Personal Credit
Conserving Your Wealth
Instructor’s Book
Copyright: Washington State Department of Financial Institutions.
Disclaimer
This course is developed for educational purposes and non-commercial use. It should not be
construed as endorsement for any financial products or services. It in no way intends to convey
legal, real estate, employee benefits, tax, insurance, or financial planning advice. It is a simple
overview to educate those who are new to these subjects. Consultation with a professional is
recommended for individual advice. These topics are complicated, dynamic, and constantly
changing. Please check for current regulations, rules and laws.
Materials were adapted from Federal Reserve and Federal Trade Commission websites.
2009 Page 1
Table of Contents
ABOUT THIS COURSE FOR INSTRUCTORS
PERSONAL CREDIT LESSON PLAN
PERSONAL CREDIT 90-MINUTE SESSION
ABOUT THIS COURSE FOR STUDENTS
INTRODUCTION
5
6
8
9
10
Setting Financial Goals
Education
First House
Retirement
Other goals
14
15
15
16
18
Create a spending plan
18
Protect Your Wealth
22
UNIT 1. BUYING
25
Buying Summary
25
UNIT 2. CREDIT CARDS
29
Credit Card Summary
29
Using Credit Cards
Credit Card APRs
Grace Periods
Finance Charges
Fees
Cash Advances
Credit Limit
Different Kinds of Cards
Other Features
30
32
34
34
35
35
35
36
36
Evaluating Credit Card Offers
Credit Card Account Comparison Worksheet
Liability Limits
Billing Errors
Lost or Stolen Credit Cards
Unsolicited Cards
Difference Between Credit and Debit Cards
36
37
38
39
39
39
39
UNIT 3. INSTALLMENT LOANS
44
Car Loans
Summary on Car Loans
45
45
Student Loans
Summary for Student Loans
529 Qualified Tuition Programs (QTP)
48
48
50
2009 Page 2
Coverdell Education Savings Account
51
Growth in Student Loans
Federal Student Loans
Stafford Loans
Perkins Loans
Parent PLUS Loans
Private Loans
Repayment
51
51
52
53
53
54
55
UNIT 4. MORTGAGES
58
Mortgage Summary
58
How mortgages work
59
How Much Can You Afford?
61
Information to Get When You Take Out a Mortgage
Rates
Points
Fees
Down Payments and Private Mortgage Insurance
Subprime Mortgages
Mortgage Shopping Worksheet
Laws That Protect You
Canceling a Mortgage
UNIT 5. HOME EQUITY LINE OF CREDIT
62
63
65
65
65
66
67
70
70
75
Home Equity Summary
75
Rates
76
Costs
77
Repayment
78
Disclosures From Lenders
78
UNIT 6. LEASE AGREEMENTS
79
Lease (Car) Summary
79
Rent-to-Buy
UNIT 7. APPLYING FOR CREDIT
81
82
Credit Summary
82
What Creditors Look For
Payment History
Amounts Owed
Length of Credit History
New Credit
82
83
83
84
84
2009 Page 3
Types of Credit Used
84
Information the Creditor Can’t Use
85
New to Credit
86
Maintaining Complete and Accurate Credit Records
87
Prompt Credit for Payments and Refunds for Credit Balances
UNIT 8. DEALING WITH CREDIT PROBLEMS
88
90
Credit Problems Summary
90
How to Deal with Credit Problems
90
Debt Management Plans
93
UNIT 9. PROTECTING YOUR WEALTH
97
Protect Your Wealth Summary
97
Checking Credit Reports
99
What To Do If You Are A Victim of Identity Theft
99
Your rights
100
Take action against fraud
101
Activity: Protect Yourself --Take Quizzes on Identity Theft, Spyware, Phishing, Spam Scam
Slam, Online Shopping
102
GLOSSARY
103
2009 Page 4
About This Course for Instructors
Personal Credit is a one-credit college-level class that has been designed to be personally
relevant to the learner, behavior-based, and flexible in its distribution. This course focuses on the
evaluation of the credit industry which lends money to people in various ways and its consumer
products and services. The topics covered in this course include:
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Credit and loan products
Consumer legal rights in assuming various forms of debt
Comparative evaluation of credit instruments
Credit ratings and their impact
Debt management
The main goal of this course is to have the learner demonstrate their ability to personally evaluate
and select the right debt instrument for their personal circumstances. Here are outcomes that will
be included:
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Evaluate “buy” messages analytically and critically
Differentiate between rational (cognitive) and emotional (affective) buying motives
Differentiate between ethical and unethical marketing practices
Compare cash price to installment price in order to make a purchasing decision
Determine periodic payment, interest and total amount required to pay to amortize a loan
Calculate finance charges on credit card balances and cash advances
Identify consumer assistance services provided by the public and private organizations
(e.g. government, the Better Business Bureau and manufacturers)
Research consumer advocacy groups that address consumer right and responsibilities
and describe how an individual can participate
Analyze various sources and types of credit and related costs
Select an appropriate form of credit for a particular buying decision
Compare and contrast the various aspects of credit cards (e.g. APR, grace period,
incentive buying, methods of calculating interest and fees)
Explain credit ratings and credit reports and describe their importance to consumers
Describe the relationship between credit rating and cost of credit
Recognize the signals of a credit problem
Compare and contrast the legal aspects of different forms of credit (e.g. title transfer,
responsibility limits, collateral requirements and co-signing)
Describe legal and illegal types of credit that carry high interest rates (e.g. payday loans,
rent-to-buy agreements and loan sharking)
Identify the components listed on a credit report and explain how the information is used.
2009 Page 5
Personal Credit Lesson Plan
Topics/Learning
Objectives
Buying
Evaluate buy messages
analytically and critically.
Develop actions to resist
persuasive tactics.
Class Activities/ Outline
Assignments
Must Cover
If Time Permits
Financial Behavior Survey
Frontline video: The
Persuaders
http://www.pbs.org/wgbh/pa
ges/frontline/video/flv/generi
c.html?s=frol02p74&continu
ous=1
Needs vs. Wants assignment.
Start auto purchase
assignment.
Introduction
Making the buy decision
Buying and resisting
persuasive tactics
Home Shopping network
activity.
Video: The Persuaders
Credit Cards
Evaluate credit card offers.
Adopt good credit cards
habits (limit use of credit,
pay all outstanding
balances, safeguard credit
cards)
Shop and evaluate a credit
card offer and present to
class.
Determine the cost of
outstanding balances, late
payments, and other
behaviors.
Secret History of the Credit
Card
http://www.pbs.org/wgbh/pa
ges/frontline/shows/credit/vi
ew/
Complete credit card
questions.
Credit Card APRs
Grace Periods
Finance Charges
Fees
Cash advances
Credit limits
Outstanding balances
Credit versus debit
cards
Have each student bring in
their own credit card
information and analyze the
fees.
Review Lease agreement.
Video: Maxed Out or In Debt
We Trust
Installment Loans
Comparison shop
installment loans.
Evaluate finance charges
based on down payment
and term.
Shop for student loan.
Use online calculators to
calculate the monthly
payments of various student
loans.
Complete auto purchase
assignment and present to
class.
Installment Loans
Car loans
Student loans
Effect of the size of
loan, interest rates, and
term on monthly
payments.
Compare tax-advantaged
saving for education to
student loan.
2009 Page 6
Mortgages
Comparison shop
mortgages.
Evaluate finance charges
based on rates, down
payment and term.
Articulate rights.
Do rent versus buy analysis.
Do affordability analysis.
Effect of down payment and
Evaluating adjustable rate
mortgages.
Money Track video on
mortgages.
Complete mortgage shopping
worksheet and present to
class.
Fixed rates
Adjustable rates
Points
Fees
Down payments
Subprime mortgages
Home equity loans.
Applying for Credit
Analyze the credit report.
Correct the credit report.
Articulate credit rights.
Activity: Finding your FICO
score
Reading a credit report
(complete handouts).
Questions on rights.
Correct errors on credit report.
The Credit Report.
Rights.
Applying for credit
Dealing with credit
problems/Fraud
How to deal with credit
problems.
Create a debt management
plan.
Adopt actions against fraud.
Create a debt management
plan.
Guest speaker on Fraud.
Post Course Financial
Behavior Survey
Action plan for conserving
wealth: Use of credit cards,
applying for loans.
Dealing with credit
problems and debt
management
Fraud
Download personal credit
report, identify ways of
improving credit and
determine life-long credit
strategy.
Video – Stolen Futures
Case study of debt.
2009 Page 7
Personal Credit 90-minute Session
Topics/Learning Objectives
Resisting persuasive tactics.
Class Activities/ Outline
If Time Permits
Home shopping network activity
Credit cards
Overview of evaluating a credit card
offer.
Installment loans (Choose car or
student)
Mortgages
Determine monthly payment.
Saving versus borrowing.
Affordability ratios.
Determine monthly payment.
Case study of debt.
Credit reports and dealing with credit
problems
Must Cover
Introduction
Making the buy decision
Resisting persuasive tactics
Credit card APRs and fees.
Outstanding balance.
Credit card features.
Fixed versus variable.
Rate, down payment and term.
Fixed versus variable.
APR.
Credit reports.
Debt management.
2009 Page 8
About This Course for Students
Just about everyone needs to borrow money at one point in their financial lives. It can be used as
a way to improving your financial situation by paying for your education or buying your family
home. But, if used without a complete understanding on how it works, it can hurt you as well.
Some surveys find that people spend a day or less on evaluating loans. That’s not enough given
the complexity and range of loans there are. It is not enough given that some debt follows you for
decades. You can easily get into a sticky debt situation that will stop you from getting all you want
out of life. It is important that you know how to evaluate credit and loan features and choose the
best one for you. If you do get into a sticky debt situation, it’s important that you know how to
work your way out of it.
You’ll practice making a major purchase and securing the financing for it in this course. We will do
this for a car and a house. You’ll also evaluate a credit card offer; know how to handle credit
problems and how to file a complaint to exercise your rights and protect your wealth.
2009 Page 9
Introduction
Your Financial Life
Growing your career
and managing
life’s ups and downs
High
School and
College
Retirement
Income
$60,000
$40,000
$20,000
Childhood
You begin by
being a financial
drain to your
middle-class
parents costing
$10,000 a year
or $184,000
until you leave
the roost—and
that doesn’t
include college
tuition.
You’re starting to
earn money (not
much) and
getting the
education
($80,000 for a
public university)
to earn more.
This is when you
start with credit
cards (33% have
over $2000
outstanding
balance) and
student loans
($20,000 average
for a bachelors).
You start a 401K
or IRA to save for
retirement.
10
20
Starting a
family
Your earnings start
to take off and you
settle down to start
a family. With that
comes your first
house (down
payment of about
$30,000),
mortgage, and the
kids who now drain
you $10,000 a
year. You need an
emergency fund of
six months. You
protect your assets
with life, property,
liability, disability
and health
insurance. You
create a will.
30
You move towards
your peak earning
years and use this
time to grow your
wealth with proper
asset allocation and
rebalancing.
You upgrade your
house and save for
your kids’ college
education ($100,000
each) and your
retirement ($1 million).
You will change jobs
(every 2 to 4 years)
and may be
unemployed (by
choice or not) at
times. You may
divorce (77% fall in
wealth). You may
have to care for your
parents ($5500 per
year). All these could
set you back.
40
50
Your income could
fall well before you
reach retirement age.
You continue to
accumulate for
retirement and plan
how your nest egg will
last for the rest of your
life. You protect your
health and assets with
long term care
insurance. You may
work longer because
you need to or
because you want to.
60
If you’ve been good
about saving, you will
enter retirement debtfree and comfortable for
the rest of your life. If
you haven’t, the only
option is to continue
working if you can. You
asset allocate,
rebalance, and ladder
your investments to give
you a steady distribution
of income. Healthcare
becomes a big expense.
You protect yourself
from fraud. You update
your estate plan.
70
80
-$10,000
Age (years)
How does a typical person look---financially? Not as prosperous as most of us believe. The
typical family income in Washington State is $63,000 in 2006 dollars. Household income tends to
go down during recessions and recover afterwards. Although it’s increased throughout most of
the last century, it’s been flattening in recent years and still hasn’t recovered from the last
recession to its 2000 peak. This means that income might not grow as quickly in the future. Some
evidence suggests that people coming out in the workforce now may be the first generation to
make less than their parents, mainly because the US economy is not growing as quickly as it
used to. According to the Economic Mobility study, the economy grew 17% in the last generation
as compared to 52% in previous generations.
Washington
Total:
2-person families
3-person families
4-person families
5-person families
6-person families
7-or-more-person
families
2006
Median
Income
63,705
58,584
66,252
75,140
68,562
62,484
61,212
Source: US Census
2009 Page 10
Your income changes depending on the economy, tending to go up during good times and down
during bad. It also changes depending on where you are in your life. You start your life as a
financial drain on your parents, costing most middle-income families about $10,000 a year. Your
income rises as you get more established in life, peaks about the time you are 50 years old and
then declines as you move towards retirement and retire. But this chart doesn’t tell the whole
story.
What can you do to improve your financial status? Education has an impact. Here is a chart that
describes the impact of education on your salary. There is a big jump in earnings when you get
your college degree and even a bigger jump if you get a professional degree such as engineer,
accountant, lawyer or doctor. Keep in mind that even with the same education, women make 60%
to 70% of what men make. Some speculate that this is because women are still the main
caregivers for both parents and children and may take time off to give this care.
2009 Page 11
Of course, your financial life doesn’t proceed as smoothly as even these charts show. Right now
the average time that someone stays in a job is about 5 years. So that there’s a pretty good
chance that you’ll be unemployed, underemployed, or self-employed for periods in your working
life. On average folks have 4.5 spells of unemployment during their working life and they last on
average about 3 months. This suggests that having an emergency fund or 3 to 6 months of
income to tide you over such periods is a very good idea.
Other life events such as marriage (70% of people get married) can have an effect on your
financial life. Marriage increases a person’s wealth by about 77% because two can live as
cheaply as one and half. Divorce (40% to 50% of first marriages end in divorce) can have a
significant impact on your financial life. Divorce can decrease your wealth by 77%. Marriage
becomes the most significant financial decision you will make in your lifetime.
You already know that children can have an impact as well. Just as you cost your parents so your
kids will cost you $10,000 a year for a total of $184,000. When they go to college, the average
cost of a college education at a Washington state public university is $20,000 per year or about
$80,000 for a bachelor’s degree. Other colleges can be priced at
http://apps.collegeboard.com/search/index.jsp. At the same time as you pay for your kid’s
education, you may have to bear some financial responsibility for your parents ($5500 per year).
It follows that net worth or the amount of wealth you have also increases as you age. Your net
worth---what you own (home, retirement accounts, investments, etc.) less what you owe
(mortgage, car loans, etc.)--grows over your lifetime and declines as you retire and no longer
earn money.
2009 Page 12
Debt is a big part of your net worth formula. The goal is to keep your financing payments (credit
card payments, car loans, student loans and mortgage payments) well below 40% of your income
while you are working and to pay down all debt by the time you retire.
For most folks, as can be seen by the graph above, their home is the largest part of their net
worth. People tend to buy their first house when they are 32 (typically 1812 square feet for
$236,500 in Washington state) and upgrade when they are older ($300,000). That house can also
be a financial drain with replacing the roof, appliances, the furnace, or even a major renovation.
However, as a financial asset, don’t depend on your home. Most folks view their homes very
emotionally and will not sell it even when they retire. About 70% of people who retire don’t sell or
even take money out of their homes to fund their retirement.
Location
Kennewick-Richland-Pasco
Portland-Vancouver-Beaverton
Seattle-Tacoma-Bellevue
Spokane
Yakima
2006 Median Price
$156,100
280,800
361,200
184,100
136,500
Source: National Association of Realtors
As you head into retirement, you have to deal with making sure that your financial resources last
you for the rest of your life and that you have taken precautions to protect your assets. Senior
citizens are targets of all the scam artists because they have assets and they are trusting or often
lonely. As you navigate your way through your financial life, it’s important to learn crucial skills to
2009 Page 13
help you deal with all the twists and turns that can be thrown at you. It’s important that you get
smart about your money no matter where you are in this journey.
Now that you have a good idea of what your financial life looks like, you need to acquire the
investing skills and habits that will serve you through your life. In this first section, you will learn
about setting goals and creating a spending plan. These two items are of vital importance in
keeping your investing program on track.
Setting Financial Goals
The first important step in your strategy to a secure financial future is to have goals. When we
don’t have goals we drift and at the end of our work lives, we wonder why we didn’t do what we
wanted (whatever that was). When we have goals, we achieve them, especially if they are written
down.
Now you will have short-term and long term goals. The short-term ones can include a car or a
vacation. Long term goals are the house, your children’s education and your retirement. Lay out
your lifetime financial goals. That’s right—for your whole life. It is tough because we tend to have
short-term horizons. But, you need to think about all your goals now because some of them will
take a long time to achieve.
According to The Facts about Saving and Investing (1999) put out by the SEC, two out of three of
all US families fail to reach one major financial goal. Identify financial or saving goals that excite
you, such as saving to buy a car; staying home with the kids; leaving an awful job; paying off your
mortgage; starting your own business; traveling with your family or friends, helping others, and
more.
Set realistic goals using the SMART approach:
Specific. Smart goals are specific enough to suggest action.
“Save money for a used car.”
Measurable. Goals need to be measurable when you’ve reached your goal.
“This used car will cost $8000 so I need to save $1,000 for a down payment.
Attainable. Goals need to be reasonable.
“$8000 for a used car (versus $20,000 for a new car) is reasonable for my
circumstances.”
Realistic. The goals need to make sense.
“I make $30,000 a year so a used car so saving $84 a month for $1000 makes sense.”
Time-related. Set a definite target date.
“I can save $84 per month and reach $1000 within 12 months.”
2009 Page 14
Education
Education seems to be a necessity in this new global age where higher skill sets are necessary.
But, education is also a big ticket item with students paying on average $10,000 a year in tuition
plus $10,000 in living expenses to go to Washington state’s public four-year universities. For four
years, this can add up to $80,000. If you go on to pursue a professional degree such as a law or
medical degree, the cost goes over $100,000. Even community college costs $4000 a year. With
this large cost, often grandparents must chip in along with parents to ensure that the kids in the
family have a chance to get the college education.
Activity
What is the difference in cost between a public and private university? Check out colleges in
Washington State such as Seattle University and Whitman and compare them to the University of
Washington and Washington State. http://cgi.money.cnn.com/tools/collegecost/collegecost.html
First House
The first major financial goal for most folks starting out is the house. If you’re living in a typical
Washington state city a house might cost you $200,000, or $40,000 down payment (keep in mind
that these prices vary greatly depending on where you live).
Activity
Although these sites are not totally accurate, check out www.zillow.com as to the price of a house in a
neighborhood that you want to live in. How much will you have to pay for the house?
2009 Page 15
Retirement
Most of you are going to live longer than the current life expectancy (about 78 years) because of
developments that are prolonging life. This means that you will have to ensure that you have
enough money for a longer period of time. If you think Social Security will take care of your
lengthening requirements, you might want to reconsider. Social Security currently gives you a
minimum wage (the average payment as of 2006 is $955 a month and the maximum is $1500). It
covers about 42% of retired people’s needs if they made $15,000 before they retired. If they
made $60,000, Social Security covers 25% of their needs. Right now workers are putting more
into the social security than retirees are taking out. But that is expected to change in about 25
years. At that time, according to the Social Security Administration, people who retire will receive
only 75% of the current entitlement. Reviewing you Social Security report gives you an amount
that you can consider as a “floor” of your retirement income. If you don’t want to live at that
income level (about 25%) you will need to start saving. We will address Social Security again in
Unit 6.
Although folks think that they will reduce spending when they retire, most keep their level of
spending up. Many people keep their homes (and all the expenses that come with them) when
they retire. When you get older, some expenses get bigger. Your medical costs increase.
Medicare takes care of 54% of your needs, but you must pay extra for doctor’s visits. If you need
long-term care such as a nursing home, you have to pay the bill yourself.
Nowadays, most people are resigned to the fact that employers will no longer take care of you
when you retire. Most people don’t work long enough at any company to even qualify for the
traditional pension plans. It’s true that employers are slowly phasing out traditional pension plans
and phasing in retirement savings plans (401k) that require you to save and invest for yourself.
Employers believe that these types of plans match what workers do. Most workers don’t stay the
5 years necessary to get any benefits, let alone the 30 years it takes to get adequate benefits
from the traditional plans. With the 401k plans, when these workers leave they can take their
retirement accounts with them.
Although many people know that these retirement savings plans will be their main source of
retirement income, about 18% don’t contribute at all. When people leave their companies, many
cash out and spend their retirement money instead of “rolling it over” into other retirement plans.
This means at their next job, they start out with nothing in retirement. Younger folks tend to do
this most and they are the most hurt by cashing out. Even small amounts set aside early in your
working life can work hard for you over time. If you’re cashing out, most of the benefits of
compounding are lost.
The experts don’t always agree on the amount you need for retirement because there’s so much
uncertainty involved in the amount of social security and your longevity not to mention inflation
rates and rates of return. It’s estimated that baby boomers (who are starting to retire now) have
about one third of what they need to retire.
As a rule of thumb, you can estimate the amount of money that you expect to live on a year and
divide by 4% to come up with what you might need in your retirement fund if you have no other
sources of retirement income.
Question
When you retire, Medicare takes care of what portion of your medical expenses when you retire?
a) One quarter
2009 Page 16
b) One half
c) Three quarters
Answer
When you retire, Medicare takes care of what portion of your medical expenses when you retire?
a) One quarter
b) One half
c) Three quarters
Correct answer b. Medicare only covers hospital and prescription drugs. Doctor visits and longterm care is not covered.
Question
When you retire, Social Security benefits can cover what portion of your living expenses?
a) One quarter
b) One half
c) Three quarters
Answer
When you retire, Social Security benefits can cover what portion of your living expenses?
a) One quarter
b) One half
c) Three quarters
It depends on how much you made before. If you made $15,000, social security may cover three
quarters or more of your income. If you made more income, social security will cover less. In the
future, social security is expected to cover only 25% to 33% of your income.
Question
Your life expectancy when you reach age 65 is:
a) 13 years
b) 18 years
c) 23 years
Answer
Your life expectancy when you reach age 65 is:
a) 13 years
b) 18 years
c) 23 years
If you are 65 now, your life expectancy is 18 years. That is older than the average life expectancy
because if you reach 65, you increase the odds of living longer.
2009 Page 17
Other goals
Maybe you’ve got other goals, like starting your own business (Jeff Bezos used $60,000 of his
own money to start Amazon.com). Lay them all out and put a price on them. You won't get there
from here unless you do. According to the 2004 Consumer Finance Survey, here are the top
reasons people save:
Retirement
34.7%
Liquidity
Purchases
Buying own home
For the family
Investment
Education
30
7.7
5
4.7
1.5
11.60
Once you've got your list of goals, post them where you will see them every day, re-evaluate
every year. Your needs may change. Tax time is a good time since you’re looking at your
finances any way. Your tax return will tell you how much you earned and you should figure out
how much you spent. Did you save enough for the year? Check out your goals. Do you have
additional goals now? (A life event—marriage, having kids, etc. — tends to change your financial
goals.)
