DIVISION OF FIRMS - National Association of Black Accountants, Inc.

National Association of Black
Accountants, Inc.
M ney $ense
Managing Credit and Debt
Managing Credit
Buy Now, Pay Later
Financial Aptitude Test
It’s always smart to send in the minimum payment due on a
credit card bill each month and stretch out the card payments as
long as possible instead of paying the bill in full. T/F
Your credit record can be a factor when you apply for a loan or
credit card, but cannot affect non-credit decisions, such as
applications for insurance for an apartment. T/F
While one or two late payments on bills may not damage your
credit record, making a habit of it will count against you. T/F
There’s no harm in having many different credit cards,
especially when the card companies offer free T-shirts and other
special giveaways as incentives. The number of cards you carry
won’t affect your ability to get a loan; what matters is that you
use the cards responsibly. T/F
Financial Aptitude Test
A debit card may be a good alternative to a
credit card for a young person because the
money to pay for purchases is automatically
deducted from a bank account, thus avoiding
interest charges or debt problems. T/F
It makes no sense for young adults to put
money aside for their retirement many years
away. People in their 20s should focus entirely
on meeting monthly expenses and saving for
short-term goals. T/F
Financial Aptitude Test
Credit and Debt
Terms You Should Know
Credit is time given for payment for goods sold on trust
Debt is a condition of owing
Credit Terms
APR: the amount it costs annually when you
decide to carry a balance (not pay off your credit
card in full) each month.
 Can range from 0 to as high as 25% annually
Finance Charge: Actual dollar cost of using credit
Credit Terms
Grace Period: the number of days you have to pay your bill in
full before incurring finance charges (typically 25 days).
Beware of cards with no grace period! Interest accrues from the
moment you charge an item.
You don’t get a grace period when you carry a balance.
Annual Fee: the amount you pay annually as a credit
cardholder for the privilege of using credit
If you pay your balance each month, you should avoid cards
with an annual fee.
Some annual fee cards have lower interest rates, so if you carry a
balance each month you may actually save money with an annual
fee card.
Credit Terms
Transaction Fees: You may be charged additional fees
for ATM cash advances, balance transfers, late charges
and exceeding your credit limit.
Some cards also charge a monthly fee for not using the card!
Late Fee: If your payment is not processed by the due
date, you may be assessed a late fee of up to $35.
Avoid this expense by mailing timely payments.
Remember, creditors must receive a payment at least every
30 days.
Credit Terms
Minimum Payment: the least amount you
must pay each month to avoid additional
transaction fees (typically 2% of the balance).
Credit Limit: The maximum amount you can
Type of Credit
• Commercial bank
• Savings and loan
• Credit union
• Homes often increase in value.
• Interest rates for mortgages are
relatively low
• The interest paid is taxdeductible.
• Mortgages are long-term
• Obtaining a home loan involves
extensive credit checks.
• Commercial bank
• Savings and loan
• Credit union
• Consumer finance company
• Cars can make it easier to work
and earn an income.
• Cars lose their value relatively
quickly. The car you purchase may
have little value when the last
payment is made.
• Commercial bank
• Savings and loan
• Credit union
 Federal government
• A college education is a good
borrow investment. necessary.
• Interest rates can be relatively
• Students sometimes borrow more
than necessary.
• New graduates can face difficulty
in repaying large loans.
• Commercial bank
• Savings and loan
• Credit union
• Consumer finance company
• Personal loans allow individuals
to purchase today that boat or
vacation they want.
• Personal loans have relatively
high interest rates.
• Some young people may borrow
more than their income should
• Commercial bank
• Savings and loan
• Department store
• Oil companies
• Other financial institutions, e.g.,
American Express
• Credit cards are convenient to use
and useful in an emergency.
• Credit cards provide a record of
• Credit cards have relatively high
interest rates.
• Some young people may borrow
more than their income should
Managing Credit Cards
Teaser rates
When you receive a credit card offer in the mail,
examine the fine print that comes with the
Many cards will offer great introductory rates, such
as 3.9% APR.
Often these rates will rise after a limited period of
time (usually six months).
After the introductory time period, your APR could
go up significantly. Not a good deal if you’re
carrying a balance!
Managing Credit Cards
Stick with one or two
Pay in full every month
Pay on time
Avoid cash advances
Managing Credit Cards
Stay within the limit
Review your statements
Report a lost or stolen card immediately
Protect your history
Protect personal information
Managing Credit Cards
Read your credit card contract carefully and be sure to
examine any letters that subsequently arrive
announcing changes to the terms of your contract.
Many cards are eliminating grace periods and adding
annual fees for customers who pay in full each month.
Contact your creditors if you can’t make your
payment on time or at all. They may be willing to
work out a deal for you if you’re in good standing.
