Personal Finance: The Appropriate Use of
Credit and the Fundamentals of Investing
Tennessee Governor’s School for the
Agricultural Sciences
June 2004
Dr. Thomas Payne
Dunagan Chair of Excellence in Banking
Professor of Finance
College Students and Credit Cards
• 83% of undergraduate students have at least one credit card; a 24%
increase since 1998.
• The average credit card balance is approximately $2,500. The median
credit card balance is $1,770; a 43% increase above the median in 2000.
• 21% of undergraduates who have cards, have high-level balances between
$3,000 and $7,000; a 61% increase over the 2000 population.
• Graduating students have an average of $20,402 in combined education
loan and credit card balances.
• Students double their average credit card debt - and triple the number of
credit cards in their wallets - from the time they arrive on campus until
graduation.
Source: Nellie Mae (2002)
College Students and Credit Cards
• Credit cards can be a good tool to learn about financial
responsibility and build a solid credit history- as long as
students are aware of the pitfalls.
• Someone once said, “ We have a rule of thumb for people
who say they need a card for emergencies, if you can eat it,
drink it or wear it, then it’s not an emergency.”
• A simple equation to remember is:
Credit cards + immature spending = bad debt
Finally, a word of caution about debit cards, identity theft,
and electronic fraud.
So, What’s the Big Deal?
Tennessee Bankruptcy Rates
• http://www.abiworld.org/statcharts/HouseRank.htm
Credit Scoring
• How Credit Scoring Works
• Along with the credit report, lenders can also buy a credit
score based on the information in the report. The score
evaluates many types of information that are on your credit
report at that agency. By comparing this information to the
patterns in hundreds of thousands of past credit reports, the
score estimates your expected credit risk.
• In order for a FICO® score to be calculated on your credit
report, the report must contain at least one account which
has been open for six months or greater. In addition, the
report must contain at least one account that has been
updated in the past six months. This ensures that there is
enough information — and enough recent information — in
your report on which to base a score.
Source: FairIsaac
Credit Reports and Scoring
• So, what's in a FICO or Beacon (reported by
Equifax) Score?
1) Payment History: Approximately 35% of the score
2) Amounts Owed: About 30% of your score
Note: Actual balance versus credit limit <20% =
low risk; > 80% = high risk
3) Length of Credit History: About 15% of your score
4) New Credit: About 10% of your score
5) Types of Credit in Use: About 10% of your score
Note: Number of cards…1 is better than 0; 2 is
best; 3 O.K. …. 7 = high risk
How to Stay Out of Credit Trouble
Symptoms of trouble - Do You…
Pay bills late?
Pay only the minimum payment on credit cards?
Take cash advance on cards or elsewhere (check overdraft protection)?
Also, note that you should never use the quick cash or “check cashing”
services)
“Max-out” on credit cards?
Always run out of cash before the next paycheck?
Borrow from one lender to pay another?
If so you should:
Stop charging and store your credit cards
Find areas to cut from your monthly expenses
Work out a realistic budget based on your income
Talk to your lenders if you are in too far over your head
Remember that bankruptcy is a last resort as it can cause problems for
many years to come (you will have trouble getting any credit for at least 10
years in the future.
Some Good Resources
• www.aba.com
• http://www.creditinfocenter.com/
• http://credit.about.com/
• www.law.cornell.edu/topics/consumer_credit.html
• www.bankrate.com/
• www.credit.com/
• www.fool.com/credit/credit.htm
• http://www.edmunds.com/
Some Basics of Interest Rates and Investing
• Stocks and Bonds (Wall Street Journal Examples)
• The Importance of Interest Rates in the Economy
• Why Interest Rates Matter
• The Role of the Federal Reserve
• Inflation, Productivity, Economic Growth and Stability
• The Concept (and mathematics) of Present Value
• Using your BA II Plus to calculate loan payments