Activity
Estimate how much you will need when you retire. Use a simple rule of thumb. Most people will take out 4%
of their retirement fund for annual living expenses. Decide what level of lifestyle you want when you retire
(e.g. $40,000, $60,000, etc.) and divide by 4%.
Create a spending plan
A spending plan is a planning tool to help you manage your money. It is the core of your financial
strategy and if implemented and made a habit all your life, you will achieve financial security. A
spending plan helps you identify your personal financial goals, analyze what income you have
available, know what you are spending money on, and develop steps to achieve your personal
financial goals. A spending plan will help you:
 Achieve financial goals and dreams.
 Keep a positive attitude about personal finances.
 Save for those important things such as a new car, college education, wedding, new
house, comfortable retirement, or travel.
 Lower stress level and reduce conflicts in your family.
 Control spending so that you conserve your wealth.
 Eliminate unnecessary debt.
This is how Americans spend their money according to the Bureau of Labor Table of 2004
Expenses by Family Size.
2009 Page 18
Expenditures Total (In
dollars)
Food at home
Food away from home
Alcoholic beverages
Housing
Apparel
Transportation
Healthcare
Entertainment
Personal
Reading
Education
Tobacco
Miscellaneous
Cash contributions
Personal insurance and pensions
Personal Taxes
One person
Two person
$40,359
Three
person
$45,508
Four
person
$54,395
Five or
more
$53,805
$23,507
1,533
1,302
314
8,371
862
4,012
1,441
1,097
297
111
423
203
518
1,063
1,960
1,829
2,954
2,336
400
12,944
1,650
7,692
2,827
2,051
512
168
476
312
744
1,429
3,864
3,599
3,696
2,512
315
14,744
2,013
9,348
2,265
2,137
555
139
830
397
843
1,167
4,547
3,066
4,404
3,043
368
17,914
2,643
10,775
2,253
2,787
614
155
1,059
349
1,156
1,287
5,589
3,900
5,151
3,042
309
17,317
2,893
11,123
2,150
2,718
658
131
984
416
743
1,399
4,770
2,652
Source: 2004 Consumer Expenditure Survey, Bureau of Labor Statistics
Start by collecting your pay stubs, household and other bills, expense receipts, checkbook or
online checking data, checking and credit card statements. Sort the receipts by categories and
sections listed on the Spending Plan Worksheet (see appendix). The sections are: Income,
Fixed Expenses, Variable Expenses Discretionary Expenses and Adjustments to Spending Plan.
Total the dollar amounts in each of these categories for one month. Don't forget to record your
cash expenditures and online transactions. Look to see where your cash goes, especially if you
make frequent ATM withdrawals from your bank accounts.
To make it easier to create a spending plan that will work for you, a 4-step process will be used to
develop each section of the Spending Plan Worksheet.
1.
2.
3.
4.
Calculate your monthly income
Calculate fixed, variable and discretionary expenses
Calculate Net Income (Monthly Income minus Total Expenses)
Analyze expenses starting with your discretionary expenses and make spending plan
adjustments such that you can achieve your saving goals. If necessary, identify your debts to
pay down and create a debt reduction plan
For more details on how to create a spending plan, you can refer to the first module of this series
on Money Management. It is important that you have a spending plan each year and that you
track all expenses to your spending plan. This could include a good manual record-keeping
system. Here are some suggestions on the financial records you should keep.
2009 Page 19
What financial records to keep and for how long?
Type of record
Bills
Length of
Time
One-year to
permanently
Credit card receipts and
statements
45 days to
seven years
Bank records
One-year to
permanently
Paycheck stubs
One year
Taxes
Seven years
Tax returns (forms) filed with IRS
Receipts/canceled checks
(charitable contributions, mortgage
interest, alimony and retirement
plan contributions)
Records for tax deductions you
took on your tax forms
Reason to Keep
 Review your bill statements once a year.
 For most cases, when the canceled
check from a paid bill was shown on
your checking statement (or the
canceled check has been returned
with your statement), you can shred or
burn the bill.
 However, bills for large purchases, such
as appliances, furniture, cars, jewelry,
computers, rugs, collectibles, antiques,
etc., should be kept in an insurance file
for proof of their value in the event of
loss, damage, flood, or fire.
 Keep your original receipts until you get
your monthly statement.
 Shred or burn the receipts if the receipts
match the monthly statement
 If a large purchase listed above, keep the
receipt.
 Go through your checks each year and
keep those related to your taxes,
business expenses, mortgage
payments and home improvements.
 Shred or burn those that have no longterm importance.
 Keep all your paycheck stubs until you
receive your annual W-2 form from
your employer; make sure the
information matches the stubs and W2.
 If it does match, shred or burn the stubs.
 If it does not match, request a corrected
form, known as a W-2c.
The IRS has three years from your tax filing
date to audit your tax returns, if it finds
questionable good faith errors.
 The three-year deadline also applies if
you discover a mistake in your return
and decide to file an amended tax
return to claim a refund.
 The IRS has six years to challenge your
return if it thinks you under-reported
your gross income by 25% or more.
There is no time limit if you failed to file
2009 Page 20
your return or filed a fraudulent tax return.
IRA contributions
Permanently
If you made a non-deductible contribution
to your IRA, keep your records indefinitely
to prove that you paid tax on this money
when it comes time for you to withdraw
from your IRA account(s).
Retirement/Savings plan
statements
One year to
permanently
 Keep the quarterly statements from your
401(k) or other plans until you receive
the annual summary statement. If it
matches up, then shred or burn the
quarterly statements.
 Keep the annual summary statements
until you retire or close the account.
Brokerage statements
Until you
sell the
securities
Keep the purchase confirmations or sales
slips from your brokerage or mutual fund to
prove whether you have capital gains or
losses at tax time.
House/condominium records
Six years to
permanently
 Maintain deeds, mortgage documents,
title, cost of improvements, and closing
statements in a safe place
permanently.
 Keep tax, rental agreements, rental
receipts and repairs for 7 years.
 Keep records of the expenses incurred in
selling and buying the house/property,
such as legal fees and your real estate
agent’s commission, for six years after
you sell your house.
 Keeping these records is important
because any improvements you make
on your house, as well as expenses in
selling it, are added to the original
purchase price or cost basis. This
adds up to a greater profit (also called
capital gains) when you sell your
house. Therefore, you lower your
capital gains tax from the sale of your
house.
Loan agreements
When
outstanding
 Keep copies of all outstanding loan
agreements and most recent
statements indicating how much you
have repaid
Insurance policies
Long term
care and life
insurance –
permanently
 Keep your insurance cards in your cars
as required by law.
 Keep copies of your most recent
homeowners, auto, and umbrella
insurance policies so that claims can
be made easily and efficiently.
 Keep both long-term care and life
insurance in a safe place and let a
Others one
year after
expiration
2009 Page 21
responsible person know how to find
them.
 Create and update an annual inventory
of all personal property. Include
appraisals or receipts. Keep a copy of
this in a safe place outside of your
home.
Health care expenses
One year to
seven years
 Keep your original receipts to file health
insurance and flexible spending
account claims
 Keep medical receipts for deductions that
you claimed on your tax return
Protect Your Wealth
The Federal Trade Commission received over 674,354 Consumer Sentinel complaints in 2006,
64% represented fraud and 36% were identity theft complaints. Identity theft occurs when a thief
uses another person’s personal identification to open new credit card accounts, take over existing
accounts, and obtains loans in the victim’s name, of otherwise steal funds from the victim.
Victims go through a difficult and time-consuming ordeal to clear their names. They must first try
to convince the lenders and the credit-reporting agencies that they are victims of identity theft.
They also must deal with calls from collection agencies and endless paperwork in trying to
remove erroneous information and fraudulent accounts from a credit record.
Credit card fraud (28%) was the most common form of reported identity theft followed by phone
or utilities fraud (19%), bank fraud (18%), and employment fraud (13%). Other significant
categories of identity theft reported by victims were government documents/benefits fraud and
loan fraud. The percentage of complaints about “Electronic Fund Transfer” related identity theft
doubled between 2002 and 2004.
Thieves get information from
 Garbage – pre-approved credit cards, bank and credit card statements, and utility bills
 Mailboxes – both incoming and outgoing mail
 Loan applications – banks, car dealerships, mortgage companies
 Rental applications – cars or apartments
 Schools – classroom attendance sheets that list the student’s Social Security number
 Desk drawers in the workplace
 Certifications/licenses placed on walls (in the workplace)
 Job applications
 Health club applications
 Internet – information resulting from the sale of personal banking and investment details, chat
rooms, and false merchants
 Telephone companies
 Information freely given by the public – from warranty cards, for contests, to department
stores, and “Win a Free Membership…” forms
Advice to avoid identity theft
 Don’t disclose any personal information that isn’t integral to a transaction.
2009 Page 22










Be careful of any personal information that you give on yourself in social networking sites and
safeguard financial information on your computer or other file storage centers.
Carry only one or two credit cards that you use regularly.
Keep your Social Security number as private as possible. If a salesperson requests it, don’t
give it. If your health plan prints it on your membership card, ask for one without it. Don’t write
it on your class attendance sheet (your school already has your number on official records).
Divulge this number only for legitimate purposes, such as paying taxes, requesting credit, or
obtaining a driver’s license. Check to see if your social security number is on the internet at
StolenIDSearch.com.
Shred or burn mail containing personal information – from account numbers to travel
itineraries.
Prevent mail theft. Have a locked mailbox. Don’t leave mail in your mailbox for the mail
carrier. Don’t have new checkbooks delivered to your home.
Lock up your personal papers and canceled checks in your home, in case of a break-in.
Be cautious on the telephone. Never give out your name, address, Social Security number, or
other personal information unless you initiate the call and you check to see that the number
of legitimate.
Secure all your financial files on your computer and don’t store your personal information on
the web storage files that can be hacked into. Don’t disclose personal information on social
networking sites.
Demand secure information handling. If you’re filling out a credit application at a department
store or auto dealership, find out what the establishment does with old applications. If it
doesn’t lock them in file cabinets or shred them, take your business elsewhere.
Pay attention to your bills. If you suddenly stop receiving your mail, particularly bills, that
could be a sign that someone has taken over your account.
Fraud examiners recommend that people review their credit reports once a year; all three
bureaus will need to be contacted.
 Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285
 Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742)
 Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289
It’s also wise to opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688).
A scam artist can retrieve a discarded credit card offer and send it to the company, saying, “Yes,
I’m interested – and here’s my new mailing address!” Sign up on the National “Do Not Call”
Registry (www.donotcall.gov or 1-888-382-1222) to eliminate telephone calls.
2009 Page 23
Future Financial Behavior Evaluation
The goal of all financial education is to get you to adopt important
behaviors that will ensure your financial security. Check all the financial
behaviors that you engage in. Do this inventory every year.
Check if you
will adopt in
the next
year.
Pay all my bills and loan payments on time.
Have a recordkeeping system for my financial affairs.
Balance my checkbook and monitor all my financial transactions monthly.
Track all my expenses.
Use a spending plan or budget.
Have an emergency savings fund.
If yes, how many months of expenses:
1-3 months ____4-6 months ____
Save or invest money from every paycheck. If yes, percent paycheck saved
__%
Save for long-term goals.
If yes, which goals: (Check any that apply.)
Education____ Car ____ Home ____ Home upgrade ____ Vacation _____
Plan and set goals for financial future.
Have money in more than one type of investment. If yes, check any that
apply:
Individual stocks ____ Mutual Funds ____ Bonds ____ Real Estate ____
Treasury bills or CDs ____ International ____ Commodities ____
Calculated net worth in the past two years.
Participate in employer’s retirement plan. 401(k) ___ 403 (b) __ Other: ____
Have insurance to protect my loved ones.
If yes, check any that apply:
Health ___ Life___ Property___ Auto___ Disability ___ Umbrella _____
Put money into other retirement plan:
Roth IRA ___ Traditional IRA __ SEP or SIMPLE IRA __
Review my credit report annually.
Pay credit card balances in full each month.
Research and compare offers before applying for a credit card or loan.
Do my own taxes.
Read about personal money management to improve how I’m doing.
2009 Page 24
Unit 1. Buying
Buying Summary
1. Look at your purchases and determine if your purchases are based on needs or wants.
Eliminate purchases that are wants.
2. Identify the influence tactics and learn how to resist them. Influence tactics include
phantom fixation, commitment, authority, social proof, scarcity, comparison, profiling,
friendship, reciprocity, and landscaping tactics.
3. Don’t allow your mental state to influence your purchases. Avoid impulse shopping that
might make you “feel better” temporarily.
4. Do your research and determine what you want down to the features you need with a
product. Don’t be lured by flashy advertising that sells a dream and not the product.
5. Investigate your options for financing a big purchase. What fits your budget? What
interest rate options or down payment options affect the purchase?
This module is to help you conserve your wealth. It’s about borrowing and how to do it smart. But
is conserving your wealth really about borrowing money? To tell you the truth, conserving your
wealth begins with buying. Most borrowing happens because you don’t have enough money to
pay for something you want. So to conserve your wealth, the first question you have to ask is: Do
I really need this? In some cases, as with the purchase of a house, it makes sense to buy. By
buying a house, you are making an investment in something that could increase or appreciate in
price. Additionally it serves a very important purpose: it provides you with shelter.
The picture is not as clear with something like a car. For some, it may be that they need a car to
get to work or to do their work. For others who have access to public transit, a car is not so much
of a necessity as it is a luxury. Except in rare cases, a car is not an investment. The value of a car
depreciates or decreases in value to the tune of 20% a year. The first question you need to ask is
do I really need the car? This is a question that most families in the US face at one time or
another. A car is probably the first major purchase that will require credit and an installment loan.
So, before you buy anything, really determine whether you need the item. For large purchases,
wait 24 hours. Think about how many hours you worked to pay for the item. Do your homework
on everything you buy. If you are getting work done, check out the contractor and the business.
Get references and call them. Look at the work done by the firm. Check for complaints at the
Better Business Bureau www.bbb.org and state Washington State Attorney General’s office
http://www.atg.wa.gov/. Google the company to see if it appears in any complaint lists. Much of
credit issues revolve around paying for defective products and services.
Salespeople are trained to use a variety of tactics to “close the deal.” These tactics are also used
by scam artists to get at your money. It’s important you learn to resist these influence tactics so
you can evaluate the purchase objectively. Identify the pattern and know that you are a target.
Here are some of the tactics:
• Phantom Fixation – The objective is to put something that is completely unavailable
before you that appeals to health issues, wealth, popularity or avoiding death. Basically
this tactic preys on your insecurities and promises to fulfill your wildest dreams. It falls
into the category of too-good-to-be-true and most often is.
• Commitment – The salesperson tries to get you to commit by saying that your earnest
money or deposit will be lost. Often there are laws that say you have 3 days to reconsider
and get your funds back in full. Know your rights before you go in to buy.
2009 Page 25
•
•
•
•
•
•
•
•
Authority – The salesperson will say that they’ve been in the business for years and know
that this is the best deal that they’ve seen. They might cite specific features. If you don’t
know the product well, you might believe the pitch.
Social Proof – This tactic tries to get you to believe that everyone is getting one so you
should, too.
Scarcity – This includes product scarcity (only three left), time scarcity (offer good only
today), and threats to take the offer away which often makes the consumer feel pressure
to buy now.
Comparison – It is very common for sales pitches to show inflated regular prices to a
hugely discounted “sales price.” You need to comparison shop to see what kind of deal it
really is.
Profiling – In cases where the salesperson wants to make a large sale, they will probe for
personal information and then customizes pitch.
Friendship – The salesperson changes the relationship from con to victim into a
friendship transaction.
Reciprocity – The sales pitch gives you a free gift or lunch. With this your response rate
doubles.
Landscaping – The salesperson changes social interaction so it leads to where he or she
wants to go by setting the agenda, limiting choices or controlling information.
People are more prone to be susceptible to influence tactics when they’ve had some negative
event in their lives. These can be as major as losing a job, divorce or a death in the family. It can
be because you’ve been chewed out by your boss. Try to be aware of your mental state and don’t
engage in any major buying. Watch those around you to alert them.
In general, don’t use buying as a form of therapy. Buying things may give you a fleeting sense of
pleasure but it can lead to a major headache in the long term. If you buy things to reward yourself
for accomplishing something, plan it well in advance and buy something that enriches you and
doesn’t cost much.
Once you’ve decided to make the purchase, then it’s important to determine what features you
need and what price you will pay. This takes a tremendous amount of research. Sadly, most folks
don’t take the time to do the thorough research that a large purchase requires so they pay too
much. To conserve your wealth you don’t want to pay too much. You want to understand
everything that is needed to negotiate the best price. This means that you will comparison shop.
Get the best price and then negotiate for an even lower price.
Once you’ve gotten the best price, then you look at the various options you have to borrow
money to finance your purchase. Financial companies are pleased to give you a huge menu of
products and services to finance your purchases. Again, you have to do the research and
evaluation to choose the best option for you. The data in the introduction shows us that we are
pretty tapped out as a nation and we should get smart about borrowing. Only borrow if you
absolutely have to and be smart when you borrow. Borrow to buy a house because a house
increases in value. Borrow to finance an education because it will return more income in the
future. For all other purchases, think very carefully before you borrow. Are you creating wealth or
are you destroying wealth? That is a crucial question for your future.
Activity - Needs and wants – Do I really need to buy?
Find your last credit card and bank statement. Keep all your receipts for cash purchases in an
envelope. Once you’ve done this, list your last ten expenditures. Classify them as “n” for needs
and “w” for wants. Needs would be expenses for anything that was necessary for living. Wants
would be the nice-to-have items. Look through each item and ask the following questions:
2009 Page 26



Did you spend too much for any item?
Are there any needs that should be wants? Check with folks in your group.
Look at the wants. What can you do to reduce the wants?
Here is an example:
Doctor's visit copay
10
N
Lightbulb for car
5.22
N
Fast food restaurant
6.44
N
Drink and snack
6.64
W
Restaurant
22.93
W
Groceries
31.92
N
Sports equipment
211.04
W
Restaurant
119.08
W
Groceries
36.07
N
Groceries
35.59
N
Medical
23.04
N
409.94
N
53.89
N
Emergency Room Visit (Canada)
Groceries
Finance Charge
Foreign Transaction Charge
9.54
12.29
The important next step is to reflect on the list. One third of the expenses in this example were
“wants” and could be eliminated. If you really wanted to, you could even reduce necessities such
as groceries. Families waste on average $590 in food every year. There are finance charges that
could have been eliminated if the previous balance was paid on time. These finance charges
were levied because the person went on a trip and forgot. Typical of people who have financial
problems, this person had a medical emergency that came up suddenly and broke the bank. This
also happened on a trip to Canada. When you purchase things outside of the country (even
Canada) you are charged a foreign transaction fee – in this case a hefty 3% for the emergency
room charge.
There are many lessons from this very simple exercise:
1. Think all expenses through carefully and devise ways of reducing spending on wants.
That doesn’t mean that you give up on everything. For example, if you want to eat out
every now and again, instead of just going to a restaurant, allocate a certain amount of
money for restaurants a week. Savings from eliminating wants? $148.75 or about 15%
of the total.
2. Plan for emergencies. Check to see what medical coverage is when you leave the
country.
3. When you leave the country, convert some cash to the foreign currency so you don’t
have to pay the 3% foreign transaction charge with your credit company or with the
charge for exchanging funds in that country. Elimination of this charge would result in
1% saving.
2009 Page 27
4. Pay off your entire credit card balance on time. Make a resolution to pay your bills as
they come in the mail instead of waiting. Another 1% could have been saved by paying
on time.
Activity – Needs and Wants
Organization experts say that we wear 20% of our clothes 80% of the time. This suggests that we
can easily cut our spending on clothing by 50%. Try the clothes hanger trick. At the beginning of a
season, reverse the way your clothes hang in your closet. After wearing that item, put it on the
hanger and replace it properly when you return it to the closet. By the end of the season, you
should be able to see what clothes you haven't worn, and most likely can live without.
Activity – Need and Wants
Last Ten Purchases
Need or Want?
Activity - Resisting Influence Tactics
Tape several segments of the Home Shopping Network or find segments on the web. View a 15minute segment.
Identify the influence tactics such as authority, scarcity, and comparison.
Summarize how many were used.
Reflect on which were most effective on you.
Reflect on how you can resist these tactics.
Activity - In preparation for car purchase exercise
Go to www.bankrate.com and determine what current rates are for car loans.
What would your monthly payment be if your car loan was for $15,000 at 6.97% for 3 years?
What are your total finance charges?
Try a longer period of time. What happened to the monthly payment? Finance charges?
Try a higher interest rate. What happened to the monthly payment? Finance charges?
Assignment - Buying a Car
This assignment covers Unit 1: Buying and Unit 3: Installment loans.
The best way to understand how to be smart about your money is to work on a specific life
activity. Just about every family in the US purchases a car. Let’s look at the purchase of a car to
learn about managing money.
Let’s say that you are starting a new job at $40,000 a year and want to get a new car. What
process will you go through to determine what type of car to buy? At the end of this exercise, you
2009 Page 28
will be asked to reflect on what you felt and learned. First, if you’ve already bought a car, reflect in
writing on how you chose the car and how you financed it.
1. Evaluating the buy message for cars
The zoom-zoom ad (or find another ad if this one is unavailable on the web)
http://www.mazdausa.com/MusaWeb/displayPage.action?pageParameter=zoomMain
What is the buy message in this ad? Are these the reasons you should buy a car? What purpose
does a car serve? What appeal does this ad make? Should you respond to this buy message?
2. Researching and evaluating cars
List all the features that are important to have in a car. Lay out what factors might affect the price
of the car. Determine which models satisfy your requirements. Research on the internet and find
a price you are willing to pay. Create a table to compare models, features, and prices and to
determine the best choice for you. Here are some sources of information but add more of your
own.
http://www.consumeraction.gov/caw_automobiles_buying_new.shtml
http://www.edmunds.com/advice/buying/articles/78386/article.html
3. Determine what type of financing you will get on the car.
How much can you afford? Use http://www.bankrate.com/brm/rate/calc_home.asp and the
$40,000 salary to determine what you can pay. How much should you put down? Do a sensitivity
analysis of different down payments. How will different down payments affect your monthly
payments? Check the internet to see what interest rates can you get? What was the lowest rate
you found? How do different interest rates affect your monthly payments? Create a table to show
your different options. How will financing affect your personal finances?
4. Reflect. Write a reflection paper on your experience listing your advice to someone else who is
embarking on the same mission.
5. Present your findings to the class in a power point presentation.
Activity – Buying a Wireless Phone
Go through the same four steps in evaluating the purchase of a cell phone. Here is a website with
information:
http://www.consumerjungle.org/index.php?option=com_content&task=view&id=56&Itemid=108
Unit 2. Credit Cards
Credit Card Summary
1.
2.
3.
4.
Credit cards encourage you to spend. So if you have problems with spending too much, use
cash.
Credit cards are a very expensive way to borrow money. Pay all credit cards on time and in
full. If at all possible, do not maintain outstanding balances. Do not use features such as cash
advance.