Ask your creditor to reduce your APR if you’re being
charged a high interest rate and carrying a balance.
Many creditors may be willing to do this.
Managing Credit Cards
Think before you buy an item on sale with your credit card. Will
you really save money? Probably not.
Remember that offers to reduce your minimum monthly
payment will only cost you more in interest during the long run.
Develop a sound spending plan for yourself. This will help you
avoid using credit cards to make up for any shortfalls in your
cash flow.
Shop carefully for a credit card! The offer you get in the mail
may not be the best deal. Check www.bankrate.com to
compare credit cards and their rates.
So Many Credit Card Offers:
What’s the Difference?
Credit Card A (Providian)
Credit Card B
Annual fee
$110 annual fee
$129 set-up fee (one-time)
Interest rate (APR)
9.9% (initially)
Grace period
25 days if the new balance is paid in full
by the payment due date
25 days
Minimum payment
2.5% of the new balance, minimum of
Late fee
$15 if balance is less than $200
$35 if balance is greater than $200
$25 and an increased APR
Other fees
3% of advance, $10 minimum
3% of balance, $5 to $50, Late
$35 if over 2% over limit
•If you were to choose one of these credit cards, which
one would it be?
•What are the benefits of the card you chose?
•What are some of the costs of the card you chose?
Common Lenders of Credit
1. Commercial banks and savings and loans
Very similar in the types of financial services they provide their
customers, but regulated by different agencies
Include loans, savings accounts, and checking accounts.
2. Credit unions
Not-for-profit cooperatives— enterprises owned by their members
Provide many of the same financial services as commercial banks
and savings and loans.
3. Consumer finance companies
Lend money to individuals usually for things such as automobiles
or household appliances
Often their customers do not qualify for bank credit and therefore
pay a higher rate of interest.
What Are Lenders Looking For?
Lenders look for certain qualities in loan applicants.
These qualities are called the Four Cs of Credit:
capacity, character, capital and collateral.
Capacity: the ability of the consumer to repay the debt.
The basic question is: “Have you been working regularly in an occupation
that is likely to provide enough income to support your use of credit?”
✔Do you have a steady job?
✔What is your salary?
✔How reliable is your income?
✔Do you have other sources of income?
✔How many other loan payments do you have?
✔What are your current living expenses?
✔What are your current debts?
✔How many dependents do you have?
✔Do you pay alimony or child support?
✔Can you afford your lifestyle?
What Are Lenders Looking For?
Character: whether you possess the honesty and reliability to pay
credit debts
✔Have you used credit before?
✔Do you pay your bills on time?
✔Do you have a good credit report?
✔Can you provide character references?
✔How long have you lived at your present address?
✔How long have you been at your present job?
Collateral: serves as a type of insurance for the creditor
The creditor is interested in determining whether you have any assets that could be sold
to pay off your loan in the event that you are unable to do so.
✔Do you have a checking account?
✔Do you have a savings account?
✔Do you own any stocks or bonds?
✔Do you have any valuable collections or jewelry?
✔Do you own your own home?
✔Do you own a car?
✔Do you own a boat?
What Are Lenders Looking For?
Capital: having personal items of value.
✔Do you have a car?
✔Do you have a home?
Credit Reports and Scores
How Credit Works For and Against You
Maintaining Good Credit
A good rating on a credit report means that in the
past bills have been paid on time.
How Bad is Bad Credit?
A poor rating indicates overdue or unpaid items.
Your Credit Report
Your ability to qualify for a loan depends on a credit report.
A credit report is a record of an individual’s personal credit
When a person applies for a loan, the lender will order a credit
report to see how well the applicant has managed credit in the
A credit report will tell, in detail, how much the person has
borrowed, from whom, and whether the bills have been paid on
Credit reports are compiled by credit bureaus, which regularly
collect information on millions of consumers.
Credit bureaus get information from a variety of sources,
including stores, credit card companies, banks, mortgage
companies, and medical providers.
Credit Reporting Agencies
Mistakes can and do occur on credit reports. For example, a credit report may contain
information about someone with the same name, or paid accounts may be listed as
unpaid. The law provides individuals with a means of requesting and reviewing their credit
report and having mistakes corrected. Under the Fair Credit Reporting Act you have the
right to get a copy of your credit report from a credit bureau. The three largest credit
bureaus are:
P.O. Box 105496
Atlanta, GA 303485496
P.O. Box 2104
Allen, TX 75013-2104
Trans Union
P.O. Box 1000
Chester, PA 19022
Free annual credit report: www.annualcreditreport.com (only authorized source)
Information on FICO Scores & Credit
What’s In Your FICO Score
The Federal Trade Commission
Other Credit Items
Credit Traps and Predatory Lending
Credit Counseling
Identity Theft
“The Golden Rule”
Credit Advantages
Access to cash in an emergency
Ability to use it now
Safety and convenience
Debt is the entire amount of money you owe
to lenders
Secured debt: the creditor has given you
credit to buy an item that they can take back
(repossess) if you don’t make your payments.
