Personal Credit
Conserving your wealth
1
Income seems to be leveling
Typical Household Income
(114 million US households - 2005 dollars)
60,000
50,000
40,000
30,000
20,000
10,000
0
1975
1980
1985
1990
2
1995
2000
2005
Yet, debt is on the rise
Outstanding Household Debt is more than Personal Disposable Income
$ Billions
12,000
Personal Disposable Income
10,000
Outstanding Household Debt
8,000
6,000
4,000
2,000
0
1979
1984
1989
1994
Source: Federal Reserve
3
1999
2004
Overview
2004 Consumer Finance Survey
Primary residence mortgage
Percent
with debt
45%
Other real estate mortgage
5%
Home equity line
1%
Installment debt (Car and education)
43%
Credit card balance
44%
Other debt
7%
4
Conserving your wealth is about
borrowing or is it about buying?
5
Persuasion tactic
• Phantom Fixation – The objective is to put something that is
completely unavailable before you that appeals to health issues,
wealth, popularity or avoiding death.
• Commitment – The salesperson tries to get you to commit but
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.
• 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.
• Social Proof – This tactic tries to get you to believe that everyone is
getting one so you should, too.
6
Persuasion tactics
• Scarcity including product scarcity (only three left) and
time scarcity (offer good only today) 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.
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Persuasion Tactics
• Friendship – The salesperson changes the
relationship to friendship.
• 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 lead to where he or she wants to
go by setting the agenda, limiting choices or
controlling information.
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Negative events can make you more susceptible
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foreclosure on a mortgage
recent loss of employment in
family
negative change in financial
status
concerns about owing money
concerns about money in
emergencies or basic
necessities
problems with upkeep in their
home
a change in living arrangements
recent retirement in family
change in social activities for
the worse
change in daily routine
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problems with transportation of
traffic
problems with troublesome
neighbors or co-workers
concern about being lonely
legal problems
minor violations of the law
death of a partner
death of a close friend or family
member
serious injury or illness
limits to physical activity
divorce or marital separation
difficulties in relationships or
problems with children or
grandchildren
Learn to resist persuasion tactics
• These tactics are used for legitimate
marketing
• Used in scamming victims
• Swindlers bombard their victims with
complex combinations of these tactics
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Activity – Identifying persuasion tactics
• Here is a clip from the home shopping
network
• Identify all the persuasion tactics you see
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The Buy Decision
• http://www.mazdausa.com/MusaWeb/displ
ayPage.action?pageParameter=zoomMain
– Ask the important question: Do I really need
this?
– Will it increase in value? Will it decrease in
value?
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Needs and wants
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Find your last credit card statement
Keep all your receipts in an envelope
List your last ten expenditures
Classify them as “n” for needs and “w” for wants
Look through each item:
– Did you spend too much in 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?
13
An unnamed credit card bill
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
Emergency Room Visit (Canada)
Groceries
Finance Charge
Foreign Transaction Charge
409.94 N
53.89 N
9.54
14
12.29
Reflecting on what I spent
• One third of my bill was “wants” – easily eliminated
• Even with necessities such as groceries, could
economize –families waste on average $590 in food
every year
• Had finance charges that could have been eliminated if
paid previous balance on time – went on trip and forgot
• Medical emergencies can pop up and break the bank
• When you purchase things outside of the country (even
Canada) you are charge a foreign transaction fee – in
this case a hefty 3% for the emergency room charge
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Activity: Buying a car
• Look at this activity in your workbook
• Break into groups
• Be prepared to present your project to the
class
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How should you use credit cards?
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Credit Cards Quiz – True or False?
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Credit cards encourage you buy
You should have a minimum of five credit cards
You should close out all credit cards you don’t use
If you are late in payment, you are paying a 5% annual
charge
• You should always pay your outstanding balance
• If you lose your credit card, you are liable for all charges
so you should buy credit card insurance to cover for this
• Credit card companies will contact you by email to let
you know about discrepancies in your account
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The big picture
Consumer debt has doubled in the past 10 years
(Consumer credit $ millions - does not include mortgages)
3000000
2500000
2000000
1500000
1000000
500000
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2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
Credit card facts
• Number issued exceeds 691 million or more than twice the
population (adults and children) of the US.