Do not spend up to your credit limit.
Opt out of credit card offers by calling Opt out 888-567-8688 or going to the website
www.optoutprescreen.com.
2009 Page 29
5.
6.
7.
8.
9.
10.
11.
12.
13.
Before you sign on to a credit card, use the credit card evaluation form to evaluate all fees
and charges.
Keep only two credit cards on you to minimize loss.
Keep a record of your account numbers, their expiration dates, and the phone number and
address of each company in a secure place. Some fraud experts recommend that you
photocopy the cards you carry with you.
Protect your card and your account number. Sign your credit card when it arrives. Don’t lend
your card to anyone. Don’t give out your account number unless you know you are calling a
company that is reputable. Destroy incorrect receipts and copies.
Save receipts to compare with billing statements. Open bills promptly and reconcile accounts
monthly, just as you would your checking account.
Report any questionable charges promptly and in writing to the card issuer. Do not pay for
purchases where product was not delivered or defective.
Correct any billing errors by contacting your credit card company as soon as possible.
If you use your credit card to shop online, consider extra precautions with your personal
computer. Experts advise installing and periodically updating virus and spyware protection
and a "personal firewall" to stop thieves from secretly installing malicious software on your
personal computer remotely that can be used to spy on your computer use and obtain
account information.
If you lose your credit or charge cards or if you realize they've been lost or stolen,
immediately call the issuers. Many companies have toll-free numbers and 24-hour service to
deal with such emergencies. By law, once you report the loss or theft, you have no further
responsibility for unauthorized charges. In any event, your maximum liability under federal
law is $50 per card.
Using Credit Cards
According to the US Government of Accountability Office (GAO) 2006 study of credit cards, the
number of credit cards issued exceeds 691 million or more than twice the population (adults and
children) of the US. Use of credit cards has contributed to an expansion in household debt, which
grew from $59 billion in 1980 to roughly $830 billion by the end of 2005. Over three-quarters of
families have credit cards. One third of teenagers have credit cards cosigned with their parents.
College students are responding to the many credit card offers they get in the mail and have
multiple credit cards.
Between 1980 and 2005, the amount that U.S. consumers charged to their cards grew from $69
billion per year to more than $1.8 trillion. According to the 2004 Consumer Finance Survey,
44.4% of families had outstanding credit card balances with a median value of $2200 or an
average of $5100. The average value for Washington State is $5100 in 2006.
The best habit to develop with credit cards is to pay off your balance every month. When you do,
you avoid the many fees and finance charges that can make borrowing money with credit cards
very expensive. But young people are learning early to do the opposite. In a 2005 Nellie Mae
study of college students, almost half had outstanding balances and a third had outstanding
balances over $2000. Additionally, when students were asked how much outstanding balance
they had, most of them underestimated the amount. Keeping the books wrong can get you into a
lot of trouble in any circumstance.
2009 Page 30
2009 Page 31
Are students spending on necessary things? Quite a few are spending on school supplies. But,
they are also spending on food and other discretionary items. What kind of impact does this
have? This same study showed that students with higher outstanding balances worked longer
hours and have higher anxiety. Now, that doesn’t make sense. If you work more, you should have
more money to pay off your outstanding balances. It’s not the case. These students are in a rat
race to support their spending. Working long hours can hurt grades, delay graduation, and getting
that higher-paying full-time job. The combination of big debt, low grades and high anxiety is
enough to cause students to drop out and many do.
Work
Do not work during school year but work during
vacations
Work 1-10 hours per week
Work 10-20 hours per week
Work more than 20 hours per week
Do not work at all
Lower score means higher anxiety
Percent of
Students
19%
12%
34%
31%
5%
Average
Balance
$
$
$
$
$
Anxiety*
942.00
782.00
926.00
1,661.00
714.00
Source: Nellie Mae 2005 Study of undergraduate students and credit cards
Credit Card APRs
The annual percentage rate (APR) is the percentage cost of credit on a yearly basis. It is your key
to comparing costs regardless of the amount of credit or how long you have to repay it. Suppose
you borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100
2009 Page 32
3.3
3
3.4
2.4
2.8
for the whole year and then repay $110 at year’s end, you are paying an APR of 10 percent. But if
you repay the $100 and finance charge (a total of $110) in twelve monthly installments, you don’t
really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each
month. In this case, the $10 finance charge amounts to an APR of 18 percent.
Month
APR 10%
Principal Interest
$ 100.00
$ 10.00
APR 18%
Principal
$7.96
$8.02
$8.09
$8.16
$8.23
$8.30
$8.36
$8.43
$8.50
$8.58
$8.65
$8.72
$ 100.00
$ 10.00
$100.00
1
2
3
4
5
6
7
8
9
10
11
12
Interest
$1.50
$1.38
$1.27
$1.15
$1.03
$0.91
$0.78
$0.66
$0.53
$0.40
$0.27
$0.14
$10.02
All creditors—banks, stores, car dealers, credit card companies, finance companies—must state
the cost of their credit in terms of the finance charge and the APR. Federal law does not set
interest rates or other credit charges. But it does require their disclosure so that you can compare
credit costs. The law says these two pieces of information must be shown to you before you use
a credit card.
Unlike the mortgage, fees such as annual membership fees, transaction charges, and points, for
example, are listed separately; they are not included in the APR of open-credit instruments. Keep
these fees in mind and compare all the costs involved in the plans, not just the APR.
Some credit cards are “fixed rate” meaning the APR doesn’t change often. Even if the APR is a
“fixed rate” it can change over time. However, the credit card company must tell you before
increasing the fixed APR. Other credit cards are variable rate where the interest rates will change
according to some benchmark such as the prime rate (the rate businesses borrow at) or the
Treasury bill rate (short-term government borrowing rates). Look for information on the credit card
application and in the credit card agreement to see how often your card’s APR may change.
A single credit card may have several APRs:

One APR for purchases, another for cash advances, and yet another for balance
transfers. The APRs for cash advances and balance transfers often are higher than the
APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19%
for balance transfers).

Tiered APRs. Different rates are applied to different levels of the outstanding balance
with the higher the balance, the higher the interest rate (for example, 16% on balances of
$1–$500 and 17% on balances above $500).

A penalty APR. The APR may increase if you are late in making payments.
2009 Page 33

An introductory APR. A different rate will apply after the introductory rate expires. The
introductory APR may be a low or teaser rate to get you to sign up. It is important to
check out what the APR will be after the teaser expires.

A delayed APR. A different rate will apply in the future. For example, a card may
advertise that there is “no interest until next March.” Again, it is important to check what
your delayed APR will be.
Grace Periods
The grace period is the number of days you have to pay your bill in full without triggering a
finance charge. For example, the credit card company may say that you have “25 days from the
statement date, provided you paid your previous balance in full by the due date.” The statement
date is given on the bill. Other credit card companies may note the due date on the statement.
Keep in mind that the date is the day the payment must be received. If you sent it in the mail on
the due date or even paid it with your online bill payment service, it will most likely be late.
The grace period usually applies only to new purchases. Most credit cards do not give a grace
period for cash advances and balance transfers. Instead, interest charges start right away.
If you carried over any part of your balance from the preceding month, you may not have a grace
period for new purchases. Instead, you may be charged interest as soon as you make a purchase
(in addition to being charged interest on the earlier balance you have not paid off). Look on the
credit card application for information about the “method of computing the balance for purchases”
to see if new purchases are included or excluded. Information on methods of computing the
balance is in the section “How is the finance charge calculated?”
Finance Charges
Know that the best way to use a credit card is to pay all balances in full every month. Finance
charges are the main way that credit card issuers make money. The amount depends in part on
your outstanding balance and the APR. Credit card companies use one of several methods to
calculate the outstanding balance.
Under one of the most common methods, the average daily balance method, creditors add your
balances for each day in the billing cycle and then divide that total by the number of days in the
cycle. Payments made during the cycle are subtracted to get the daily amounts, and depending
on the plan, new purchases in the month may or may not be included. In the two-cycle average
daily balance method, creditors use the average daily balances for two billing cycles to compute
your finance charge which can net you large finance charges even though you paid off the
balance as can be seen in the figure below. In 2006, two of the six largest credit card issuers use
the two-cycle method.
2009 Page 34
Source: GAO Credit Card Study September 2006
Be aware, as shown by the figure above, that the amount of the finance charge will vary
considerably depending on the method used, even for the same pattern of purchases and
payments.
Some credit cards have a minimum finance charge. You’ll be charged that minimum even if the
calculated amount of your finance charge is less. For example, your finance charge may be
calculated to be 35¢--but if the company’s minimum finance charge is $1.00, you’ll pay $1.00.
Fees
Most credit cards charge annual fees for using the card, a cash advance fee (typically, $5
minimum or 3%), a fee when you transfer a balance from another credit card ($5 minimum or
3%), late payment fee ($35), over-the-credit-limit fee ($30), credit-limit-increase fee, set-up fee
(for new account), a fee if your payment check is returned ($25), and other fees for services
(telephone payment, reporting to credit bureaus, reviewing your account, etc.)
Cash Advances
Some credit cards let you borrow cash in addition to making purchases on credit. If you plan to
use your card for cash advances, look for information about use of ATMs (there may be charges
for using other banks’ ATMs, different APRs for cash advances, fees, limits (may be lower than
your credit card limit), and how payments are credited.
Credit Limit
The credit limit is the maximum total amount--for purchases, cash advances, balance transfers,
fees, and finance charges--you may charge on your credit card. If you go over this limit, you may
have to pay an “over-the-credit-limit fee.”
2009 Page 35
Different Kinds of Cards
Secured cards require a security deposit. The larger the security deposit, the higher the credit
limit. Secured cards are usually offered to people who have limited credit records--people who
are just starting out or who have had trouble with credit in the past. Premium cards (gold,
platinum, titanium), have higher fees but offer higher credit limits and usually have extra features-for example, product warranties, travel insurance, or emergency services.
Other Features
Many credit card companies offer incentives for you to buy and use their cards. These include
rebates on the purchases you make, frequent flier miles, additional warranties on products you
buy using the card, car rental insurance when you use the card to rent a car, travel accident
insurance when you use the card to buy an airline ticket, credit card registration if your card is lost
or stolen and more. At a charge they may offer many other services such as insurance to cover
your balance. It’s fine to take advantage of these features as long as you carefully evaluate what
they cost (nothing is free) and if you do not buy more than you need to because of the incentives.
Evaluating Credit Card Offers
Financial experts recommend that you limit the number of credit cards to two. But credit card
companies are often happy to get your business and send you offers. If you don’t want to receive
these offers, you can call Opt out 888-567-8688 or go to www.optoutprescreen.com.
Some folks like to review these offers and may take advantage of low teaser offers like 0%
finance charge for 6 months to finance credit balances. Make sure that you understand all the
APRs and fees that you are likely to incur before you sign on. Here is all the information a credit
card company must provide to you:
Annual percentage
rate APR
2.9% until 11/1/06
after that, 14.9%
The annual percentage rate you’ll be charged if you
carry over a balance from month to month. If the card
has an introductory rate, you’ll see both that rate and
the rate that will apply after the introductory rate
expires.
Other APRs
Cash-advance
APR: 15.9%
Balance-Transfer
APR: 15.9%
Penalty rate:
23.9%
The APRs you’ll be charged if you get a cash advance
on your card, transfer a balance from another card, or
are late in making a payment. More information about
the penalty rate may be stated outside the disclosure
box--for instance, in a footnote.
In this case, if your payment arrives more than ten days
late two times within a six-month period, the penalty
rate will apply. If you make two payments that are more
than ten days late within six months, the APR will
increase to 23.9%.
Variable-rate
information
Your APR for
purchase
transactions may
vary.
The rate is
determined
Information about how the variable rate will be
determined (if relevant). More information may be
stated outside the disclosure box--for instance, in a
footnote.
The credit card company will designate where the
prime rate information can be gotten such as in the
2009 Page 36
monthly by adding
5.9% to the Prime
Rate.
Wall Street Journal.
Grace period for
repayment of
balances for
purchases.
25 days on
average
The number of days you’ll have to pay your bill for
purchases in full without triggering finance charge.
Method of
computing the
balance for
purchases.
Average daily
balance
(excluding new
purchases)
The method that will be used to calculate your
outstanding balance if you carry over a balance and will
pay a finance charge.
Annual fees.
None
The amount you’ll be charged each twelve-month
period for simply having the card. In 2006, 75% of all
credit cards charged no annual fee. Of those that
charged, the fees ranged from $30 to $90.
Minimum finance
charge.
$.50
The minimum, or fixed, finance charge that will be
imposed during a billing cycle. A minimum finance
charge usually applies only when a finance charge is
imposed, that is, when you carry over a balance.
Transaction fee for cash advances: 3%
of the amount advanced
Balance-transfer fee: 3% of the amount
transferred
Late-payment fee: $25
Over-the-credit-limit fee: $25
Transaction fee for cash advances. The charge that will
be imposed each time you use the card for a cash
advance.
Balance-transfer fee. The fee that will be imposed each
time you transfer a balance from another card.
Late-payment fee. The fee that will be imposed when
your payment is late. In 2006, about 35% of credit card
holders paid late fees for an average of $35 each time.
Over-the-credit-limit fee. The fee that will be imposed if
your charges exceed the credit limit set for your card.
Credit Card Account Comparison Worksheet
Use this Credit Card Account Comparison Worksheet to compare the fine print on credit cards
you’re considering as well as keeping track of the terms you agree to with the credit card
company.
Features
Credit Card Account Comparison Worksheet
Card:
Card:
Card:
Issuer:
Credit limit:
Interest rate for:
Purchases
2009 Page 37
Penalty for late payment
Cash advances
Balance transfers
Fees:
Annual
Late payment
Over-credit limit
Account Set Up
Cash advance
Rewards program
Finance charges:
One-cycle or two-cycle billing
Minimum finance charge
New purchases included
Interest calculated:
Fixed, variable or tiered basis
Grace period (# of days):
If you carry a balance
If you pay off the balance monthly
For cash advances
Type of card:
Secured, regular, student, rewards
Perks and rewards:
Rebates
Points
Frequent flier miles
Cash back
Insurance
Other
Liability Limits
If your credit card is lost or stolen--and then is used by someone without your permission--you do
not have to pay more than $50 of those charges. This protection is provided by the federal Truth
in Lending Act. You do not need to buy “credit card insurance” to cover amounts over $50.
If you discover that your card is lost or stolen, report it immediately to your credit card company.
Call the toll-free number listed on your monthly statement. The company will cancel the card so
that new purchases cannot be made with it. The company will also send you a new card.
Make a list of your account numbers and the companies’ phone numbers. Keep the list in a safe
place. If your wallet or purse is lost or stolen, you’ll have all the numbers in one place. Take the
list of phone numbers--not the account numbers--with you when you travel, just in case a card is
lost or stolen.
2009 Page 38
Billing Errors
It is important that you check your credit card statement every month. Billing errors can happen
and checking your credit card statement is your best defense against fraud, identify theft or other
criminal activity.
If you are charged or overcharged for something you did not buy, did not take delivery of, or was
not delivered, you need to call your credit card company and get it corrected. If payments are not
credited to your account or a charge was made by someone who did not have permission to use
your card, get it corrected. If you think your credit card bill has an error, do the following:
1. Write to the credit card company within 60 days after the statement date on the bill with the
error. Use the address for “billing inquiries” listed on the bill.
2. Pay all the other parts of the bill. You do not have to pay the “disputed amount” or any
minimum payments or finance charges that apply to it. If there is an error, you will not have to
pay any finance charges on the disputed amount. Your account must be corrected.
3. If there is no error, the credit card company must send you an explanation and a statement of
the amount you owe. The amount will include any finance charges or other charges that
accumulated while you were questioning the bill.
The federal Fair Credit Billing Act allows you to withhold payment on any damaged or poor-quality
goods or services purchased with a credit card--even if you have accepted the goods or services-as long as you have made an attempt to solve the problem with the merchant. The sale must
have been for more than $50 and must have taken place in your home state or within 100 miles
of your home address. You should notify the credit card company in writing and explain why you
are withholding your payment. You may withhold the payment while the credit card company
investigates your claim. If you pay the charges for the goods on your credit card bill before the
dispute is resolved, you will lose your right to make a claim.
Lost or Stolen Credit Cards
Under the Truth in Lending Act you do not have to pay for any unauthorized charges made after
you notify the card company of loss or theft of your card. Have a list of your credit card telephone
numbers handy and notify card issuers immediately if your card is lost or stolen. The most you
will have to pay for unauthorized charges is $50 on each card even if someone runs up several
hundred dollars worth of charges before you report a card missing.
Unsolicited Cards
It is illegal for card issuers to send you a credit card unless you ask for or agree to receive one.
However, a card issuer may send, without your request, a new card to replace an expiring one.
Difference Between Credit and Debit Cards
You typically use a debit card (sometimes called a check card) or online banking service to make
a transfer of funds you have in a bank account. The payments are electronic and are deducted
from accounts more quickly. Often, a debit card purchase is posted within 24 hours instead of
days with a paper check or weeks with a credit card transaction. That means there would be little
time to make a deposit to cover the purchase. Merchants may take steps as protection against
fraud, errors or other losses by putting a hold on a certain amount in your bank account when you
use a debit card to say reserve a room in a hotel for some time in the future. This might cause
your bank account to be overdrawn.
2009 Page 39
Unlike the Truth in Lending Act protections for credit cards, which caps a consumer's liability for
unauthorized transactions at $50, the Electronic Funds Transfer Act limits liability to $50 only if
the debit cardholder notifies the bank within two business days after discovering the theft. If
you don't notify your bank within two days, you could lose up to $500 or more. Don’t forget a thief
can draw your bank account and tap into your line of credit. If you receive a bank statement that
includes an unauthorized debit-card withdrawal and you wait more than 60 days to tell your bank
you could be liable for any amounts from transactions made after that 60-day period.
Because funds are deducted from your account very quickly, don't expect to have the option to
stop payment or obtain a refund. If you return an item to a merchant you may not be able to get a
refund. You may have to ask for a store credit or a gift card. If you are concerned that the
merchant may not deliver as promised, use a credit card. Consumer protections are stronger for
returning merchandise under the Fair Credit Billing Act. It gives you the ability, under certain
circumstances, to withhold payment on defective goods until the problem has been corrected.
Question
You are trying to pay down a credit card balance. Which of the following is best for you when
computing a finance charge?
a)
b)
c)
d)
two-cycle daily balance with new purchases
one-cycle daily balance with adjusted balance
one-cycle daily balance with new purchases
two-cycle daily balance with previous balance
Answer
You are trying to pay down a credit card balance. Which of the following is best for you when
computing a finance charge?
a)
b)
c)
d)
two-cycle daily balance with new purchases
one-cycle daily balance with adjusted balance
one-cycle daily balance with new purchases
two-cycle daily balance with previous balance
Correct answer: b Your previous cycle would be higher as you pay down and you don’t want new
purchases in the balance.
Question
How are credit card or open-credit APRs different from mortgage APRs?
Answer
How are credit card or open-credit APRs different from mortgage APRs?
Credit card APRs do not include fees while mortgage APRs do include fees, points, and other
costs.
Question
Annual percentage rate APR
2.9% until 11/1/07
2009 Page 40
after that, 14.9%
Other APRs
Cash-advance APR: 15.9%
Balance-Transfer APR: 15.9%
Penalty rate: 23.9%
Variable-rate information
Your APR for purchase transactions may
vary.
The rate is determined monthly by adding
5.9% to the Prime Rate.
Grace period for repayment of balances for
purchases.
25 days
Method of computing the balance for purchases.
Average daily balance (excluding new
purchases)
Annual fees.
None
Minimum finance charge.
$.50
Transaction fee for cash advances: 3% of the amount advanced
Balance-transfer fee: 3% of the amount transferred
Late-payment fee: $25
Over-the-credit-limit fee: $25
It’s September 2007. What will you be charged on your outstanding balance?
What will you be charged on your outstanding balance at Christmas of 2007?
It is 2008 and the prime rate is 11%, What is your rate?
Your payment reaches the credit card company in 27 days. What will happen?
You miss two payments by more than 10 days in a six month period. What is your rate?
How much will a cash advance of $1000 cost you?
Answer
It’s September 2007. What will you be charged on your outstanding balance? 2.9%
What will you be charged on your outstanding balance at Christmas of 2007? 14.9%
It is 2008 and the prime rate is 11%, What is your rate? 16.9%
Your payment reaches the credit card company in 27 days. What will happen? Late fee $25
You miss two payments by more than 10 days in a six month period. What is your rate? 23.9%
2009 Page 41
How much will a cash advance of $1000 cost you? 3% or $30 plus 15.9% APR on $1000 for
whatever period you had the advance.
Assignment - Evaluating a Credit Card Offer
You’ve received the following credit card solicitation in the mail. (Several credit card offers are
attached at the end of this workbook but you may use one you got in the mail.)
Read the solicitation disclosure, fill in the credit card account comparison worksheet, and answer
the following questions:
– What interest rate are you charged on your purchases if you don’t pay your full
outstanding balance at the end of the month?
– Is this interest rate fixed?
– How is the interest computed?
– What are you charged on cash advances?
– Besides the interest rate, what other charges will you incur if you have an
outstanding balance? If your payment doesn’t clear?
– Assume you had an average daily balance of $500 for the month, what interest
rate and other fees would you pay?
– If you are using an offer you got in the mail, compare it to offers your classmates
have or the sample ones attached. How are they different?
Question
You were billed for a product that you ordered but that you did not receive on your latest credit
card statement. What should you do?
Answer
You were billed for a product that you ordered but that you did not receive on your latest credit
card statement. What should you do?
You should contact your credit card company (in writing or by phone) and let them know that the
billing was made in error. Be prepared to give you name, address, account number, the date of
the item, and the merchant. If you are talking by telephone, be sure to get the name of the
individual you are talking to and note the time and what was promised. Tell them that you will not
pay for the item until the dispute has been settled and exclude the item from your payment.
Assignment – Write a letter to correct an error on your credit card bill.
You purchased a flashlight from a store for $11.14. When your credit card bill arrived, the charge
was $111.40. Write a letter to the credit card company to correct this error. In your letter state
your name, billing address and account number. Give the date of the charge, the merchant
(store), and note the disputed amount.
Question
True or False
 Your liability on a debit card is the same or less than a credit card ______
 The bank has 10 days to investigate any errors you bring to their attention ___
 If you don’t notify your bank you lost your debit card you could be liable for $500 or more
_____
2009 Page 42
Answer

True or False



Your liability on a debit card is the same or less than a credit card __F__
The bank has 10 days to investigate any errors you bring to their attention _T_
If you don’t notify your bank you lost your debit card, you could be liable for $500 or more
_T___
o
o
o
If you do not report any unauthorized transactions by 60 days after your statement
arrives, you can be liable for all unauthorized transactions after 60 days.
There are exceptions for new accounts (20 days) and certain other transactions such
as foreign transactions (90 days).
The law limits liability to $50 if the debit cardholder notifies the bank within two
business days after discovering the theft. If you don't notify your bank within those
two days, you could lose up to $500, or perhaps more.