Generally secured debt involves major purchases. Examples
of include:
House or condominium, Land, Time share, Automobile, Boat
If you allow a secured debt to be repossessed for nonpayment, you’ll damage your credit rating.
Unsecured debt: credit granted to you where
property can’t be repossessed. Examples include:
Credit cards, Student loans, Payday loans, Medical bills not covered by
Good debt:
Example: borrowing to pay for a home--considered good debt because
you’re purchasing a tangible asset that will generally be worth more over
Most secured debts are usually considered good debt but there are some
exceptions. For instance, new cars lose as much as 20% of their value as
soon as they are driven off the lot.
Bad debt:
Most unsecured debts are considered to be bad debt with the exception
of student loans.
If you complete your degree, the money you borrowed to pay for your
education will be returned to you throughout your lifetime by the type of
job. You’ll obtain and the higher wages you’ll earn.
It’s never good to carry credit card debt. Interest rates can be staggering,
and balances and interest costs will grow when you make irregular or
minimum payments.
A Word About Debt
What is a “debt load?” What is a safe amount of credit for you to carry? How do
creditors find out what a person’s debt load is? How do I know my own debt
This debt/income ratio is figured with monthly amounts
To figure this ratio: add all of your non-housing monthly payments except for
your utilities or taxes. Then compare that total with your total gross annual
wages divided by 12. If you don’t have fixed monthly payments on revolving
debts such as credit cards, estimate your monthly payments at 4% of the total
amount you owe.
Monthly debt payments/Total monthly income = monthly non-housing
debt/income ratio. It’s usually expressed as a percentage so move the decimal
point 2 places to the right and add the “%” sign.
Rule of Thumb
A conservative rule of thumb: the “20-10 Rule.”
Total household debt including your housing payments
shouldn’t exceed 20% of your net household income.
Remember your net income is how much you “bring home”
in your paycheck and monthly payments on the debt
shouldn’t exceed 10% of net monthly income.
Another conservative rule of thumb for mortgage
debt is the “28/36” rule.
Your non-housing debt shouldn’t exceed 28% of your gross
(your total) income, and your total debt — consumer debt
plus housing debt — shouldn’t exceed 36% of your gross
How Much Debt Can You Afford?
Yearly income after taxes and deductions: $28,000
 Monthly income: $2,333 ($28,000/12)
 Amt. of consumer pmts. per month you can afford:
(15-20% of your after tax income) :
$2,333 * .15 = $355 to $2,333 * .20 = $467
So you’ve got a bunch of debt. What do you do? Add up your debts and find
out where you stand. You can’t make payoff decisions without a clear
picture of what you owe. Look at the amounts owed and determine how
much you are paying to all of your creditors.
Amt. Owed
Monthly Pmt.
Payoff Goal
Student Loan $25,000
5 years
6 months
10 years
5 years
Manage Your Debt
Paying $605 every month is going to pay off your
debt. The secret to getting rid of debt is to keep
paying at least $605 a month until the debt is
gone. In six months when the dentist is paid off,
take the extra $25 and apply it to the Visa card
since it has the highest interest rate.
Keep the payments at $605. To quickly reduce
your debt, apply any extra cash to high interest
debt. Using this payment strategy, the debt in
this example would be paid off in less than 10
Managing Debt
Negotiating with Creditors
The Perils of Credit Card and other
Consumer Debt
Debt Consolidation Options
Tips: How to Get Out of Debt
Don’t wait to act
Create a plan to get out of debt
Cut expenses
Honestly assess your ability to pay and take appropriate action
Try to increase income
Keep making payments when debt is paid off
Consolidate loans
Limit the number of credit cards you own
Try to stop most credit card offers from arriving in the mail (call
(888) 5OPT-OUT
Debt Counseling
Financial literacy isn’t just
a matter of knowing what you
have and knowing your options.
It is a matter of planning for
life’s milestones.
Thank You!
National Association of Black Accountants, Inc.
M ney $ense
For more information visit www.nabainc.org
360 Degrees of Financial Literacy
360 Degrees of Financial Literacy is a national effort of the CPA
profession to improve the financial understanding of Americans.
It provides a comprehensive approach to financial education,
focusing on the information Americans need at every life stage,
from childhood to retirement. CPAs volunteer their time and
expertise to educate members of their communities about
financial issues.
Visit www.360financialliteracy.org for tools to help you make
sound financial decisions.
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