into one loan
– Lower interest rate
– Easier to focus on one loan than several
– Don’t add new debt
• Seek help if overwhelmed
– See a reputable credit counselor
– Renegotiates loan terms
– Ask about fees
42
Pay Off Your Debt
Take Action Now
• Bankruptcy
Bankruptcy Reform Act
– Based on income and ability to pay
– Chapter 7 or Chapter 13
– Means test is required
– Will vary according to state average income
– Must receive credit counseling before bankruptcy
– Must complete debt education before being discharged
43
Resources
• Government Sites
Federal Reserve Board – www.federalreserve.gov
Federal Trade Commission – www.ftc.gov
U.S. Department of Justice – www.usdoj.gov
Cooperative Extension – www.csrees.usda.gov
U.S. Bankruptcy Courts – www.uscourts.gov
Financial Literacy & Education – www.mymoney.gov
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Resources
• Debt & Credit Management
Freddie Mac – www.freddiemac.com
MasterCard International – www.mastercard.com
MasterCard – www.debtknowhow.com
Your Credit Card Companies –
www.yourcreditcardcompanies.com
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Resources
• Accessing Your Credit Report
Annual Credit Report – www.annualcreditreport.com
Equifax – www.equifax.com
Experian – www.experian.com
Trans Union – www.transunion.com
MyFico, a division of Fair Isaac Corporation
www.myfico.com
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Evaluation
Help us for future trainings!
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For information about MasterCard’s
Debt Know How program
Patrick Dwyer
MasterCard International
2000 Purchase Street
Purchase, NY 10577
Tel: (914) 249-6637
Fax: (914) 249-3648
patrick_dwyer@mastercard.com
Cindy M. Petersen
University of Minnesota
Regional Extension Educator
Family Resource Management
980 - 2nd Avenue SE
Hutchinson, MN 55350
Tel: (320) 234-0440 or 1-888-2413207
Fax: (320) 234-0444
peter210@umn.edu
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Bibliography
Materials have been adapted from the following sources:
Anthes, William L., Ph.D. Twelve Ways to Get Out of Serious
Debt, National Endowment for Financial Education,
February 3, 2003
U.S. Department of Justice and Cooperative Extension Service
conference call, July 21, 2005
Bankruptcy Reform, BankruptcyAction.com
MyFICO What’s in Your Credit Report, myfico.com
Lifelong Money Management, Home Ownership Center,
St. Paul, MN
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MasterCard International
in partnership with the
University of Minnesota Extension Service
Cindy M. Petersen, M.Ed., A.F.C
University of Minnesota Extension Service
Regional Extension Educator
Family Resource Management
In consultation with:
Jean W. Bauer, Ph.D.
Family Economist
University of Minnesota Extension Service
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