Question
You are buying a product from a merchant you haven’t dealt with before. Should you use a debit
or credit card?
Answer
You are buying a product from a merchant you haven’t dealt with before. Should you use a debit
or credit card?
When you use the debit card, the cash is taken out of your account immediately. If you are
uncertain about the product or the merchant, it’s best to use a credit card because you can
dispute the charge if the product is defective.
Question
On Monday, John’s debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the
money John had in his checking account. Five days later, the thief withdrew another $500,
triggering John’s overdraft line of credit. John did not realize his card was stolen until he received
his bank statement, showing withdrawals of $750 he did not make. He called the bank right away.
What is John’s liability?
Answer
On Monday, John’s debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the
money John had in his checking account. Five days later, the thief withdrew another $500,
triggering John’s overdraft line of credit. John did not realize his card was stolen until he received
his bank statement, showing withdrawals of $750 he did not make. He called the bank right away.
What is John’s liability?
John’s liability is $50.
Question
2009 Page 43
Now suppose that when John got his bank statement he didn’t look at it and didn’t call the bank.
Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching
the limit on John’s line of credit.
Answer
Now suppose that when John got his bank statement he didn’t look at it and didn’t call the bank.
Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching
the limit on John’s line of credit.
In this case, John would be liable for $1,050 ($50 for transfers before the end of the 60 days;
$1,000 for transfers made more than 60 days after the statement was mailed).
Question
You don't realize you have only $100 in your bank account and you want to use your debit card to
buy a $200 item. What will happen to your account?
Answer
You don't realize you have only $100 in your bank account and you want to use your debit card to
buy a $200 item. What will happen to your account?
Depending on the terms of your account or the rules of the card network, the bank might approve
the $200 purchase as a convenience, but it also might assess an overdraft fee for that transaction
and subsequent ones until you make a sufficient deposit.
Question
The typical person in Washington State has a credit card balance of $5500. Assuming the
minimum payment on this is $200, how long will it take to pay this off? Go to the Bankrate.com
calculator to determine this for 18% interest and 22% interest.
http://www.bankrate.com/brm/calc/creditcardpay.asp
Answer
It will take 36 months to pay off at 18% interest and 39 months to pay off at 22% interest.
Activity
Using your own credit card balance and credit card interest rate, calculate how long it will take
you to pay off the balance.
http://www.bankrate.com/brm/calc/creditcardpay.asp
Unit 3. Installment Loans
2009 Page 44
Installment loans are loans that are used to make major purchases. They typically involved
borrowing a large amount of money for a set number of years which is repaid with the same
monthly payment for the life of the loan. The most common installment loans are loans to
purchase a car and student loans to pay for college education.
Before you borrow money, you should always determine whether the purchase is necessary.
Smart money managers never borrow to spend; they borrow to invest—that is they would borrow
money to purchase an investment that increases in value. Therefore, it you are borrowing money
to buy something that depreciates or falls in value, you need to consider very carefully.
If you are a person who has ample savings, once you’ve decided to purchase the item, it’s
important to determine whether or not you should finance it yourself. For example, if you decide
to buy a car, should you finance or pay cash? Financial managers would look to see if you could
earn more with your investments than you pay for the loan. As an example, let’s you decide to get
an auto loan for $10,000 at 7%. You can get 8% by investing which might come to 6% after taxes.
In this case, the loan costs you more than what would you could get investing, so a better use of
your money is to pay cash. If you can get 11% by investing or 8% after taxes, then it makes
sense to borrow the money. You would use the same analysis when you decide whether you
should pay off a debt.
Here is what the analysis would look like:
7% Loan
Investment return
Less taxes (tax rates are
usually 25% to 40% of your
return)
After-tax return
Is my after-tax return more
than my finance rate of 7%?
Scenario 1
8%
Scenario 2
11%
2%
3%
6%
8%
NO. Pay cash.
YES. Take out loan.
Of course, there are other considerations. Some folks find it psychologically difficult to take on
more debt, so even if they don’t get a better return on investing, they would prefer to get rid of the
debt. For others, if they have too much debt, it makes sense to ease the burden.
Additionally, there is no guarantee on the investment returns you will get in the future. If you are
relying on the historical 11% return on the stock market, you might be hitting a patch where
returns are much lower.
Car Loans
Summary on Car Loans
1.
2.
3.
4.
5.
6.
7.
Shop around and do a lot of research before you buy a car. A car depreciates or loses value
so it’s not wise to spend a lot of money on a car.
Pull your credit report and know how you rate.
The type of car you buy can affect how much you pay for car insurance, maintenance and
gas.
Negotiate for the lowest price.
Don’t take out a loan for longer than the time you will be using the car. The shorter the term,
the less finance charges you pay.
Don’t let salespeople tell you how much you can borrow. Do your homework and work it out
yourself.
Shop around for the lowest interest rates.
2009 Page 45
8.
Don’t spend more than 40% of your monthly income (gross? Or net?) on debt including your
mortgage.
The temptation for many young people as they start their career and start to earn more than
they’ve ever earned is to splurge on a car that improves their image. As with any major purchase,
it is important to do your homework before you purchase a car. Sporty and fancy cars will not only
put you in major debt but they can also have an impact on other costs such as repairs, cost of
gas or insurance. It’s best to consider the whole package before you buy. Most people need a car
but it’s not wise to spend too much on this necessity. It loses value from the minute that you take
it off the lot.
It’s important to comparison shop with autos and often dealers will meet special deals offered by
their competitors. Many internet sites give information on the wholesale prices of cars so you can
be informed when you go into negotiate. For more information about buying a car, visit the FTC's
Web site at www.ftc.gov/autos.
Do all your homework before you walk into the dealership. This way you’ll be less swayed by
sales tactics and more likely to get a good deal. Most people simply don’t spend enough time
getting all the facts they need to buy smart. If you want motivation, think of the cost of a car and
how many hours you have to work to pay it off. For example, let’s say you make $15 an hour and
a car costs $17,000. You have to work 1133 hours to earn that car. That’s 28 weeks or about 7
months.
Research is not limited to the car. You also have to research loans. It’s important to understand
how a car loan works. If you need to finance you car, you’ll probably do it with an installment loan.
Installment loans all work the same way. There is a down payment, a time period in which the
loan must be paid, and a monthly payment of principal and finance or interest charges. The
amount you put down and the term or length of the loan can have an impact on your monthly
payment and the finance charges you pay. The longer the term, the less your monthly payment
will be. However, the longer the term, the more finance charges you will pay. Since most people
keep a car for about 5 years, it is not wise to finance a car for longer than its life. If you do, you
will be paying for the car when you are no longer using it.
Let’s say you buy a car for $17,000 and put $2,000 down. Your car loan for $15,000 is at the
2007 interest rate of 6.97%. If you take a car loan for 4 years, you will pay $359 each month for
48 months. The monthly payments are divided between principal and interest. As you can see
your principal payment increases each month and as a result your interest decreases. At the end
of 48 months, you will have paid back the $15,000 in principal and total finance charges of $2231.
With financing, your car cost you $17,231.
2009 Page 46
The loan issuer will look at your credit report to determine what interest rate you should be
charged. The lower your credit score, the more you will pay. Get your credit report to see if there
are any factors that might hurt you in the process. You may need to correct some information on
your credit report. The following are the three major credit reporting agencies. You are allowed
one free credit report from each every year. Take advantage of this.



Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285
Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742)
Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289
Check out a few banks to see what the going interest rate is for a car. The APR is the key factor
in determining which car loan is the best deal for you. Be sure that you get a complete schedule
showing exactly what you will be paying on a monthly basis in both principal and finance charges.
You don’t want the total payments of all debt (including mortgage) to exceed 40% of your income.
2009 Page 47
Go to a website like www.bankrate.com to try out a few loan amounts to see what the monthly
payments you can afford to make.
Car salespeople have a reputation for using many persuasion tactics to get you to buy more.
Review all the persuasion tactics at the beginning of this book so that you can defend yourself
well. Remember, it’s your hard-earned money that will be taken away. Spend and borrow only
what you absolutely have to.
Student Loans
Summary for Student Loans
1. Save as much as you can using tax-advantaged educational savings plans before you
go to college.
2. Make sure that you have a good chance of earning the income you need to pay off the
debt.
3. Only borrow as much as you need.
4. Fill out the Free Application for Federal Student Aid (FAFSA) for federal loans first.
They are the cheapest and have the most options.
5. Comparison shop for private loans and evaluate APRs. Check out the maximum
monthly payment if you are considering a variable rate.
6. Ask for loan features that will help you if you miss a payment or if you have a good ontime record.
7. Create a plan for repaying your loan when you take out the loan.
Student loans are taken out to finance your education. They are also installment loans, but
different from other installment loans, the interest is tax deductible in addition to your standard
deduction. Students are borrowing more nowadays as tuition increases. Educational inflation for
Washington State is 7% which is higher than general inflation.
2009 Page 48
The best way to pay for college is to start saving before you go to college. A little bit of planning
can save you a lot of money. For example, let’s say you are trying to pay for $60,000 in college
costs. If you saved using a qualified tuition plan, you would put $4343 in your plan every year at
7% for a total of $43.427 and you’ll have $60,000 for college.
2009 Page 49
If you borrow to pay for the same $60,000 at 7% for ten years, you’ll pay a total of $60,000 in
principal repayment and $25,427 in interest for a total of $85,427. Now a true comparison isn’t
quite that simple but you get the point.
Here are two ways the government helps you save for education.
529 Qualified Tuition Programs (QTP)
Many states have set up qualified tuition programs (also known as a 529 plan) that allow you to
either prepay or contribute to an account for a student's qualified education expenses (tuition,
fees, books, supplies, room and board) at an eligible educational institution (which is just about
any accredited college). The student (designated beneficiary) can be changed and is not limited
to any age.
The nice thing about 529s is the returns on your contribution are not taxable when you take them
out for qualified expenses. Contributions to a 529 cannot be more than the amount necessary to
provide for the qualified education expenses of the beneficiary. Unlike a Coverdell Education
Savings Account, there are no income restrictions on the individuals who contribute. You can
contribute to both a 529 and a Coverdell ESA in the same year for the same designated
beneficiary.
Assets can be rolled over or transferred from one 529 to another. In addition, the designated
beneficiary can be changed without transferring accounts. Any amount distributed from a 529 is
not taxable if it is rolled over to another 529 for the benefit of the same beneficiary or for the
benefit of a member of the beneficiary's family (including the beneficiary's spouse). For more
information on 529s go to http://www.irs.gov/publications/p970/ch08.html. For more information
on all education savings and credits see http://www.irs.gov/publications/p970/index.html.
Washington State’s Guaranteed Education Tuition Program works in a different way. If you buy
one year of college tuition today (100 GET units), it will be worth one year of college tuition when
your child is ready for college, no matter what the cost of college at the time. One hundred GET
2009 Page 50
units are equal to one year of resident undergraduate tuition and state-mandated fees at the most
expensive public university in Washington. This type of account takes out the uncertainty in the
return on your QTP.
Although the value of GET units is tied to tuition at a Washington public university, you can use
your units at nearly any qualified educational institution in the country. This program is open to
residents of the state of Washington. For more information, go to
http://www.get.wa.gov/index.shtml.
Coverdell Education Savings Account
A Coverdell ESA can also be used to save for qualified higher education expenses. There are
more restrictions, though. The student must be under age 18 when the account is set up and the
account must be used when the student reaches age 30 (unless the student has special needs).
There is no limit to the number of Coverdell ESAs that can be established for one beneficiary but
total contributions made to all Coverdell ESAs for any beneficiary in one tax year cannot be
greater than $2,000. There are income restrictions for the contributors.
Growth in Student Loans
Students took $80 billion in loans out in 2006. Student loans outstanding (still to be paid back) are
about $525 billion. Federal student loans are the largest source of education loans. In 2006, 12
million loans were made for a total of $55 billion. On average students coming out with a
bachelor’s degree had $20,000 in debt, those with a graduate degree had $35,000 in debt, and
those coming out of professional schools such as law school and medical school had $100,000 in
debt. If you think that these debts are paid off quickly, an AOL survey showed 65% of those who
took out student loans still had an outstanding balance at age 35.
You would assume that education is a good investment and it would be appropriate to borrow
money to go to college. After all, your earnings will go up once you get that degree. Just as with
any other purchase, look carefully at what you are buying. As an example, students borrowed
money to attend the many private culinary institutes that have sprung up and racked up $30,000
in debt. When they graduated, they hit a market where there was an oversupply of chefs and
some could only get jobs at $10 per hour. Their incomes did not go up and they could not support
the debt that they had assumed. Think carefully about where you are going to school if you have
to take out a loan. Could you get the same education at a public institution that you could at a
private institution? As with any other kind of debt, only borrow what you absolutely need.
Federal Student Loans
Federal student loans are considerably less expensive than private loans therefore you should
always apply for federal student loans first. Federal student loans are different from private loans
in that the government guarantees the loan. For subsidized Federal student loans that you have
to qualify for, you don’t have to pay interest until you leave school.
2009 Page 51
Stafford Loans
In order to be considered, you have to fill out a Free Application for Federal Student Aid (FAFSA).
You must have financial need as determined by your college. You have to be a US citizen or
national, a US permanent resident or eligible non-citizen. You must be enrolled or plan to enroll at
least half time. The school you attend must participate in the Federal Family Education Loan
Program. You must not be in default on any education loan or owe a refund on an education
grant.
The nice thing about Stafford loans are that no payments are required while you are in school at
least half time. There is no prepayment penalty if you pay off the loan early. No credit check is
required. There is a six-month grace period when no payments are required immediately
following your graduation or dropping to less-than-half-time status. The loan limits from July 2007
onwards are as follows:
Dependent
Annual loan limit
Freshman
$3,500
Sophomore
$4,500
Junior or senior
$5,500
Independent
Annual loan limit
Freshman
$7,500
Sophomore
$8,500
2009 Page 52
Junior or senior
Graduate or professional
$10,500
$20,500
Lifetime Limit
Undergraduate dependent
Undergraduate
independent
Graduate or professional
(some exceptions)
$23,000
$46,000
$138,500
Source: www.salliemae.com
For Stafford loans beginning July 1, 2006, the interest rate is fixed at 6.8%. This rate is adjusted
annually. There are various ways to repay the loan. The standard way is to make both principal
and interest payments each month for up to a 10-year repayment term. This plan has the lowest
total interest cost. You can also make reduced payments in the early years of repayment and
increased payments thereafter, while still paying off the loans within the maximum 10-year period.
With this graduated repayment, you have a higher total loan cost than with fixed repayment plan.
Payments can be adjusted to a percentage of your gross income. You must reapply every year
for this plan and payments are adjusted annually to reflect changes in income. With incomesensitive repayment, you have a higher total loan cost than with standard repayment. If you have
high student loan debt, you may be eligible for up to a 25-year repayment term and the choice of
standard or graduated payments to keep payments affordable. With extended repayment, you
have a higher total loan cost than with standard repayment. You combine your eligible loans into
a new loan with a single monthly payment and a fixed interest rate. While consolidation will lower
your monthly payments, it will generally result in a higher finance charges.
To find out more about student loans, check out the Department of Education website:
www.studentaid.ed.gov/students/publications/student_guide/2006-2007/english/index.htm.
Perkins Loans
Eligibility is very similar to the Stafford loan in that you must be enrolled in an eligible school at
least half-time in a degree program; have U.S. citizenship, permanent residency, or eligible noncitizen status; satisfactory academic progress; no unresolved defaults or overpayments owed on
Title IV education loans and grants and satisfaction of all selective service requirements.
Your school will have an allocation of Perkins loans and it determines which students have the
greatest need. The school combines federal funds with some of its own funds for loans to
qualifying students. Your school will pay you directly (usually by check) or apply your loan to your
school charges. You'll receive the loan in at least two payments during the academic year.
Perkins loans have no fees and a longer grace period than Stafford loans.
Parent PLUS Loans
Parents of a dependent child who is going to college may apply for a federal loan. They must
have U.S. citizenship, permanent residency, or eligible non-citizen status just as with the other
two loans. They must also undergo a credit check. The parents may borrow up to the full amount
of the child’s college expenses. The interest rate for Parent PLUS loans after July 1, 2006 is fixed
at 8.5%, which is adjusted annually. Repayment terms are very similar to the Stafford Loans.
2009 Page 53
Parents may sometimes cosign on a child’s student loans. By doing so, the child can get the
benefit of the parents’ longer and better credit rating with lower interest rates. A cosigner is
guaranteeing the debt. That means the cosigner will have to repay the loan if the borrower does
not. Cosigners must be able to repay the loan or suffer the consequences on their credit. The
liability will be included in their debt-to-income ratio when applying for other loans. All copies of
the loan documents must be given to the cosigner.
To limit their liability, people asked to cosign will instead provide funds to secure a loan. For
example, they may put money in deposit as collateral for the loan. This limits the liability to the
amount deposited and will not impact the person’s credit rating.
Private Loans
Private loans have grown to 20% of all student loans. These can be more costly and risky than
federal loans. Federal student loans are considerably less expensive than private loans therefore
you should always apply for federal student loans first. Federal student loans are different from
private loans in that the government guarantees the loan. For subsidized Federal student loans
that you have to qualify for, you don’t have to pay interest until you leave school.
Private student loans can have variable rates. Variable rates can go up and down while fixed
rates stay the same for the life of the loan. Variable rates for private student loans are pegged to
an interest benchmark such as the prime rate. The interest rate you are charged may be
anywhere from 1% to 3.75% over the prime rate depending on your credit rating. For example, if
the prime rate is 8%, your rate could be 9% to 11.75%. With variable rate loans, it’s always good
to check how high the rate can go.
There may be origination fees so you must factor these into your comparison shopping.
Origination fees are typically a percent of the loan which you pay upfront to cover administrative
costs. You can include those fees and do your own calculation with an APR calculator on the
2009 Page 54
internet. The APR is the more effective way to compare different loans. Some students have
found themselves paying 18% to 20% on their loans of over $50,000. Paying so much on student
loans can hinder your ability to achieve your other goals such as buying a house or saving for
retirement.
Also check to see if the interest rates will go up if you miss a payment. You might want to work
out a waiver for the first missed payment. Conversely check to see if the interest rates will go
down if you have a good on-time payment record.
Your college may have a list of “preferred” lenders. There have been some recent scandals
where it was found out that the lenders paid the colleges to get on their preferred list and may not
be the least expensive. Shop around for your private loans. Don’t restrict yourself to the
“preferred list.” You should check with the bank that holds your family’s home mortgage or with
state nonprofit agencies that offer student loans. Here is a link to their umbrella organization
www.efc.org/cs/root/resources/resources.
Repayment
Each year of college will add more debt to your student loan. Keep vigilant of your spending the
whole time. You’ll be running up a tab that will never let you go. Some student loans are
dischargeable by death, though no longer by bankruptcy. It’s best to understand this by looking
at those who have graduated from college and are working to pay back the student loan. Nellie
Mae asked borrowers questions about their attitude towards their student loans in a 2002
National Student Loan Survey. The borrowers’ monthly loan payments averaged 16% of their
starting salaries. As their salaries rose, payments fell to 8% of their income. About 55% of
borrowers felt burdened by the loan and 54% would have borrowed less if they had to do it again.
If you have a few private loans, you might consider consolidating them. (They can’t be
consolidated with federal loans.) But be very careful to do the same evaluation you would for any
new loan.
Question
What is an installment loan?
Answer
What is an installment loan?
An installment loan is a loan that is used to make a major purchase or to pay for college. This
type of loan requires multiple payments over an extended period of time.
Question
Name some types of installment loans.
Answer
Name some types of installment loans.
Installment loans include car loans, student loans, federal student loans, private loans and
mortgages.
2009 Page 55
Question
When obtaining a car loan, what are some other things to consider that may affect your budget
and the type of loan you want to get?
Answer
When obtaining a car loan, what are some other things to consider that may affect your budget
and the type of loan you want to get?
When obtaining a car loan you should also consider the cost of insurance, maintenance, and gas.
Question
What is the maximum amount of your income that you want to be spending on debt, including a
mortgage, all installment loans, and credit cards?
Answer
What is the maximum amount of your income that you want to be spending on debt, including a
mortgage, all installment loans, and credit cards?
The maximum amount of income that should be spent on debt is 40%.
Question
True or False
1. Any higher education degree is worth the investment required to earn it. _________
2. The government pays your interest on student loans while you are in school so you
should take out as much as they will let you. __________
3. When a company offers you a loan, you either have to take their offer or find another
company to deal with. __________
4. If your parents sign up for a Parent PLUS Loan and you fail to make the payments after
you graduate, they have an equal responsibility to repay the loan or it will hurt their credit
as well. __________
Answer
True or False
1. Any higher education degree is worth the investment required to earn it. __F_______
Sometimes a degree may cost more to earn than it is worth. Consider the example of all
the chefs that graduated at the same time flooding the market with their skills. They
could not earn enough from their chosen profession to keep up with the cost of the loans
that gave them the necessary skills to compete. Also, some colleges may be more
reputable than others and open more doors. Research the career you are choosing
carefully.
2. The government pays your interest on student loans while you are in school so you
should take out as much as they will let you. __F________
The government pays interest on some types of student loans while you are attending
full-time school and maintain good academic standing. However, any time you are taking
2009 Page 56
out a loan it is important to be sure that you only take as much as you need. Eventually
you will have to pay it back.
3. When a company offers you a loan, you either have to take their offer or find another
company to deal with. __F________
Some companies will allow you, as the borrower, to negotiate certain terms of the loan.
See if the lender is willing to reduce the interest rate for consistent on-time payments.
Make sure there is no pre-payment penalty. If you know what features you want out of a
loan, it makes it easier for a lender to tailor a loan to meet your needs.
4. If your parents sign up for a Parent PLUS Loan and you fail to make the payments after
you graduate, they have an equal responsibility to repay the loan or it will hurt their credit
as well. __T________
Parents that sign up for a Parent PLUS Loan as co-borrowers and any payments affect
their credit rating as well as the credit rating of the student.
Question – Will your degree be worth it?
Nellie Mae found the following average student loans and starting salaries for the college
graduates in various professions. Many students going to professional schools have to take
private loans.
Assume that graduates will have the standard ten-year repayment plan. What percent of their
starting salaries will go to student loan payments if the interest rate for the loan is 8%? What if the
interest rate is 11%?
Mean total
debt
Mean 2001
earnings
Would
borrow less
Feel very
burdened
Delayed
buying home
Law/Medicine
$91,700
Business
$39,500
Education
$32,200
Other Health
$55,300
$68,000
$57,000
$32,900
$40,500
65%
48%
60%
61%
75%
53%
65%
64%
49%
22%
25%
29%
Answer
Law/Medicine
Business
Education
Other Health
Mean total debt
$91,700
$39,500
$32,200
$55,300
Mean 2001 earnings
$68,000
$57,000
$32,900
$40,500
$1,112.57
$479.24
$390.67
$670.94
$13,350.89 $5,750.93
20%
10%
$1,263.17
$544.11
$15,158.01 $6,529.35
22%
11%
$4,688.10
14%
$443.56
$5,322.66
16%
$8,051.30
20%
$761.76
$9,141.09
23%
8%
Annual Loan Payments
Percent of salary
11%
Annual Loan Payments
Percent of salary
2009 Page 57
Unit 4. Mortgages
Mortgage Summary
1. Make sure that buying a house is the right thing for you to do right now.
2. Negotiate the best deal you can on the house.
3. Check your credit report and figure out how much you can afford in a mortgage. Don’t let
your mortgage broker do this for you.
4. Comparison shop for mortgages by filling out the mortgage evaluation sheet.
5. Use the APR to compare offers. Make sure that you have included all costs.
6. If you are getting a variable-rate mortgage, look at the highs and lows for the index that is
used for your mortgage. Figure out what your maximum payment might be and make
sure that you can afford it.
7. Understand what and when you are paying back. Ask the lender to show you both
principal repayment and interest charges for the term of the loan. Will you be required to
make a balloon payment?
8. Obtain all disclosures
9. Read all documents. Once you sign the mortgage agreement, you cannot cancel.
10. If you are denied credit, ask why.
11. If you have a dispute about payment, the lender must respond to you.
12. If you have problems that persist, report them to the FTC.
A big part of the American dream is getting a home. However, buying a home may not be right
for you at this time. Here are some factors you need to consider when you are thinking of buying
a home or refinancing your home:
 Do I expect to live in the house for over five years? It’s true that most people don’t live forever
in their homes but if you plan to move in a few years or you are uncertain, it’s best not to buy
a house because you cannot recover the transaction costs of buying and selling in a short
period of time.
 Is my income stable? Although it’s tough to predict whether what your employer will do, any
reduction in salary can affect your ability to pay your mortgage. Many folks are depending on
two salaries to support a mortgage. What happens if one salary is gone?
 Is this a good time to buy? Many factors play into the price of a house. Prices tend to rise
when interest rates fall as seen by the figure below. Housing can go through times when
prices are extremely high only to drop quickly. Assess whether this might be such a time. If it
is, it might not be a good time to buy.
 For refinances, it is important to ask if you really need the money. Some folks refinance to get
money to remodel the house. They reason that this is an investment and will be returned
when the house is sold. Not all renovations result in increased value. You need to evaluate
this carefully.
2009 Page 58
How mortgages work
Consumer surveys show that about one-third of people who have mortgages don’t know what
kind of mortgage they have. A mortgage is a loan that you take out to finance the purchase of
your house. Typically mortgages go over a span of 30 years or 15 years, although they can go for
other time periods as well. As with installment loans, the longer your term, the smaller the
monthly payment but the more interest you pay. People can get a mortgage when they buy a
house or they can also refinance by paying back the mortgage that they have and taking on a
new mortgage.
Mortgages can be fixed-rate meaning that you pay the same interest through its life or they can
be adjustable-rate meaning that they will change based on a stated benchmark. You can also
have balloon mortgages where the principal will come due in a given year. According to the 2004
Consumer Finance Survey, 11.4% of families had adjustable-rate mortgages. 57.5% had 30-year,
32.9% had 15-year or less, and 4.1% had balloon mortgages.
2009 Page 59
Typically more mortgages are taken out when interest rates are low. In 2003, when mortgage
interest rates were low, there were $3.8 trillion in purchase and refinance mortgages taken out by
people in the US.
2009 Page 60
Easy-to-get mortgage debt has had an impact on the wealth of families. The home is the largest
part of most folks’ net worth of wealth. Paying down the mortgage of a house is a form of savings.
In the 1950s, families preferred to have less mortgage debt and the typical family had almost 80%
equity in their homes (meaning their mortgage only accounted for 20%). Now the typical family
has only 55% equity in their home.
How Much Can You Afford?
The lending institution will check your employment and credit history to determine whether or not
you are a good lending risk. They will also look at the amount of down payment and your assets
and liabilities. In qualifying you for a mortgage, the lending institution will use ratios such as the
debt to income ratio. For example, a lending institution may require a 28/36 debt to income ratio.
The first number is 28% and it signifies the largest percent of monthly income that goes to
housing. This includes mortgage, insurance, and taxes. Say if your monthly income is $3600,
28% of that would equal $1008. The lending institution would require that the monthly expenses
from your house not exceed $1008. The second number in the ratio (36%) represents the total
amount of debt payment as a percent of monthly income. This will include auto, student, credit
card, and personal loans along with any alimony that has to be paid. Debt-to-income ratios can
vary from 28/36 to 33/41, depending on the institution. Be aware that you should also consider
how much of your monthly income is put to these costs. The higher the percent of your monthly
income you put to payment for loans of any kind, the more financial risk you put yourself in.
Home loans are available from several types of lenders—thrift institutions such as saving banks,
commercial banks, mortgage companies, and credit unions. Different lenders may quote you
different prices, so you should contact several lenders to make sure you’re getting the best price.
You can also get a home loan through a mortgage broker. Brokers arrange transactions rather
than lending money directly; in other words, they find a lender for you. Brokers will generally
contact several lenders regarding your application, but they are not obligated to find the best deal
for you unless they have contracted with you to act as your agent. To get the best deal, you
2009 Page 61
should consider contacting more than one broker, just as you would comparison shop with
mortgage lenders.
Whether you are dealing with a lender or a broker may not always be clear. Therefore, be sure to
ask whether a broker is involved. This information is important because brokers are usually paid a
fee for their services that may be separate from and in addition to the lender’s origination or other
fees. A broker’s compensation may be in the form of "points" paid at closing or as an add-on to
your interest rate, or both. You should ask each broker you work with how he or she will be
compensated so that you can compare the different fees. Be prepared to negotiate with the
brokers as well as the lenders.
Information to Get When You Take Out a Mortgage
Be sure to get information about mortgages from several lenders or brokers. Know how much of a
down payment you can afford, and find out all the costs involved in the loan. Knowing just the
amount of the monthly payment or the interest rate is not enough. Ask for information about the
same loan amount, loan term, and type of loan so that you can compare the information. Here is
the average statistics for Washington state residents on conventional mortgages from 1978 to
2003.
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Contract
Interest
Rate
(%)
9.67
10.75
12.41
14.08
14.17
12.52
11.71
10.75
9.87
8.85
8.88
9.93
10.06
9.20
7.92
6.84
6.82
7.50
7.47
7.52
6.93
6.95
7.59
6.85
Initial
Fees
and
Charges
(%)
1.80
1.88
2.30
3.12
3.35
2.57
2.59
2.34
2.22
1.92
1.80
1.71
1.80
1.61
1.69
1.29
1.03
1.07
1.07
1.10
0.98
0.82
0.66
0.57
Effective
Interest
Rate
(%)
Term
to
Maturity
Purchase
Price
($000)
Loanto-Price
Ratio
(%)
AdjustableRate
Loans
(%)
9.97
11.09
12.85
14.73
14.89
13.01
12.18
11.16
10.24
9.17
9.17
10.22
10.37
9.47
8.22
7.05
6.98
7.66
7.64
7.69
7.08
7.08
7.69
6.94
28.1
28.5
28.9
28.8
26.6
27.9
29.5
29.3
28.3
28.4
28.6
28.6
28.4
27.3
24.9
25.7
28.5
28.2
27.9
27.1
27.5
28.3
29.1
27.4
55.4
68.6
78.1
77.8
83.1
86.4
89.7
90.4
109.8
116.8
119.0
134.7
144.5
160.7
147.1
148.6
150.8
162.0
186.3
190.6
194.6
209.1
223.0
234.8
77.3
74.8
75.1
77.9
74.5
77.5
79.6
80.7
77.2
77.7
76.1
74.4
73.6
72.3
75.1
72.5
79.2
78.7
77.8
76.7
75.4
75.9
75.8
72.8
NA
NA
NA
NA
NA
NA
NA
NA
22
51
59
36
23
19
17
18
55
29
34
17
9
26
30
12
2009 Page 62
2002
6.31
0.44
6.37
2003
5.50
0.26
5.54
Source: Federal Home Finance Board
26.6
26.0
245.9
252.6
71.1
69.8
20
19
Rates
There are two general ways in which interest can be determined. The first is a fixed-rate
mortgage where the interest rate is fixed for the entire time that the money is borrowed. The
lower the interest rate the less you pay to borrow the money. Most people like to buy a home and
take a mortgage when interest rates are low, but unfortunately, that is usually the time when the
prices of houses are higher. Here is how interest rates can affect the monthly payment on your
mortgage:
Adjustable-rate mortgages are where the interest rate can be reset based on a benchmark
interest rate such as treasury (money the federal government borrows) bill rates. Sometimes
adjustable-rate mortgages will be offered with a “teaser” rate (a rate that is low relative to other
rates) that will be fixed for a set number of years. For example, an adjustable 5/1 would be one in
which the initial interest rate would hold for 5 years and then it would reset every year after that.
The rate resets based on the benchmark. Since interest rates can vary, your interest rate on an
adjustable-rate mortgage can change. Loans secured by a dwelling need to have a maximum
(cap) on how high the rate can go. The good news about adjustable-rate mortgages is that often
they are offered at low interest rates that allow you to qualify to buy a higher-priced house. The
bad news is that they can make your monthly mortgage payments go up substantially.
As you can see from the chart above, if you got an adjustable-rate mortgage in 2004 that was
fixed for two years on a low teaser rate or 4%, when the rate resets in 2006 you will move up to
6%. Looking at the rate chart above, your monthly payment will go up 26%.
Each of your mortgage payments is divided between interest and repayment of principal or the
money borrowed. Over the life of a mortgage even though the monthly payment stays the same,
the interest portion of the monthly decreases while the principal increases. The number of years
that you hold a mortgage determines how much interest you pay. The longer the term of the
mortgage, the more interest you pay. Now some folks may protest that the interest is tax
2009 Page 63
deductible. But interest is still an expense even if you get some taxes back for it. So if you pay
$100 in interest and after tax it’s $70, that is still $70 out the door.
Here is a comparison of a 30-year mortgage versus a 15-year mortgage at 6%. Although the
annual payments are lower with a 30-year mortgage, you pay twice as much interest.
Given all the options you have for a mortgage, it is important that you get as much information as
possible when you comparison shop. Ask each lender and broker for a list of its current mortgage
interest rates and whether the rates being quoted are the lowest for that day or week.
Ask even more questions about adjustable-rate mortgage. Some adjustable-rate mortgages are
fixed for a few years and then they reset. Looking at how interest rates can vary in the chart
above, it’s important to understand what your risk is. Some people think that they can predict
2009 Page 64
where interest rates will go and will use an adjustable-rate mortgage for the lower rates in the
hopes that interest rates will fall and they can refinance when they do. Even the experts have a
hard time predicting where interest rates will go. Ask what the maximum rate is. Some mortgages
have balloons meaning they require payment in full in a few years. Understand exactly how the
mortgage works before you sign on.
Given the exotic combinations that some lenders can offer, one of the key measures is the loan’s
annual percentage rate (APR). The APR for a mortgage takes into account not only the interest
rate but also points, broker fees, and certain other credit charges that you may be required to
pay, expressed as a yearly rate. But be aware, APRs generally do not include appraisals, credit
report fees, house inspections or title fees. You can include those fees and do your own
calculation with an APR calculator on the internet. (http://www.occ.treas.gov/aprwin.htm has the
Comptroller of Currency’s APR calculator for download.)
Points
Points are fees paid to the lender or broker for the loan and are often linked to the interest rate;
usually the more points you pay, the lower the rate. For example if you are borrowing $100,000, 3
points or 3% of the value of the mortgage may be linked with a 6% rate while 2 points or 2% of
the value may be linked with a 6.5% rate. Check your local paper to see a comparison of the
rates and points. Ask the lender to calculate the points as a dollar amount so you can see what it
will cost. Often the lender will match lower points with higher interest rates making it difficult to
see what the better deal is. In this case, be sure to ask for the APR (Annual Percentage Rate)
which takes into account all the fees and points in calculating the rate you have to pay.
Fees
A home loan often involves many fees, such as loan origination or underwriting fees, transaction,
settlement and closing costs. The New York Times estimates that consumers paid $50 billion in
mortgage fees in 2006. Your lender or broker should be able to give you an estimate of its fees.
Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as
application and appraisal fees), and others are paid at closing. In some cases, you can borrow
the money needed to pay these fees, but doing so will increase your loan amount and total costs.
"No cost" loans are sometimes available, but they usually involve higher rates.
Down Payments and Private Mortgage Insurance
Down payments are cash payments that lenders require and represent the buyer’s equity in the
house. It follows that the bigger the down payment you put on a house, the less your monthly
payment will be. This provides for some security in that if you lose your job or your salary is
reduced, you will have less of a financial strain.
Effect of Down Payment on $100,000 Purchase at 6% for 30 years
Down
Payment
0%
5%
10%
15%
20%
25%
Monthly
Payment
$605.41
$575.14
$544.87
$514.60
$484.33
$454.06
2009 Page 65
30%
$423.79
Some lenders require 20 percent of the home’s purchase price as a down payment. Some
lenders will require that you show where the down payment is held. However, many lenders now
offer loans that require less than 20 percent down--sometimes as little as 5 percent. If a 20
percent down payment is not made, lenders usually require the home buyer to purchase private
mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. If PMI is
required, ask how much it adds to your monthly payment and ask how long you will have to pay it.
When government-assisted programs such as FHA (Federal Housing Administration), VA
(Veterans Administration), or Rural Development Services are available, the down payment
requirements may be substantially smaller.
Subprime Mortgages
The homeownership rate has grown to 69% from 65% over the past decade; about half of this
growth was subprime lending or lending to people who would not qualify under the conventional
mortgage criteria, according to a study by the Federal Reserve Bank of Chicago. Subprime loans
made up 12.75% of the $10.2 trillion mortgage market in 2006, up from 8.5% in 2001.
Although it appears that subprime lending is helping folks who might otherwise not get to buy a
home, this is not always the case. In fact, many of the people who borrowed subprime money
were put in a situation where they were forced to live beyond their means. These mortgages were
adjustable rate and rates increased by as much as 2% and many of these homeowners face
losing their homes and foreclosure. The Center for Responsible Lending estimates that use of
subprime loans will cause less people in this group to own houses because of foreclosures.
Although it is enticing to be offered the opportunity to buy a house, it’s important to think about
securing your financial future. This can be done by saving enough for a good down payment,
making sure that your debt-to-income ratio is low, and preparing for bad times by having an
emergency reserve.
Once you know what each lender has to offer, negotiate for the best deal that you can. On any
given day, lenders and brokers may offer different prices for the same loan terms to different
consumers, even if those consumers have the same loan qualifications. The most likely reason
for this difference in price is that loan officers and brokers are often allowed to keep some or all of
this difference as extra compensation. Generally, the difference between the lowest available
price for a loan product and any higher price that the borrower agrees to pay is an overage. When
overages occur, they are built into the prices quoted to consumers. They can occur in both fixed
and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether
quoted to you by a loan officer or a broker, the price of any loan may contain overages. According
to research by Harvard professor Howell E. Jackson, who testified before the U.S. Senate
Committee on Banking in 2002, the average customer paid $1,850 in the form of an overage.
Professor Jackson also testified that African Americans ($474 more) and Hispanics ($580 more)
pay mortgage brokers more for their services.
Have the lender or broker write down all the costs associated with the loan. Then ask if the lender
or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points.
You’ll want to make sure that the lender or broker is not agreeing to lower one fee while raising
another or to lower the rate while raising points.
If you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in
from the lender or broker. The lock-in should include the rate that you have agreed upon, the
period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in
the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases
2009 Page 66
while your loan is being processed; if rates fall, however, you could end up with a less favorable
rate. Should that happen, try to negotiate a compromise with the lender or broker.
Be aware that some disreputable lenders disclose that they can change the terms of the
mortgage at any time and may jack up the rates considerably just before closing in hopes the
prospective buyer will feel obliged to continue with the transaction. Be very careful and evaluate
the situation. It may be best to walk away from the deal.
Mortgage Shopping Worksheet
(From the Federal Reserve)
Lender 1
Lender 2
Name of Lender:
___
___
Name of Contact:
___
___
Date of Contact:
___
___
Mortgage Amount:
___
___
mortgage 1 mortgage 2 mortgage 1 mortgage 2
Basic Information on the Loans
Type of Mortgage: fixed rate,
adjustable rate, conventional, FHA,
other? If adjustable, see below
___
___
___
___
Minimum down payment required
___
___
___
___
Loan term (length of loan)
___
___
___
___
Contract interest rate
___
___
___
___
Annual percentage rate (APR)
___
___
___
___
Points (may be called loan discount
___
points)
___
___
___
Monthly Private Mortgage
Insurance (PMI) premiums
___
___
___
___
How long must you keep PMI?
___
___
___
___
Estimated monthly escrow for taxes
___
and hazard insurance
___
___
___
Estimated monthly payment
(Principal, Interest, Taxes,
Insurance, PMI)
___
___
___
___
Fees
Different institutions may have
___
different names for some fees and
may charge different fees. We have
___
___
___
2009 Page 67
listed some typical fees you may
see on loan documents.
Application fee or Loan processing
fee
Origination fee or Underwriting fee
___
___
___
___
Lender fee or Funding fee
___
___
___
___
Appraisal fee
___
___
___
___
Attorney fees
___
___
___
___
Document preparation and
recording fees
___
___
___
___
Broker fees (may be quoted as
points, origination fees, or interest
rate add-on)
___
___
___
___
Credit report fee
___
___
___
___
Other fees
___
___
___
___
Other Costs at
Closing/Settlement
Title search/Title insurance
For lender
___
___
___
___
___
___
___
___
Estimated prepaid amounts for
interest, taxes, hazard insurance,
payments to escrow
___
___
___
___
State and local taxes, stamp taxes,
transfer taxes
___
___
___
___
Flood determination
___
___
___
___
Prepaid Private Mortgage
Insurance (PMI)
___
___
___
___
Surveys and home inspections
___
___
___
___
Total Fees and Other
Closing/Settlement Cost
Estimates
___
___
___
___
For you
Lender 1
Lender 2
Name of Lender:
mortgage 1 mortgage 2 mortgage 1 mortgage 2
2009 Page 68
Other Questions and
Considerations about the Loan
Are any of the fees or costs
waivable?
___
___
___
___
Prepayment penalties
Is there a prepayment penalty?
___
___
___
___
If so, how much is it?
___
___
___
___
How long does the penalty period
last? (for example, 3 years? 5
years?)
___
___
___
___
Are extra principal payments
allowed?
___
___
___
___
Lock-ins
Is the lock-in agreement in writing?
___
___
___
___
Is there a fee to lock-in?
___
___
___
___
When does the lock-in occur—at
application, approval, or another
time?
___
___
___
___
How long will the lock-in last?
___
___
___
___
If the rate drops before closing, can
___
you lock-in at a lower rate?
___
___
___
If the loan is an adjustable rate
mortgage:
What is the initial rate?
___
___
___
___
What is the maximum the rate
could be next year?
___
___
___
___
What are the rate and payment
caps each year and over the life of
the loan?
___
___
___
___
What is the frequency of rate
change and of any changes to the
monthly payment?
___
___
___
___
What is the index that the lender
will use?
___
___
___
___
What margin will the lender add to
the index?
___
___
___
___
Credit life insurance
Does the monthly amount quoted to ___
you include a charge for credit life
___
___
___
2009 Page 69
insurance?
If so, does the lender require credit
life insurance as a condition of the
loan?
___
___
___
___
How much does the credit life
insurance cost?
___
___
___
___
How much lower would your
monthly payment be without the
credit life insurance?
___
___
___
___
If the lender does not require credit
life insurance, and you still want to
buy it, what rates can you get from
other insurance providers?
___
___
___
___
Laws That Protect You
A house is probably the single largest loan for most people and one of the most complicated. The
Real Estate Settlement Procedures Act, like Truth in Lending, requires that the lender give you, in
advance, certain information about the costs you will pay when you close the loan. The act also
requires that lenders give you the booklet “Buying Your Home: Settlement Costs and Information”
to help you understand the closing process and shop for lower settlement costs. The Federal
Reserve pamphlet “A Consumer’s Guide to Mortgage Closing Costs” also contains useful
information.
The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in
any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital
status, age, whether all or part of the applicant’s income comes from a public assistance
program, or whether the applicant has in good faith exercised a right under the Consumer Credit
Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of
race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a
consumer cannot be refused a loan based on these characteristics nor be charged more for a
loan or offered less favorable terms based on such characteristics.
Although there are many laws to protect you, be aware that many studies have shown that
minorities often receive rates that are higher than their economic status warrants. It is important
that you assert your rights and ask questions. If you feel that you have been discriminated
against, file a complaint.
Canceling a Mortgage
The right to cancel (or right of rescission) was provided to protect you from decisions that are
hasty or made under pressure, possibly putting your home at risk if you are unable to repay the
loan. The law does not apply to a mortgage to finance the purchase of your home; for that, you
commit yourself as soon as you sign the mortgage contract. This is true.
Question 15
A debt-to-income ratio of 28/36 refers to:
2009 Page 70
a) the percent of your monthly income after tax put to debt
b) the percent of your loan payments put to mortgage payment
c) the percent of your gross monthly income put to housing expenses and other loan payments
d) the percent of your mortgage payments put to other loan payments
Answer 15
A debt-to-income ratio of 28/36 refers to:
a) the percent of your monthly income after tax put to debt
b) the percent of your loan payments put to mortgage payment
c) the percent of your gross monthly income put to housing expenses and other loan payments
d) the percent of your mortgage payments put to other loan payments
Correct answer c.
Question 16
Which payments are included in the first number in the debt –to-income ratio?
Auto loan payments ____
Student loan payments _____
Personal loan payments _____
Mortgage payments _____
Alimony paid out _____
Real estate taxes ____
Home insurance ______
Answer 16
Which payments are included in the first number in the debt –to-income ratio?
Auto loan payments ____
Student loan payments _____
Personal loan payments _____
Mortgage payments __X__
Alimony paid out _____
Real estate taxes __X__
Home insurance ___X___
Question 17
Which payments are included in the second number in the debt –to-income ratio?
Auto loan payments ____
Student loan payments _____
Personal loan payments _____
Mortgage payments _____
Alimony paid out _____
Real estate taxes ____
Home insurance ______
Answer 17
Which payments are included in the second number in the debt –to-income ratio?
Auto loan payments __X__
Student loan payments ___X__
Personal loan payments __X___
Mortgage payments _X____
2009 Page 71
Alimony paid out __X__
Real estate taxes __X__
Home insurance ___X___
Question 18
Your gross household income is $60,000. Using the 28/36 debt to income ratio, how much
mortgage can you afford? Assume housing expenses other than mortgage is $400 per month.
Answer 18
Your gross household income is $60,000. Using the 28/36 debt to income ratio, how much
mortgage can you afford?
Your gross monthly income is $5000 ($60,000/12). 28% of $5000 is $1400. $1400 less $400 for
other housing expenses leaves you $1000 for monthly mortgage payments.
Question 19
True or False
Going to one lender is enough when you want to get a mortgage.
A mortgage broker is not obligated to get the best deal for you.
It’s not important to know whether you’re dealing with a lender or a mortgage broker.
Answer 19
True or False
Going to one lender is enough when you want to get a mortgage.
False. There are many different rates and offers. You need to comparison shop for your
mortgage. It can cost you a lot over a long period of time of you don’t.
A mortgage broker is not obligated to get the best deal for you.
True. Unless you contract with the mortgage broker to act on your behalf, he or she is not
obligated to get the best deal for you. And even if the broker is contracted by you, be sure to go to
a few mortgage brokers to comparison shop.
It’s not important to know whether you’re dealing with a lender or a mortgage broker.
False. A mortgage broker will charge a fee on top of the cost of the mortgage so you need to
know what that will cost you.
Question 20
What do the following do to your finance charges in a mortgage? Indicate whether it makes the
charges higher or lower.
2009 Page 72
Higher down payment ____________
30-year term as compared to 15-year term _____________
3 points as compared to 1 point ______________
Answer 20
What do the following do to your finance charges in a mortgage?
Higher down payment _Lower_
30-year term as compared to 15-year term __Higher___
3 points as compared to 1 point ___Higher____
Question 21
When is it good to use an adjustable-rate mortgage over a fixed-rate mortgage?
Answer 21
When is it good to use an adjustable-rate mortgage over a fixed-rate mortgage?
When interest rates are high, often people will do an adjustable-rate mortgage so that they can
get a lower rate. They plan to lock into a fixed-rate mortgage when interest rates fall.
Unfortunately, it’s not possible to predict for certain where interest rates will go.
Question 22
A lender is advertising 5% mortgages with an APR of 5.2%. How is the noted (nominal) rate different from
the APR? Which should be used to evaluate a mortgage?
Answer 22
A lender is advertising 5% mortgages with an APR of 5.2%. How is the noted (nominal) rate
different from the APR? Which should be used to evaluate a mortgage?
The APR is the cost of credit on an annual basis. Lenders are required to disclose this so that
consumers can compare across different lenders. It is important that you ask for the APR when
you are comparison shopping on mortgages. It is also important to ask whether all fees are
included in the calculation of the APR.
Question 23
You have an adjustable-rate mortgage that resets after a year. The rate is set at 2% above the
90-day treasury bill. When you assumed the mortgage a year ago, you were given the rate of
4.97%. The treasury bill rate is 5.03%. What will your rate be changed to? What increase will you
see in your monthly payments?
Answer 23
2009 Page 73
You have an adjustable-rate mortgage that changes annually. The rate is set at 2% above the 90day treasury bill. When you assumed the mortgage a year ago, you were given the rate of 4.97%.
The treasury bill rate is 5.03%. What will your rate be changed to? What increase will you see in
your monthly payments?
The new rate will be 7.03%. You add 2% to 5.03% to get the new rate. Your monthly payments
will increase about $125 for every $100,000 that you borrowed.
Question 24
You are comparing two mortgage lenders for a $200,000 mortgage. The first is offering a 5.75 rate with 3
points, while the second is offering 6.00% with 1 point. Which is the better deal?
Answer 24
You are comparing two mortgage lenders for a $200,000 mortgage. The first is offering a 5.75 rate with 3
points, while the second is offering 6.00% with 1 point. Which is the better deal?
You have to do an APR calculation on this one to determine which is the better deal. Go to:
http://www.dinkytown.net/java/MortgageApr.html and input the numbers. The 6% with 1 point
wins by a hair.
Question 25
The local newspaper had these rates for 30-year fixed rate mortgages. Using an APR calculator
determine what the APRs are for each:
Company
Interest rate
Points
A
B
C
D
5.75
5.875
4.875
5.25
0
1
5.875
2.875
Down
payment
0 – 20%
0 – 20%
0 – 20%
0 – 20%
APR
Answer 25
The local newspaper had these rates for 30-year fixed rate mortgages. Using an APR calculator
determine http://www.dinkytown.net/java/MortgageApr.html what the APRs are for each:
Company
Interest rate
Points
A
B
C
D
5.75
5.875
4.875
5.25
0
1
5.875
2.875
Down
payment
0 – 20%
0 – 20%
0 – 20%
0 – 20%
APR
5.75
5.967
5.31
5.5
Assignment 1: Buying a house
Go to zillow.com. Identify a house that you want to buy. The sky is the limit.
Find at least two mortgage rates including points. Estimate the other closing costs. Assume a
reasonable down payment. Determine what your monthly payment will be.
2009 Page 74
Activity
Comparison shop mortgage fees. Determine what typical fees are for a mortgage. Go to the
website www.feedisclosure.com. Read the sample disclosure report and compare to your
analysis.
Unit 5. Home Equity Line of Credit
Home Equity Summary
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Don’t use home equity loans to finance spending on day-to-day items.
Evaluate the home equity loan against refinancing your mortgage.
Comparison shop for home equity loans.
Use the APR to compare offers but remember that APRs for home equity loans do not
include closing costs. Look at all costs.
Look at the highs and lows for the index that is used for your home equity loan. Figure
out the maximum payment you will need to pay.
Understand what you are paying back. Ask the lender to show you both principal
repayment and interest charges. Will you be required to make a balloon payment?
On a home equity line of credit, determine a repayment schedule. You do not want the
loan to be outstanding for an indeterminate period of time.
You have 3 days to cancel the credit lines and they have to pay everything back to you.
If you are denied credit, ask why.
If you have a dispute about payment, the lender must respond to you.
If you have problems that persist, report them to the FTC.
A home equity line of credit is a form of revolving credit in which your home serves as collateral.
Because the home is likely to be a family's largest asset, many homeowners use their credit lines
only for major items such as education, home improvements, or medical bills and not for day-today expenses. According to the 2004 Consumer Finance Survey 1.3% of families used a home
equity line for a median balance of $4,200. Many of these families use a home equity loan to pay
for home improvements.
Homeowner remodeling has become a huge industry accounting for almost $300 billion a year. It
makes sense that when you buy a home, there will be the need to maintain or upgrade parts of
your house. This can run from $500 to $1000 for appliances such as a refrigerator or dishwasher,
$5000 for a furnace, and more for items like a new roof or driveway. Other homeowners may
want to upgrade their homes to enjoy or they may want to put in energy-efficient features. Just be
aware that only a few home renovations pay themselves back if you are planning to sell.
According to Remodeling magazine’s 2005 Cost vs Value Survey these include new siding
($10,000), bathroom ($10,000) and kitchen renovations ($15,000) which may pay back 75% to
100% of the value—and only if your home is not above the average value in your neighborhood.
If you are planning to sell, don’t spend too much on remodeling. Extra fancy or customized
remodeling rarely pays back as new owners may not have the same taste as you do. Other
renovations recoup only a portion of their cost. So, as with any other time that you assume debt,
evaluate very carefully before you spend.
Some people may use a home equity loan to consolidate loans which are not tax-deductible.
Interest payments on a home equity loan and other mortgages totaling up to $1 million are taxdeductible while other kinds of loans may not be. In comparison to mortgages, home equity loans
typically have a higher interest rate, so if you are thinking of a substantial home equity loan, you
may want to evaluate the finance charges and fees against refinancing your mortgage.
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With a home equity line, you will be approved for a specific amount of credit you may borrow at
any one time under the plan. Many lenders set the credit limit on a home equity line by taking a
percentage (say, 75 percent) of the home's appraised value and subtracting from that the balance
owed on the existing mortgage. For example:
Appraised Value
75%
Mortgage owed
Potential credit
$ 200,000.00
$ 150,000.00
$ 125,000.00
$ 25,000.00
In determining your actual credit limit, the lender will also consider your ability to repay, by looking
at your income, debts, and other financial obligations as well as your credit history.
Many home equity plans set a fixed period during which you can borrow money, such as 10
years. At the end of this "draw period," you may be allowed to renew the credit line. If your plan
does not allow renewals, you will not be able to borrow additional money once the period has
ended. Some plans may call for payment in full of any outstanding balance at the end of the
period. Others may allow repayment over a fixed period (the "repayment period"), for example, 10
years.
Once approved for a home equity line of credit, you will most likely be able to borrow up to your
credit limit whenever you want. Typically, you will use special checks to draw on your line. Under
some plans, borrowers can use a credit card or other means to draw on the line. There may be
limitations on how you use the line. Some plans may require you to borrow a minimum amount
each time you draw on the line (for example, $300) and to keep a minimum amount outstanding.
Some plans may also require that you take an initial advance when the line is set up.
If you decide to apply for a home equity line of credit, look for the plan that best meets your
particular needs. Read the credit agreement carefully, and examine the terms and conditions of
various plans, including the annual percentage rate (APR) and the costs of establishing the plan.
The APR for a home equity line is based on the interest rate alone and will not reflect the closing
costs and other fees and charges, so you'll need to compare these costs, as well as the APRs,
among lenders.
Rates
Home equity lines of credit typically involve variable rather than fixed interest rates. The variable
rate must be based on a publicly available index (such as a business lending rate such as the
prime rate published in some major daily newspapers or a U.S. Treasury rate) plus a “margin”
such as 2%. So if the prime rate is 5%, you would pay 7% interest. Interest rates change
frequently and this means your rate will change. It is important to find out which index is used,
how often it changes, and how high and low it goes.
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Lenders sometimes offer a low or “teaser” rate for home equity lines--a rate that is much lower
than the market and may last for only an introductory period, such as 6 months. These can be
dangerous as you are lulled into thinking that you will always have a low rate. When the loan
resets at market rates, your payments can go up substantially.
Variable-rate loans secured by a dwelling must, by law, have a ceiling (or cap) on how much your
interest rate may increase over the life of the loan. Some variable-rate loans limit how high and
how low your interest rate will go. Some lenders allow you to convert from a variable interest rate
to a fixed rate during the life of the plan. It may be good to have this option so you can lock in on
low rates.
Plans generally permit the lender to freeze or reduce your credit line under certain circumstances.
For example, some variable-rate plans may not allow you to draw additional funds during a period
in which the interest rate reaches the cap.
Costs
Many of the costs of setting up a home equity line of credit are similar to those you pay when you
buy a home. It could include a property appraisal, an application fee, which may not be refunded
if you are turned down for credit, up-front charges, such as one or more points (one point equals
1 percent of the credit limit), and closing costs including fees for attorneys, title search, and
mortgage preparation and filing; property and title insurance; and taxes. You may have to pay
other fees such as annual membership or maintenance fees and a transaction fee every time you
draw on the credit line.
You could be paying hundreds of dollars to draw only a small amount against your credit line, so
really evaluate before you borrow. On the other hand, home equity lines have generally lower
rates than other types of credit. Some folks may consolidate their other consumer credit and take
out a home equity loan to pay for it. Additionally, this interest is tax deductible.
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Repayment
Before entering into a plan, work out how you will pay back the money you borrow. Some plans
set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued
interest. But (unlike with the typical installment loan) the portion that goes toward principal may
not be enough to repay the principal by the end of the term. Other plans may require the payment
of interest alone so you will owe the whole principal at the end of the loan. You must be prepared
to make this "balloon payment" by refinancing it with the lender or you might have to come up
with the money from somewhere else. If you are unable to make the balloon payment, you could
lose your home. Ask to see the entire payment schedule broken out by principal and interest
charges so you understand how it works.
If you sell your home, you will probably be required to pay off your home equity line in full
immediately. If you are likely to sell your home in the near future, consider whether it makes
sense to pay the up-front costs of setting up a line of credit. Also keep in mind that renting your
home may be prohibited under the terms of your agreement.
Disclosures From Lenders
The federal Truth in Lending Act requires lenders to disclose the important terms and costs of
their home equity plans, including the APR, miscellaneous charges, the payment terms, and
information about any variable-rate feature. The lender can’t charge a fee until after you have
received this information. You usually get these disclosures when you receive an application
form. If any term (other than a variable-rate feature) changes before the plan is opened, the
lender must return all fees if you decide not to enter into the plan because of the change.
When you open a home equity line, the transaction puts your home at risk. If the home involved is
your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was
opened to cancel the credit line. This right allows you to change your mind for any reason. You
simply inform the lender in writing within the 3-day period. The lender must then cancel its
security interest in your home and return all fees--including any application and appraisal fees-paid to open the account.
The Consumer Credit Protection Act of 1968 requires that creditors state the cost of borrowing in
a common language so that you can figure out what the charges are, compare costs, and shop
for the best deal. It also requires that consumers be told why credit is denied, let borrowers find
out about their credit records, and set up a way for consumers to settle billing disputes. Let the
buyer beware! It is important to know your rights and how to use them.
Question
When obtaining a home equity line of credit, are the costs included in the APRs?
Answer
When obtaining a home equity line of credit, are the costs included in the APRs?
No. The APR does not always include all costs when dealing with home equity lines of credit.
Question
You have a home equity loan for $50,000 that resets every year based on the prime rate and a
15-year term. It is calculated by adding 3% to the rate. Using the calculator on
www.bankrate.com, find your monthly payment on the following years:
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Year
2004
2001
2006
Prime rate
Home equity loan rate
Monthly Payment
Answer
Year
Prime rate
2004
0.04
Home
equity
loan rate
Monthly
Payment
0.07
$449.41
2001
0.09
0.12
$600.08
2006
0.0726
0.1026
$545.28
Monthly payments can vary substantially.
Unit 6. Lease Agreements
Lease (Car) Summary
1. Make sure that leasing is right for you. Compare the cost of leasing to the cost of buying
a car. Don’t forget that when you buy a car, you own the car at the end of the period.
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2. Shop as if you’re buying a car. Make sure the capitalized cost of the car on the lease is a
fair market value and use trade-ins and a down payment to reduce the cost.
3. Ask whether extra charges will be assessed for excessive mileage, wear and tear,
disposition and early termination, and find out the amount of these charges. Have the
lessor define what normal wear and tear is.
4. Make sure that you are protected by warranty or insurance.
5. Comparison shop and have the lessors fill out the Lease Evaluation form, take it home
and carefully evaluate the lease. Make sure that you have all fees included.
6. If the lessor claims a difference in value when you return the car, make sure that it is not
more than three times a monthly payment.
7. If you dispute the difference in value, have an independent appraisal (at your cost) done.
8. If you want to file a complaint, contact www.ftc.gov.
A lease is a contract between a lessor (the property owner) and a lessee (the property user) for
the use of a car or property subject to terms and limits for a specified period at a specified
payment. Leasing has become a popular alternative to buying when you plan to use the property
for a short period of time.
A consumer lease is a contract between a lessor (the property owner) and lessee for the use of
personal property primarily for personal, family, or household purposes for a period of more than
four months and for no more than $25,000. These leases are covered by the Consumer Leasing
Act. They include long-term leases of cars, furniture, and appliances, but not daily car rentals or
apartment leases.
In the case of leasing a car versus buying, leasing can involve lower monthly payments but at the
end of the lease, you will not own the car. Even though you are leasing you have to shop as if
you're buying a car. The capitalized cost is the price of the car for leasing purposes plus taxes
and extra charges like service contracts and registration fees. The capitalized cost reduction is
similar to a down payment. The value of a trade-in can be applied to the price your lease is based
on. Negotiate all the lease terms, including the price (capitalized cost) of the vehicle. Lowering the
lease price will help reduce your monthly payments.
In a closed-end lease, you return the car at the end of the lease and "walk away," but you're still
usually responsible for certain end-of-lease charges, such as excess mileage, wear and tear, and
disposition. In an open-end lease, you pay the difference between the value stated in your
contract and the lessor's appraised value at the end of the lease. The Consumer Leasing Act
gives consumers with some protections against unreasonable end-of-term charges in open-end
leases. Assuming that you have met the wear-and-use standards, the residual value is
considered unreasonable if it exceeds the realized value by more than three times the base
monthly payment (the “Three Payment Rule”). If you cannot reach a settlement with the lessor,
you cannot be forced to pay the excess amount unless the lessor brings a successful court action
and pays your reasonable attorney’s fees.
You have the right to an independent appraisal of the property’s worth at the end of the lease
term; however, you must pay the appraiser’s fee. The Federal Reserve pamphlet “Keys to Vehicle
Leasing: A Consumer Guide” (http://www.federalreserve.gov/pubs/leasing/) also contains useful
information on leasing and a form to have your lessor fill out.
Lease inception fees are payments you must make when the lease starts. These may include a
down payment, security deposit, acquisition fee, first month's payment, taxes and title fees. It
could also include conveyance and preparation fees. Get full disclosure of all fees when the lease
starts. You may be able to negotiate some or all of the terms.
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Ask whether extra charges will be assessed for excessive mileage, wear and tear, disposition and
early termination, and find out the amount of these charges. Most leases allow you to drive
12,000 to 15,000 a year; if you put on more miles you will have to pay more. Ask questions to
determine what is normal wear and tear. Check out penalties for an early return; expect to pay a
substantial charge if you give the car up before the end of your lease.
Federal law requires lessors to provide lease cost information before you sign the lease. Take a
copy of form available at the FTC for lease disclosure to the dealer and ask them to complete it.
Some dealers may be willing to provide the information during your shopping process. If the
dealer declines, consider shopping elsewhere.
As with mortgages and credit cards, the important two factors to analyze when you enter a lease
is the finance charges you will be paying and the APR. The finance charge is the total dollar
amount you pay to use credit. It includes interest costs and other costs, such as service charges
and some credit-related insurance premiums.
For more information about buying or leasing a car, visit the FTC's Web site at
www.ftc.gov/autos. To file a complaint or to get free information on consumer issues, visit
www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.
Rent-to-Buy
A rent-to-buy agreement will allow you to put your rent payments toward the purchase of the item.
For example, you may use your rental payments for furniture such that you will own the furniture
after a period of time. Although, these arrangements may sound attractive, it is important that you
carefully assess the offer before you take it. As with other loans, assess the APR and total
finance charges. Some people find that they are paying three or four times the value of the item
to own it—not a very good deal.
Question 27
Describe the difference between a closed-end lease and an open-end lease.
Answer 27
Describe the difference between a closed-end lease and an open-end lease.
In a closed-end lease you return the car at the end of the lease and are only responsible for
excess mileage, wear and tear, and disposition. In an open-end lease, you pay the difference
between the value stated in your contract and the lessor’s appraised value at the end of the
lease.
Question 28
When are the end-of-term charges considered unreasonable in open-end leases? When can you
be forced to pay these unreasonable charges?
Answer 28
When are the end-of-term charges considered unreasonable in open-end leases? When can you
be forced to pay these unreasonable charges?
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The end-of-term charges are considered unreasonable for open-end leases when the residual
value exceeds the realized value by more than three times the base monthly payment. You can
be forced to pay this amount when a lessor brings a successful court action after paying your
reasonable attorney’s fees.
Unit 7. Applying for Credit
Credit Summary
1. Check your credit report annually by requesting a free credit report from
www.annualcreditreport.com or contacting the three credit reporting services. Ask to
correct any errors in writing to the credit rating service.
2. Opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688).
3. Pay all your bills on time and don’t spend to your credit limit. Check to make sure that
your creditors post your payments in a timely fashion.
4. Establish an emergency fund of 3 to 6 months.
5. If you’ve been denied credit, check to see if the lender has violated any laws. File a
complaint if you feel this is the case.
6. Maintain accurate records and reconcile your accounts.
What Creditors Look For
The Three Cs. Creditors look for your credit and earning history to determine your ability to repay
the loan and your responsibility record. They speak of the three Cs of credit:
Capacity. Can you repay the debt? Creditors ask for employment information: your job, how long
you’ve worked, how many times you’ve changed jobs, and how much you earn. They also want to
know your expenses and responsibilities: how many dependents you have, whether you pay
alimony or child support, and the amount of your other loan obligations.
Character. Will you repay the debt? Creditors will look at your credit history to see how much you
owe, how often you borrow, whether you pay bills on time, and whether you live within your
means. They also look for signs of stability such as how long you’ve lived at your present
address, whether you own or rent your home, and the length of your present employment.
Collateral. What assets do you have? Creditors want to know what assets you may have to back
up or secure your loan and other resources you have for repaying debt other than income, such
as savings, investments, or property.
Creditors use different combinations of these facts to reach their decisions. Some set high
standards and others are anxious to get you to borrow money. Creditors also use different rating
systems. Some rely strictly on their own instinct and experience. Others use a “credit-scoring” or
statistical system to predict whether you’re a good credit risk. Different creditors may reach
different conclusions based on the same set of facts. One may give you the loan, while another
may deny you a loan.
Also be aware that studies over the past 15 years show that credit reports can contain errors. In a
study conducted by the National Association of State Public Interest Research Groups in 2004, it
was found that 79% of all credit reports contain some type of error and 25% contained serious
enough errors that those individuals could be denied credit. It is essential that you request your
credit report annually and that you correct any errors you find. Credit reports are used to
determine what interest rates to charge. Insurance companies routinely pull them to determine
2009 Page 82
what kind of risk you are. About 35% of all employers use credit reports as pre-screening for
employment; 40% of retailers do so.
Your Credit Score
Source: www.fico.com
Payment History
Your payment history is the largest component of your credit score. In assessing your payment
history, the credit company will look at account payment information on credit cards, retail
accounts, installment loans, finance company accounts, mortgage, etc. They will look to see if
you paid on time or how long you were delinquent in payments. They will look for adverse public
records such as bankruptcy (up to 10 years), judgments, suits, liens, wage attachments,
collection items, and/or delinquency (up to 7 years on past due items). How long your payments
were past due and how much you owed will figure into your payment history score. The number
of past due items on file will be reviewed as will the number of accounts paid on time.
Amounts Owed
A separate analysis is made of the amount owing on accounts. The credit rating company will
look at the number of accounts, the amount owing on each account, proportion of credit lines
used (how much of the credit limit) and proportion of installment loans still owning (proportion of
balance as compared to original loan). If you have a tendency to spend up to your credit limit, that
will count against you.
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Length of Credit History
The length of time since accounts have been opened will be considered and the time of the
account activity will be considered. Anyone who has had a long history of paying on time will have
a better credit rating.
New Credit
Any number of recently opened accounts, and proportion of accounts that are recently opened,
by type of account will factor into the new credit proportion of your credit score. Although there is
legislation again this, the number of recent credit inquiries may affect your credit rating. Reestablishment of the positive credit history following past payment problems will also be
examined.
Types of Credit Used
The number of (presence, prevalence, and recent information on) various types of accounts
(credit cards, retail accounts, installment loans, mortgage, consumer finance accounts) will be
examined.
According to FICO, the score does not count inquiries initiated by you for your credit report, or
promotional inquiries made by lenders in order to make you a pre-approved credit offer, or
administrative inquiries made by lenders to review your account with them. Requests that are
marked as coming from employers are not counted either.
Here is the distribution of FICO scores as of early 2007.
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Since employers may check your credit rating as part of application screening, it can figure in
whether you get a job. Credit reports can be used for setting your insurance rates as well. Your
credit score figures very much in the amount of interest you will be charged as can be seen by
the table below. A person with a good FICO score could pay $200 less per month or almost
$2500 per year. Over the life of a 30-year mortgage for $200,000, that could account for over
$75,000 in interest.
FICO score
Interest rate
Monthly payment $200,000
30-yr fixed mortgage
760 - 850
5.78%
1,182.45
700 - 759
6%
1,210.82
680 - 699
6.18%
1,234.23
660 - 679
6.39%
1,261.77
640 - 659
6.82%
1,318.90
620 - 639
7.37%
1,393.37
Source: www.fico.com 3/07
Information the Creditor Can’t Use
The Equal Credit Opportunity Act bars discrimination based on age, gender, marital status, race,
color, religion, and national origin. The act also bars discrimination because you receive public
income, such as veterans’ benefits, welfare or social security, or because you exercise your rights
under federal credit laws to file a billing error notice with a creditor. It does not guarantee that you
will get the loan. You still have to pass the creditworthiness tests. The creditor cannot discourage
you from applying for a loan, refuse you a loan if you qualify, lend you money on terms different
from those granted another person with similar creditworthiness because of age, gender, marital
status, race, color, religion, national origin, receipt of public income or because you exercise your
rights under federal credit laws. Although creditors may not discriminate on the basis of national
origin, they may consider your immigration status when making a loan decision.
In the past, many older persons have complained about being denied credit because they were
over a certain age of when they retired. A creditor may ask your age to determine if you’re old
enough to sign a binding contract (usually 18 or 21 years old depending on state law). A creditor
may not turn you down, offer you less credit, or offer you less favorable credit terms because of
your age. They cannot ignore your retirement income in evaluating your loan application. Nor can
they close your credit account or require you to reapply for it because you reach a certain age or
retire or may not be eligible for credit insurance because of your age. If you are 62 or older you
2009 Page 85
must be given at least as many points for age as any person under 62 in credit scoring. The law
lets creditors consider how long until you retire or how long your income will continue.
You may not be denied credit just because you receive social security or public assistance, such
as Temporary Assistance to Needy Families (TANF). A creditor may consider such things as how
old your children are if you may lose benefits when they reach a certain age or whether you will
continue to receive the benefits.
The Equal Credit Opportunity Act bars discrimination because of characteristics such as your
race, color, gender or because of the race or national origin of the people in the neighborhood
where you live or want to buy your home. Creditors may not use any appraisal of the value of the
property that considers the race of the people in the neighborhood. You are entitled to a copy of
an appraisal report that you paid for in connection with an application for credit with a written
request.
Many of the Equal Credit Opportunity Act’s provisions were designed to stop particular abuses
that generally made it difficult for women to get credit. The general rule is that you may not be
denied credit because you are a woman or because you are married, single, widowed, divorced,
or separated.
Gender and Marital Status. Usually, creditors may not ask your gender on an application form
(one exception is on a loan to buy or build a home). You do not have to use Miss, Mrs., or Ms.
with your name on a credit application. But in some cases, a creditor may ask your marital status.
Childbearing Plans. Creditors may not ask about your plans to have children, and they may not
assume anything about those plans.
Income and Alimony. The creditor must count all of your income, even income from part-time
employment. Child support and alimony payments are a source of income for many women and
creditors must count them. A creditor may consider whether alimony and child support is steady
and reliable.
Your Own Accounts. Women have the right to their own credit, based on their own credit
records and earnings. It is a good idea to set up your own credit history. Your own credit means a
separate account or loan in your own name which could be your last name, your husband’s name
or a combined last name. You are not required to have your husband cosign for the account.
Creditors may not ask for information about your husband or ex-husband unless that income is
alimony, child support, or separate maintenance payments from your spouse or former spouse.
This assumes that your husband is not responsible for paying the debt.
Change in Marital Status. Widowed or divorced women may face a cut-off of credit. The law
says that creditors may not make you reapply for credit because you marry or become widowed
or divorced. Nor may they close your account or change the terms of your account on these
grounds. There must be some sign that your creditworthiness has changed because of your
change in marital status.
New to Credit
It’s frustrating to know that you have to already have credit to get credit. Your salary and job and
the other financial assets that you put on the application count for something but most creditors
want to know about your track record in handling credit. They want to know how reliably you’ve
repaid past debts. There are several ways you can begin to build a good credit history:
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1. Open a checking account or a savings account or both. Cancelled checks can be used to
show that you pay utilities or rent bills regularly, a sign of reliability.
2. Apply for a credit card. Repaying credit card bills on time is a plus in credit histories.
3. If you can’t open a credit card because of lack of credit history, ask whether you may
deposit funds with a financial institution to serve as collateral for a credit card. This
secured credit card can support purchases up to the limit of your deposit. This is a good
way to start a credit history without having the credit history.
4. You can offer to have someone cosign your application. But make sure that the cosigner
understands the full extent of the liability.
5. If you’re turned down, find out why and try to resolve any misunderstandings.
Under the Equal Credit Opportunity Act, you must be notified within 30 days after your application
has been completed whether your loan has been approved or not. If credit is denied, this notice
must be in writing and must explain the specific reasons that you were denied credit. You have
the same rights if an account you have had is closed.
Maintaining Complete and Accurate Credit Records
Mistakes on your credit record can hurt your financial future. Your credit rating is important, so be
sure that credit-bureau records are complete and accurate. The Fair Credit Reporting Act says
that you must be told what’s in your credit file and have any errors corrected.
The three companies have set up a central website, a toll-free telephone number, and a mailing
address through which you can order your free annual report. To order, click on
annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request
Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 303485281. You may order your reports from each of the three nationwide consumer reporting
companies at the same time, or you can order your report from each of the companies, one at a
time.
If a lender refuses you credit because of unfavorable information in your credit report, you have a
right to get the name and address of the agency that keeps your report and request a copy of the
file. The law also says that the credit bureau must help you interpret the data in the report if you
don’t understand it. If you’re questioning denial of credit made within the past 60 days, the credit
rating service cannot charge a fee for giving you information.
If you notify the credit rating service about an error, generally it must investigate and resolve the
dispute within 30 days of receiving your letter. The credit rating service will contact the creditor
who supplied the data and remove any information that is incomplete or inaccurate from your
credit file. If you disagree with the findings, you can file a short statement (100 words) in your
record, giving your side of the story. Future reports to creditors must include this statement or a
summary of it.
There is a limit on how long certain information may be kept in your file. Bankruptcies must not be
reported after 10 years. However, information about any bankruptcies at any time may be
reported if you apply for life insurance with a face value over $150,000, for a job paying $75,000
or more, or for credit with a principal amount of $150,000 or more. Suits and judgments paid, tax
liens, and most other kinds of unfavorable information must not be reported after 7 years. Your
credit record may not be given to anyone who does not have a legitimate business need for it.
Stores to which you are applying for credit may examine your record; curious neighbors may not.
Prospective employers may examine your record with your permission which often is granted
when you sign an application form with the employer.
2009 Page 87
If you write to your creditor about an error the creditor must not release information to other
creditors or credit bureaus that would hurt your credit reputation. Until your complaint is
answered, the creditor cannot collect the disputed amount. If the creditor disagrees with your
error and you do not pay in the time allowed, you may be reported as delinquent and the creditor
may take action to collect. You can still disagree in writing and the creditor must report that you
have challenged your bill and give you the name and address of each person who has received
information about your account. When the matter is settled, the creditor must report the outcome
to each person who has received that information. Remember that you may tell your own side in
your credit record with a 100-word explanation.
Prompt Credit for Payments and Refunds for Credit Balances
Some creditors will not charge a finance charge if you pay your account within a certain period of
time, often called a grace period. This requires that you get the bill on time and that your payment
is received on time. Check to see if your creditor bills according to the law. If your account is one
on which no finance or other charge is added before a certain due date, then creditors must mail
their statements at least 14 days before payment is due. Check the postmark to see if that is the
case. Creditors must credit payments on the day they arrive. Check to see when the funds clear
your bank account. This is a good method of verifying that your bank online service pays on a
timely basis. If you pay more than the amount you owe or you return a purchase, the creditor
must make a refund to you within seven business days after your written request or automatically
if the credit balance still exists after six months.
Question 29
Check all the factors that may be used to determine your credit standing:
Marital status _______
Gender ________
Age _________
Alimony paid ________
Whether you plan to have children _______
Stability of job ________
Income from public assistance __________
If you don’t fit in with the people in the neighborhood ________
How many loans you have ________
Whether you’ve been fired from your job _______
How much your monthly expenses are _________
Whether you were late in paying obligations ________
2009 Page 88
How old your children are _________
Immigrant status ______________
Answer 29
Marital status - only if your spouse is cosigning
Gender - No
Age – only if you are going to retire and have a drop in income
Alimony paid - Yes
Whether you plan to have children - No
Stability of job - Yes
Income from public assistance – They should include your income from public assistance.
If you don’t fit in with the people in the neighborhood - No
How many loans you have - Yes
Whether you’ve been fired from your job - Yes
How much your monthly expenses are - Yes
Whether you were late in paying obligations - Yes
How old your children are - Yes
Immigrant status - Yes
Assignment 2 – Reading a Credit Report
Read the sample credit report. The sample credit report shows a judgment against you that never
happened. What would you do to correct the error? How many days does the credit rating service
have to respond to you? What action would you take if they responded that you were incorrect?
Students may download their own credit reports and reflect on what it shows.
Activity 1- FICO Score
Checking out your FICO score. To get a rough estimate of your FICO score, go to:
http://www.bankrate.com/brm/fico/calc.asp?lpid=BKRATE29
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Unit 8. Dealing with Credit Problems
Credit Problems Summary
1. Remember, when dealing with credit problems, stay clam. Deal with the problem when it
is small. Don’t delay.
2. Review your credit report and report problems or errors quickly.
3. Seek financial counseling.
4. Maintain open lines of communication with your creditors and set forth reasonable
expectations regarding your ability to meet your obligations.
5. List your debts and create a debt repayment plan. Stick to it.
6. Consider using a portion of your safety net to help you with this crisis. Obtain a second
job.
7. Pay yourself first, put money into savings to ensure that once you make your way out of
this problem you don’t have to face it again.
8. Be persistent and patient. Things will get better in the end.
9. Be aware of scams. Continue to protect your credit as you build your way out of the
problems.
Poor money management from compulsive shopping and buying things you can’t afford can
result in credit problems. In this case, working towards a good spending plan is the path to take.
But, the most common causes of credit problems are issues that people face every day and for
the most part are not due to them. These include losing a job, divorce, death in the family,
emergency expenses such as hospital bills, defective goods and services such as a car or roof,
or fraudulent use of credit cards. It is important to plan for them by keeping an emergency fund.
For some people, it’s important to assess your financial situation and determine whether or not
you are financially stressed. These warning signs include maxing out credit cards, being charged
late fees consistently, only paying the minimum of credit card balances, putting off going to see
the doctor about a medical problem, working overtime or a second job just to pay for basic living,
paying more than 40% of your income on debt servicing.
How to Deal with Credit Problems
These coping tips are adapted from Consumer Credit Counseling Services (CCCS), part of the
National Foundation for Credit Counseling. For more, go to www.nfcc.org.
1. Stay calm and work your way slowly and surely through the problem. By taking action
you are already improving the situation as it is better to manage the problem now before
it gets bigger. Don’t delay. Take action now and make it a priority.
2. If you feel that an error caused your credit problem, tell the credit rating service what
information you think is wrong (they must respond within 30 days). Provide copies (not
originals) of documentation. Be diligent about monitoring your credit report.
3. Seek financial counseling right away. Use free counseling services that are listed in
www.usdoj.gov/ust. It helps to have experienced and clear eyes looking at your problem.
But be aware of credit counseling services (even though they claim to be nonprofit) that
charge you fees.
4. Make a list of all the debts you owe with the creditor names and addresses. Call your
lenders and creditors. Let them know you're having financial difficulties. Some of them
have different credit standards and you may still be able to get credit to bide you over.
5. Prepare a realistic spending plan to pay down your debt. Some folks pay the higher
interest rate debts first. Others pay smaller debts first so they can feel a sense of
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accomplishment that will help them tackle the rest. You might even be able to restructure
your debt. They would rather you pay something than nothing at all.
6. If you have savings, consider using it to pay as many bills as you can. Consider selling
some assets. Consider getting a second job to pay off your debt.
7. It might take longer than you thought for your financial crisis to go away. Be persistent
with your creditors and payment plan. Establishing a good relationship will get you farther
than running away from your obligations.
8. As you start to pull yourself out of the financial crisis, remember to set aside money for
savings. This will give you a safety net for financial crises in the future.
The first step in getting out of debt is to identify what debts you have. To help you get a handle on
how much you owe—and to whom—here's a handy worksheet to plan how to pay off these debts.
Debt Identification Worksheet
Debt owed
Taxes
$ Amount owed
Owed to whom?
Alimony
(federal and/
or state)
ex-spouse
Child support
ex-spouse
Action taken
Credit cards
Credit cards
Credit cards
Personal loan
(such as a car)
Personal loan
(other)
businesses
Personal loan
family members
Personal loan
friends
Back rent/ mortgage
Other debts
Once you’ve identified all your debts, put together a debt reduction plan using the worksheet
below. Make steady payments and persist. For example an outstanding credit card balance of
$9000 will take almost 5 years to pay off with the minimum $250 per month. If you make shortterm sacrifices and pay $1000 per month, the debt will be gone in a year. Making extra payments
2009 Page 91
whenever you can is a good way of reducing your interest charges. Don’t forget interest charges
only add more to your debt.
Here are two ways you can choose between:
1. Put your worksheets in order with the highest interest rate first. You will pay down your
debts faster and reduce your interest charges, if you pay more on the debt with the
highest interest rate.
2. Pay the creditor with the smallest balance first to get rid of that debt. It might motivate you
to see progress in reducing the number of creditors.
When you've paid off one debt, congratulate yourself. Celebrate your progress, and then start
using that money to pay off another debt.
Interest Rate and Debt Payment Worksheet
Creditor:
Interest rate
Debt is for:
Amount owed
Monthly
payment
Payment
due date
Amount paid
and date
Be aware that when you are having credit problems you will be enticed by all sorts of firms who
will make promises such as creating a new credit identity for you or removing bankruptcies or bad
loans from your credit files. These companies prey on desperate consumers with poor credit
histories. They promise, for a fee, to clean up your credit report so you can get a car loan, a home
mortgage, insurance, or even a job. Don’t believe these statements. No one can legally remove
accurate and timely negative information from a credit report. You can dispute as inaccurate or
incomplete and there is no charge for this. Everything a credit repair clinic can do for you legally,
you can do for yourself at little or no cost. Only time, a concerted and persistent effort, and a
personal debt repayment plan will improve your credit report.
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According to the Federal Trade Commission, you should look for these signs of a scam. Watch
out for companies that:
 Want you to pay for credit repair services before they provide any services.
 Do not tell you your legal rights and what you can do for yourself for free.
 Recommend that you not contact a credit reporting company directly.
 Suggest that you try to invent a “new” credit identity — and then, a new credit report —
by applying for an Employer Identification Number to use instead of your Social Security
number.
 Advise you to dispute all information in your credit report or take any action that seems
illegal, like creating a new credit identity. If you follow illegal advice and commit fraud, you
may be subject to prosecution.
Know that you could be charged and prosecuted for mail or wire fraud if you use the mail or
telephone to apply for credit and provide false information. It’s a federal crime to lie on a loan or
credit application, to misrepresent your Social Security number, and to obtain an Employer
Identification Number from the Internal Revenue Service under false pretenses.
By law, credit repair organizations must give you a copy of the “Consumer Credit File Rights
Under State and Federal Law” before you sign a contract. They also must give you a written
contract that spells out your rights and obligations. Read these documents before you sign
anything. The law contains specific protections for you. A credit repair company cannot make
false claims about their services, charge you until they have completed the promised services,
perform any services until they have your signature on a written contract and have completed a
three-day waiting period. During this time, you can cancel the contract without paying any fees.
Your contract must specify the payment terms for services, including their total cost,
a detailed description of the services to be performed, how long it will take to achieve the results,
any guarantees they offer and the company’s name and business address. If you’ve had a
problem with a credit repair company, don’t be embarrassed to report it. Contact the Washington
State Attorney General’s office at www.atg.wa.gov.
If you are considering filing for bankruptcy, as of October 17, 2005, you must get credit
counseling from a government-approved organization within six months before you file for
bankruptcy relief. You can find a state-by-state list of government-approved organizations at
www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the
U.S. Department of Justice that supervises bankruptcy cases and trustees.
Reputable credit counseling organizations can advise you on managing your money and debts,
help you develop a budget, and offer free educational materials and workshops. Their counselors
are certified and trained in the areas of consumer credit, money and debt management, and
budgeting. Counselors discuss your entire financial situation with you, and help you develop a
personalized plan to solve your money problems. An initial counseling session typically lasts an
hour, with an offer of follow-up sessions.
Debt Management Plans
Credit counselors often arrange for you to pay debts through a debt management plan (DMP).
You deposit money each month with a credit counseling organization and it uses these deposits
to pay your bills, loans, and other debts according to a payment schedule they’ve worked out with
you and your creditors. Creditors may agree to lower interest rates or waive certain fees if you are
repaying through a DMP.
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The FTC has found that some organizations that offer debt management plans (DMPs) have
deceived and defrauded consumers. If you are paying through a DMP, contact your creditors and
confirm that they have accepted the proposed plan before you send any payments to the
organization handling your DMP. Once the creditors have accepted the DMP, it is important to
make regular, timely payments and read your monthly statements promptly to make sure your
creditors are being paid according to your plan.
If payments to your DMP and creditors are not made on time, you could lose the progress you’ve
made on paying down your debt, or the benefits of being in a DMP, including lower interest rates
and fee waivers. Although creditors may have forgiven late payments that you made before you
began the DMP, this will not be the same once you are in a DMP. If you fall behind on your
payments, your credit report will have “late” marks and you will rack up late fees.
If you are considering working with a credit counselor for the first time, the Federal Trade
Commission recommends that you ask these questions:
1. What services do you offer?
Look for an organization that offers a range of services, including budget counseling, savings
and debt management classes, and counselors who are trained and certified in consumer
credit, money and debt management, and budgeting. Counselors should discuss your entire
financial situation with you, and help you develop a personalized plan to solve your money
problems now and avoid others in the future. An initial counseling session typically lasts an
hour, with an offer of follow-up sessions. Avoid organizations that push a debt management
plan (DMP) as your only option before they spend a significant amount of time analyzing your
financial situation. DMPs are not for everyone. You should sign up for a DMP only after a
certified credit counselor has spent time thoroughly reviewing your financial situation, and has
offered you customized advice on managing your money.
2. Are you licensed to offer your services in my state?
Many states require that an organization register or obtain a license before offering credit
counseling, debt management plans, and similar services. Do not hire an organization that
has not fulfilled the requirements for your state.
3. Do you offer free information?
Avoid organizations that charge for information about the nature of their services.
4. Will I have a formal written agreement or contract with you?
Don’t commit to participate in a DMP over the telephone. Get all verbal promises in writing.
Read all documents carefully before you sign them. If you are told you need to act
immediately, consider finding another organization.
5. What are the qualifications of your counselors? Are they accredited or certified by an outside
organization? If so, which one? If not, how are they trained?
Try to use an organization whose counselors are trained by an outside organization that is
not affiliated with creditors.
6. Have other consumers been satisfied with the service that they received?
Once you’ve identified credit counseling organizations that suit your needs, check them out
with your state Attorney General, local consumer protection agency, and Better Business
Bureau. These organizations can tell you if consumers have filed complaints about them. The
absence of complaints doesn’t guarantee legitimacy, but complaints from other consumers
may alert you to problems.
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7. What are your fees? Are there set-up and/or monthly fees?
Get a detailed price quote in writing, and specifically ask whether all the fees are covered in
the quote. If you’re concerned that you cannot afford to pay your fees, ask if the organization
waives or reduces fees when providing counseling to consumers in your circumstances. If an
organization won’t help you because you can’t afford to pay, look elsewhere for help.
8. How are your employees paid? Are the employees or the organization paid more if I sign up
for certain services, pay a fee, or make a contribution to your organization?
Employees who are counseling you to purchase certain services may receive a commission if
you choose to sign up for those services. Many credit counseling organizations receive
additional compensation from creditors if you enroll in a DMP. If the organization will not
disclose what compensation it receives from creditors, or how employees are compensated,
go elsewhere for help.
9. What do you do to keep personal information about your clients (for example, name, address,
phone number, and financial information) confidential and secure?
Credit counseling organizations handle your most sensitive financial information. The
organization should have safeguards in place to protect the privacy of this information and
prevent misuse.
To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call tollfree, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.
Activity: Develop a Debt Reduction Plan
Make several copies of this worksheet—one for each company or credit card company to which
you owe money. Then, list the interest rate, how much money you owe to each creditor, and how
much you will pay off each month.
Using a Debt Reduction Plan you will soon see the amount you owe decrease, as you make
steady payments. It will shrink even faster if you pay something extra whenever you can.
 Put your worksheets in order with the highest interest rate first. You will pay down your debts
faster and reduce your interest charges, if you pay more on the debt with the highest
interest first.
 Or you can pay the creditor with the smallest balances first to get rid of them to see progress
in the number of creditors you owe. This is like a stair-step to financial success.
When you've paid off one debt, congratulations! Celebrate your progress, and then start using
that money to pay off another debt.
Interest Rate and Debt Payment Worksheet
Creditor:
Interest rate
Debt is for:
Amount owed
Monthly
payment
Payment
due date
Amount paid
and date
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Activity
Case Study in Debt Reduction
The following register (used with permission) is from the credit card records of a family who had
set up automatic bill payment on their bank account and was using their credit card as overdraft
protection. The family had sufficient money to pay their bills but was not monitoring their account.
Analyze what happened and what it cost.
2009 Page 96
Answer
Keeping an accurate ledger book is a challenge when using funds from a joint account. My
spouse and I became victim to late payment fees, high finance charges, overdraft fees, and cash
advance fees. In this case, we were charged $873 in fees and $675 in cash advances while we
had nothing material to show for the debt. We were not making purchases; all the cash advances
were for bills we were paying through automatic bill-pay. It didn’t make sense to us because our
account always looked like we had money in it, but it seemed we never had enough. The
problem was not that we were paying our bills with money we didn’t have. In fact, we had enough
money to pay all of our bills with money left over, but our account was set up to pay the bills on
certain days; consequently, the bills were being paid and were posting before our paychecks
were being posted. So our accounts appeared as if the funds were there when in actuality, they
were not yet available. This allowed the bank to make cash advances from our credit card and
say that it was for “Overdraft Protection.”
Also, notice the late payment fees. We had our account set up to pay our credit cards on time,
including this one; however, we were still charged late payment fees. These were fees we hadn’t
caught until we really started looking at our bills. I cringe when I imagine how many times we
were probably over-charged in the past that we had not caught.
To get rid of this debt, I re-dated some of the automatic payments, started manually paying some
of the bills, and transferred this balance to another card at 0% interest. Since we have good
credit, we always get good offers, but the contracts are tricky and I find I have to read every offer
with a fine-tooth comb. I am also very careful to make sure I either pay off the balance within the
allotted time or transfer the balance before the introductory time-frame runs out.
Unit 9. Protecting Your Wealth
Protect Your Wealth Summary
1. Safeguard all your financial information. Shred or burn all old financial documents. Lock
up your financial documents.
2. Don’t give out your social security number unless absolutely necessary. If you do, ask
how they protect your financial information. Ask for another identification number for most
routine things. Check to see if your social security number is on the internet at
StolenIDSearch.com.
3. Review all your credit card bills and reconcile with your receipts. Do the same with your
bank statement. Check all your account statements to ensure that they are correct.
4. Review your credit report annually and correct any errors.
5. Report fraud or file complaints when you find financial service companies have violated
the law.
The Federal Trade Commission received over 674,354 Consumer Sentinel complaints in 2006,
64% represented fraud and 36% were identity theft complaints. Identity theft occurs when a thief
uses another person’s personal identification to open new credit card accounts, take over existing
accounts, obtain loans in the victim’s name, or otherwise steal funds from the victim.
Victims go through a difficult and time-consuming ordeal to clear their names. They must first try
to convince the lenders and the credit-reporting agencies that they are victims of identity theft.
2009 Page 97
They also must deal with calls from collection agencies and endless paperwork in trying to
remove erroneous information and fraudulent accounts from a credit record.
Many victims of this fraud are unwittingly impersonated for years. They struggle to get their
finances, jobs, and lives back in order. The thieves seldom discriminate. For instance, several
cases filed with the Broward Sheriff’s Office in Ft. Lauderdale, Fla., revealed a variety of victims –
from the unemployed to the self-employed and from an electrician to a judge. The main offenses
committed were establishing public utility accounts, and obtaining credit cards to order
merchandise in the victims’ names. Identity thieves target everyone.
Credit card fraud (28%) was the most common form of reported identity theft followed by phone
or utilities fraud (19%), bank fraud (18%), and employment fraud (13%). Other significant
categories of identity theft reported by victims were government documents/benefits fraud and
loan fraud. The percentage of complaints about “Electronic Fund Transfer” related identity theft
doubled between 2002 and 2004.
Thieves get information from
 Garbage – pre-approved credit cards, bank and credit card statements, and utility bills
 Mailboxes – both incoming and outgoing mail
 Loan applications – banks, car dealerships, mortgage companies
 Rental applications – cars or apartments
 Schools – classroom attendance sheets that list the student’s Social Security number
 Desk drawers in the workplace
 Certifications/licenses placed on walls (in the workplace)
 Job applications
 Health club applications
 Internet – information resulting from the sale of personal banking and investment details, chat
rooms, and false merchants
 Telephone companies
 Information freely given by the public – from warranty cards, for contests, to department
stores, and “Win a Free Membership…” forms
Advice to avoid identity theft
 Don’t disclose any personal information that isn’t integral to a transaction.
 Don’t keep your Social Security card in your wallet; bring only the one or two credit cards that
you use regularly.
 Keep your Social Security number as private as possible. If a salesperson requests it, ask
why. If your health plan prints it on your membership card, ask for one without it. Don’t write it
on your class attendance sheet (your school already has your number on official records).
Divulge this number only for legitimate purposes, such as paying taxes, requesting credit, or
obtaining a driver’s license. Check to see if your social security number is on the internet at
StolenIDSearch.com.
 Shred or burn mail containing personal information – from account numbers to travel
itineraries.
 Prevent mail theft. Have a locked mailbox. Don’t leave mail in your mailbox for the mail
carrier. Don’t have new checkbooks delivered to your home.
 Lock up your personal papers and canceled checks in your home, in case of a break-in.
 Be cautious on the telephone. Never give out your name, address, Social Security number, or
other personal information unless you initiate the call.
 Demand secure information handling. If you’re filling out a credit application at a department
store or auto dealership, find out what the establishment does with old applications. If it
doesn’t lock them in file cabinets or shred them, take your business elsewhere.
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

Pay attention to your bills. If you suddenly stop receiving your mail, particularly bills, that
could be a sign that someone has taken over your account.
Let federal, state, and local representatives know you’re concerned about this issue. Tell
them you want tougher laws against identity thieves and better protection from the credit
industry.
Source: Beth Givens, director of the Privacy Rights Clearinghouse, a nonprofit consumer
information and advocacy program in San Diego, Calif.
Checking Credit Reports
Fraud examiners recommend that people review their credit reports once a year; all three
bureaus will need to be contacted.
 Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285
 Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742)
 Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289
It’s also wise to opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688).
A scam artist can retrieve a discarded credit card offer and send it to the company, saying, “Yes,
I’m interested – and here’s my new mailing address!”
What To Do If You Are A Victim of Identity Theft
The Attorney General of Washington state suggests the following actions if you are a victim of
identity theft.
Step 1: Call the toll-free fraud number of any one of the three major credit bureaus to place
a fraud alert on your credit report.
This can help prevent an identity thief from opening additional accounts in your name. As soon as
the credit bureau confirms your fraud alert, the other two credit bureaus will automatically be
notified to place fraud alerts, and all three credit reports will be sent to you free of charge.
Step 2: Report the ID theft to your bank and other creditors.
Ask to speak to someone in the security or fraud department. They may advise you to close your
accounts and start over with new ones. Also, ask your financial institution what procedures they
require of victims whose credit cards or checks have been stolen or forged.
Step 3: Report the ID theft to the police or sheriff in the area where you live.
ID theft is a felony, and charges may be filed against the thief in the county where you live. Ask
the police to make a police report and give you a copy. You will need this to help correct your
credit rating.
Step 4: Consider requesting a credit report security freeze.
A security freeze means that your credit file cannot be shared with potential creditors. A security
freeze can help prevent identity theft since most businesses will not open credit accounts without
checking a consumer's credit history first.
You, too, will not be able to open new credit while a freeze is in place. Individuals can request
that a freeze be temporarily lifted for the purpose of obtaining new credit.
Step 5: Send a copy of the police report to the three main credit reporting companies.
The credit bureaus are required to block information victims identify as resulting from identify
theft. Once the three consumer-reporting agencies receive the police report and a request from
you, they are required to block any adverse credit reports resulting from the crime.
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Step 6: Ask businesses to provide you with information about transactions made in your
name.
Under the Identity Theft law, businesses must give you this information, but may, if they choose,
require proof of your identity—including a copy of the police report and your fingerprints. If you
need to obtain your fingerprints for this purpose, the Washington State Patrol provides this
service. You will pay a fee and will have to wait for processing before you receive a letter notifying
you that the fingerprints are on file. Businesses refusing to provide information to you may be
subject to actual damages, plus a $1,000 penalty for willful violations. You may present this letter
to businesses and creditors as proof of your identity.
Step 7: Be prepared for contacts from creditors who may want you to pay the debts of ID
thieves who used stolen or fake checks to make purchases or pay bills in your name.
Explain to them that you have been the victim of identity theft. Provide them with the police report
and, if you have one, an Order Correcting Records. Once the collection agency has been notified
that the debt is a result of an identity theft, under the law the collection agency may not continue
to call you. This prevents victims from being inundated with calls for every misused check if they
have had a box or book of checks stolen or forged.
Although calls might stop, you may still be subject to legal action by credit agencies. However,
there are limits on what a collection agency can do to try to collect a debt from you. The Attorney
General’s Consumer Protection web site provides more information about debt collection, or you
can call the AG's consumer line at 1-800-551-4636.
Step 8: Contact the Federal Trade Commission’s Identity Theft Hotline, 1-877-IDTHEFT or
visit http://www.ftc.gov/bcp/edu/microsites/idtheft/.
Among other things, the FTC site provides a uniform
http://www.ftc.gov/bcp/conline/pubs/credit/affidavit.pdf that is accepted and endorsed by many
businesses.
Step 9: Tell the prosecuting attorney that if the person who stole your identity is found
guilty, you'd like the court to issue you an Order Correcting Public Records.
This is a Court Order you can use to correct public records damaged by identity theft. Show the
Order Correcting Records to your bank and send a copy to your creditors so they can correct
your records.
Your rights
According to the Federal Reserve, the following are the penalties allowed by law for violations of
laws relating to banking and credit.
Truth in Lending and Consumer Leasing Acts. If any creditor fails to disclose information
required under these acts, or gives inaccurate information, or does not comply with the rules
about credit cards or the right to cancel certain home-secured loans, you as an individual may
sue for actual damages and any money loss you suffer. In addition, you can sue for twice the
finance charge in the case of certain credit disclosures, or if a lease is concerned, 25 percent of
total monthly payments. In either case, the least the court may award you if you win is $100, and
the most is $1,000. In any lawsuit that you win, you are entitled to reimbursement for court costs
and attorney’s fees. Class action suits are also permitted. A class action suit is one filed on behalf
of a group of people with similar claims.
Equal Credit Opportunity Act. If you think you can prove that a creditor has discriminated
against you for any reason prohibited by this act, you as an individual may sue for actual
damages plus punitive damages—that is, damages for the fact that the law has been violated—of
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up to $10,000. In a successful lawsuit, the court will award you court costs and a reasonable
amount for attorney’s fees. Class action suits are also permitted.
Fair Credit Billing Act. A creditor who breaks the rules for the correction of billing errors
automatically loses the amount owed on the item in question and any finance charges on it, up to
a combined total of $50 even if the bill was correct. You, as an individual, may also sue for actual
damages plus twice the amount of any finance charges, but in any case not less than $100 nor
more than $1,000. You are also entitled to court costs and attorney’s fees in a successful lawsuit.
Class action suits are also permitted.
Fair Credit Reporting Act. You may sue any credit-reporting agency or creditor for breaking the
rules about who may see your credit records or for not correcting errors in your file. Again, you
are entitled to actual damages, plus punitive damages that the court may allow if the violation is
proved to have been intentional. In any successful lawsuit, you will also be awarded court costs
and attorney’s fees. A person who obtains a credit report without proper authorization or an
employee of a credit-reporting agency who gives a credit report to unauthorized persons may be
fined up to $5,000 or imprisoned for one year or both.
Electronic Fund Transfer Act. If a financial institution does not follow the provisions of the EFT
Act, you may sue for actual damages (or in certain cases when the institution fails to correct an
error or recredit an account, for three times actual damages) plus punitive damages of not less
than $100 nor more than $1,000. You are also entitled to court costs and attorney’s fees in a
successful lawsuit. Class action suits are also permitted.
If an institution fails to make an electronic fund transfer or to stop payment of a preauthorized
transfer when properly instructed by you to do so, you may sue for all damages that result from
failure.
Take action against fraud
The best place to start with a complaint is with the Washington State Attorney General’s office
http://www.atg.wa.gov/ or the Washington Department of Financial Institutions
http://dfi.wa.gov/default.htm 1-877-RINGDFI. For more information on how to file a complaint, go
to http://www.dfi.wa.gov/consumers/complaint.htm.
Complaints about discrimination in housing are covered by the Fair Housing Act. These
complaints are investigated by the Federal Reserve and referred to the U.S. Department of
Housing and Urban Development. First, please try to settle the problem directly with your bank.
This may involve contacting senior bank management or the bank's customer service
representative.
If you cannot resolve the problem with your bank, you may want to file a complaint with the
appropriate federal regulator (see "Contacting Federal Agencies"). If you cannot identify the
federal regulator, contact the Federal Reserve Board, and we will forward your complaint to the
appropriate agency.
For complaints about state member banks, you can use the online complaint form
https://federalreserve.gov/secure/iccs/iccsquery.cfm or file a written complaint with the Federal
Reserve at:
Board of Governors of the Federal Reserve System
Division of Consumer and Community Affairs
2009 Page 101
20th and C Streets, NW, Stop 801
Washington, DC 20551
Telephone (202) 452-3693.
For more information, go to http://www.federalreserve.gov/pubs/complaints/.
Complaints about credit unions can be filed at:
National Credit Union Administration
Office of Public & Congressional Affairs
1775 Duke Street
Alexandria, VA 22314- 3428
Phone: 1-703-518-6330
Complaints about finance, mortgage, credit card and credit bureaus can be filed at:
Federal Trade Commission
CRC-240
Washington, D.C. 20580
Phone: 1-877-FTC-HELP (382-4357)
For the online complaint form go to:
https://rn.ftc.gov/pls/dod/wsolcq$.startup?Z_ORG_CODE=PU01
Activity: Protect Yourself --Take Quizzes on Identity Theft, Spyware, Phishing, Spam Scam Slam,
Online Shopping
Go online to the OnGuard website to check your knowledge about many electronic crimes at
www.onguardonline.gov/quiz There are a series of nine short fun, colorful quizzes to test your
knowledge to protect yourself, your work or your family.
Sources
AARP, Be a Wise Consumer, http://www.aarp.org/money/wise_consumer/
Be Crime Smart, Federal Bureau of Investigation, www.fbi.gov
Canadian government has an excellent explanation of credit reports. http://www.fcacacfc.gc.ca/eng/publications/CreditReportScore/CreditReportScoreTOC-eng.asp. Review the two
sample credit reports provided.
Center for Responsible Lending has many statistics on subprime mortgages and predatory
lending. http://www.responsiblelending.org/index.html
Federal Trade Commission (FTC) Consumer Information-ID Theft, www.ftc.gov/ftc/consumer.htm
www.ftc.gov/idtheft
Federal Deposit Insurance Corporation (FDIC) on interest only loans:
http://www.fdic.gov/consumers/consumer/interest-only/index.html
Freddie Mac’s mortgage calculators
http://www.freddiemac.com/corporate/buyown/english/calcs_tools/
MyMoney.gov, America’s One Stop Shop for Free Personal Finance Information from the Federal
Government, www.mymoney.gov
The ID Theft Resource Center, www.idtheftcenter.org/index.shtml
Washington State Attorney General, Identity Theft—A Guide for Consumers, www.atg.wa.gov
2009 Page 102
Washington State Department of Financial Institutions, Consumer Protection information,
http://www.dfi.wa.gov/
San Francisco Federal Reserve has information on credit reports.
http://www.frbsf.org/publications/consumer/creditreport.html
GLOSSARY
Adjustable-rate loans: Also known as variable-rate loans, usually offer a lower initial interest
rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on a
benchmark such as the London Interbank Offered Rate (LIBOR) or a treasury bond rate, but the
loan agreement generally sets maximum and minimum rates. When interest rates rise, generally,
so do your loan payments; and when interest rates fall, your monthly payments may be lowered.
Annual percentage rate (APR): The cost of credit expressed as a yearly rate. The APR includes
the interest rate, points, broker fees, and certain other credit charges that the borrower is required
to pay. Here is an example of how repaying a loan over time can affect your APR.
Month
1
2
3
4
5
6
7
8
9
10
11
12
APR 10%
Principal
Interest
$ 100.00
$ 10.00
$ 100.00
$ 10.00
APR 18%
Principal Interest
$7.96
$1.50
$8.02
$1.38
$8.09
$1.27
$8.16
$1.15
$8.23
$1.03
$8.30
$0.91
$8.36
$0.78
$8.43
$0.66
$8.50
$0.53
$8.58
$0.40
$8.65
$0.27
$8.72
$0.14
$100.00
$10.02
Appraisal Fee: The charge for estimating the value of property offered as security. This fee
should be included into your evaluation when comparison shopping between banks as not all
lenders may require an appraisal.
Asset: An item owned by an individual or organization that has monetary value.
Automated Teller Machines (ATMs): Electronic terminals located on bank premises or
elsewhere, through which customers of financial institutions may make deposits, withdrawals, or
other transactions as they would through a bank teller.
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Balloon Payment: A large extra payment that may be charged at the end of a loan or lease. For
example, a loan may start off with the regular principal and interest and at the end of a specified
period the balance of the principal may be due.
Billing Error: Any mistake in your monthly statement as defined by the Fair Credit Billing Act.
Business Days: Check with your institution to find out what days it counts as business days
under the Truth in Lending and Electronic Fund Transfer Acts.
Closed-End Lease: A lease in which you are not responsible for the difference if the actual
value of the item at the scheduled end of the lease is less than the residual value, but you may be
responsible for excess wear-and-use charges and for other lease requirements.
Collateral: Property, such as stocks, bonds or a car, offered to support a loan and subject to
seizure (may be taken from you) if you default.
Compounding: The interest earned on principle plus previously accrued interest.
Conventional loans: Mortgage loans other than those insured or guaranteed by a government
agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or
the Rural Development Services (formerly know as Farmers Home Administration, or FmHA).
These do not include subprime loans which are given to folks who might not qualify for a
conventional loan.
Cosigner: Another person who signs your loan and assumes equal responsibility for it. It is not
recommended that you cosign loans for others.
Credit: The right granted by a creditor to pay in the future to buy or borrow in the present; a sum
of money due a person or business.
Credit Bureau: An agency that keeps your credit record; also called a credit-reporting agency.
There are three main credit reporting companies Equifax, Experian and Trans Union.
Credit Card: A card issued to you by a financial company to buy goods or services on credit
(meaning you buy now and pay in a month) and borrow money. The best way to use credit cards
is to pay your outstanding balance in full every month.
Credit History: The record of how you’ve borrowed and repaid debts including the amount of the
debts and whether you paid on time or late and how late. Your credit history determines how
much you are charged for credit.
Credit Insurance: Health, life, accident, or disruption of income insurance designed to pay the
outstanding balance on a debt.
Creditor: A person or business from whom you borrow money.
Credit-Scoring System: A statistical system used to rate credit applicants according to various
characteristics relevant to creditworthiness. A fico score is an example of a credit score.
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Creditworthiness: Past, present, and future ability to repay debts. The record of how you’ve
borrowed and repaid debts including the amount of the debts and whether you paid on time or
late and how late. Your credit history determines how much you are charged for credit.
Debit Card (EFT Card): A plastic card, which looks similar to a credit card, that consumers may
use at an ATM or to make purchases, withdrawals, or other types of electronic fund transfers.
Transactions with debit cards are taken from your bank account usually within 24-hours. Often it
is difficult to reverse the transaction.
Default: Failure to repay a loan or otherwise meet the terms of your credit agreement.
Disclosures: Information that must be given to consumers about their financial dealings.
Electronic Fund Transfer (EFT) Systems: A variety of systems and technologies for
transferring funds electronically rather than by check. This includes direct deposit of your
paycheck, online bill payment services, and electronic transfer of funds between banks.
Escrow: Money or documents held by a neutral third party prior to closing on the purchase of a
house. It can also be an account held by the lender (or servicer) into which a homeowner pays
money for taxes and insurance that may be due in the future.
Finance Charge: The total dollar amount credit will cost. This and the APR are the most
important factors in evaluating a loan.
Fixed-rate Loans: Generally these have repayment terms of 15, 20, or 30 years. Both the
interest rate and the monthly payments (for principal and interest) stay the same during the life of
the loan. The interest portion of the monthly payment is larger at the beginning of the term and
the principal portion is larger in the later part of the term.
Fraud: Intentional misrepresentation for illegal gain.
Home Equity: The difference between what you paid for your home and what you get when you
sell.
Home Equity Line of Credit: A form of open-end credit in which the home serves as collateral.
Interest Rate: The cost of borrowing money expressed as a percentage rate. Interest rates can
change because of market conditions.
Joint Account: A credit account held by two or more people so that all can use the account and
all assume legal responsibility to repay.
Late Payment: A payment made later than agreed upon in a credit contract and on which
additional charges may be imposed. Credit card late payments may result in a higher interest
rate.
Lessee: The party to whom the item is leased. In a consumer lease, the lessee is you, the
consumer. The lessee is required to make payments and to meet other obligations specified in
the lease agreement.
2009 Page 105
Lessor: The person or organization who regularly leases, offers to lease, or arranges for the
lease of the item.
Liability: The dollar value of debts owed to others.
Liability on an Account: Legal responsibility to repay debt.
Loan origination fees: Fees charged by the lender for processing the loan and are often
expressed as a percentage of the loan amount.
Lock-in: Refers to a written agreement guaranteeing a home buyer a specific interest rate on a
home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days.
Often the agreement also specifies the number of points to be paid at closing.
Mortgage: a document signed by a borrower when a home loan is made that gives the lender a
right to take possession of the property if the borrower fails to pay off the loan.
Net Worth: A person’s financial condition at a given time. Assets (things owned) minus liabilities
(things owed) equals net worth.
Open-End Credit: A line of credit that may be used repeatedly, including credit cards, overdraft
credit accounts, and home equity lines.
Open-End Lease: A lease agreement in which the amount you owe at the end of the lease term
is based on the difference between the residual value of the leased property and its realized
value. Your lease agreement may provide for a refund of any excess if the realized value is
greater than the residual value. In an open-end consumer lease, assuming you have met the use
and wear standards, the residual value is considered unreasonable if it exceeds the realized
value by more than three times the base monthly payment (sometimes called the “three-payment
rule”).
Overages: The difference between the lowest available price and any higher price that the home
buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all
of this difference as extra compensation. When comparison shopping between mortgages, it is
important to include all fees in the calculations of APRs to properly compare.
Overdraft Checking: A line of credit that allows you to write checks or draw funds with an EFT
card for more than your actual balance, with an interest charge on the overdraft.
Pay Yourself First: A practice that establishes an amount to be saved each payday and put into
savings or invested.
Points: Fees paid to the lender for the loan. One point equals 1 percent of the loan amount.
Points are usually paid in cash at closing. In some cases, the money needed to pay points can be
borrowed, but doing so will increase the loan amount and the total costs. Include all points in the
calculation of the APR.
Points and Origination Fees: Fees paid to the lender for the loan. One point equals 1 percent
of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed
to pay points can be borrowed, but doing so will increase the loan amount and the total costs. An
origination fee covers the lender’s work in preparing your mortgage loan.
2009 Page 106
Private mortgage insurance (PMI): Protects the lender against a loss if a borrower defaults on
the loan. It is usually required for loans in which the down payment is less than 20 percent of the
sales price or, in a refinancing, when the amount financed is greater than 80 percent of the
appraised value.
Realized Value: (1) The price the lessor or assignee receives for the leased item at disposition,
(2) the highest offer for the leased item at disposition, or (3) the fair market value of the leased
item at termination. The realized value may be either the wholesale or the retail value as specified
in the lease agreement.
Rescission: The cancellation of a contract. In some lending agreements such as home equity
loans, the consumer is allowed 3 days to cancel a contract. This does not apply to mortgages.
Residual Value: The end-of-term value of the item established at the beginning of the lease and
used in calculating your base monthly payment. The residual value is deducted from the adjusted
capitalized cost to determine the depreciation and any amortized amounts. It is an estimate that
may be determined in part by using residual value guidebooks. The residual value may be higher
or lower than the realized value at the scheduled end of the lease.
Risk (Investment): The possibility that you may lose some (or all) of your original investment. In
general, the greater the potential gain from an investment, the greater the risk that you might lose
money.
Security: Property pledged to the creditor in case of a default on a loan; see collateral. When
signing a rental lease, you may be required to submit a security deposit of a certain number of
months.
Security Interest: The creditor’s right to take property or a portion of property offered as
security.
Service Charge: A component of some finance charges, such as the fee for triggering an
overdraft checking account into use.
Social Security: A comprehensive federal benefit program that provides workers and their
dependents with retirement income, disability income, and other payments.
Thrift institution: A general term for savings banks and savings and loan associations.
Transaction, settlement, or closing costs: May include application fees; title examination,
abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages,
and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit
report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith
estimate of closing costs at the time of application or within three days of application. The good
faith estimate lists each expected cost either as an amount or a range.
2009 Page 107