• Between 1980 and 2005, amount charged to their cards grew from
$69 billion per year to more than $1.8 trillion.
• 44.4% of families had outstanding credit card balances with a
median value of $2200. Average value for Washington state is
$5100 in 2006.
• Use of credit cards adds to household debt, which grew from $59
billion in 1980 to roughly $830 billion by the end of 2005.
• One third of teenagers have credit cards cosigned with their parents.
• According to the Federal Reserve, from 1983 to 2001, credit card
debt for 24- to 35-year olds tripled from $3,989 to $12,000.
• Some experts believe that the rise in credit cards has brought about
the rise in personal bankruptcies.
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How well do you know your credit card?
• Read the solicitation disclosure
• Answer the following questions:
– What interest rate are you charged on your purchases
if you don’t pay your 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, calculate what interest rate and other fees
you would pay
21
Credit Card
• Credit cards encourage you to spend. So if you have
problems with spending too much, use cash.
• Opt out of credit card offers by calling Opt out 888-5678688 or going to the website www.optoutprescreen.com.
• 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.
22
Credit Cards
• Protect your card and your account number.
• Save receipts to compare with billing statements
promptly.
• Pay all credit cards on time and in full.
• Do not spend up to your credit limit.
• Report any questionable charges promptly and
in writing to the card issuer. Do not pay for
purchases where product was not delivered or
defective.
23
Credit Cards
• Correct any billing errors as soon as possible.
• If you use your credit card to shop online, install security
on your personal computer.
• Don’t automatically close credit cards when you no
longer use them. Put them in a safe place.
• If you lose your credit or charge cards or if you realize
they've been lost or stolen, immediately call the issuers.
Your maximum liability under federal law is $50 per card.
24
Installment Loans
• Borrow money now
• Pay back over period of time
• The shorter the period you borrow, the
less interest
• The lower the interest rate, the better
25
Car Loan - $15,000 – 48 months – 7%
Auto Loan Monthly Payment
(15,000 - 48 months - 7%)
Interest
Principal
$400.00
$350.00
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
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35
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39
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Auto Loan Balance Outstanding
($15,000 - 48 months - 7%)
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
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Summary on Car Loans
• 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.
• Shop around for the lowest interest rates.
• Don’t spend more than 40% of your monthly income on
debt including your mortgage.
27
Student Loan Facts
• 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 -12 million
loans were made for a total of $55 billion (2006).
• 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.
• An AOL survey showed 65% of those who took out
student loans still had an outstanding balance at age 35.
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Student Loans
29
Best way to pay is by saving ahead of time
• Qualified tuition plans (529 Plans) allow
you to save tax-free
• Washington GET
• Coverdell Education Savings
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The difference between saving and borrowing
Debt Payment on $60,000 at 8% for 10
years
Total principal $60,000
Interest
Total interest $25,427
payment
Total payments $85,427
Principal
Saving $60,000 in 10 years at 7%
Total contribution $43,427
10,000.00
9,000.00
9,000.00
8,000.00
8,000.00
7,000.00
7,000.00
6,000.00
6,000.00
5,000.00
5,000.00
repayment
4,000.00
4,000.00
3,000.00
3,000.00
2,000.00
2,000.00
1,000.00
1,000.00
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Summary on Student Loans
• Make sure that you have a good chance of earning the
income you need to pay off the debt.
• Only borrow as much as you need.
• Check for federal loans first. They are the cheapest and
have the most options.
• Comparison shop for private loans and evaluate APRs.
• Ask for loan features that will help you if you miss a
payment or if you have a good on-time record.
• Create a plan for repaying your loan when you take out
the loan.
32
The home is part of the American dream,
but you can’t get one without a mortgage.
33
Mortgages -$10.2 trillion in debt
Mortgages and Refinances
($ billions)
1400
1200
Refinance
Originations
1000
Purchase
Originations
800
600
400
200
Source: Mortgage Bankers Association
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2006-Q1
2005-Q1
2004-Q1
2003-Q1
2002-Q1
2001-Q1
2000-Q1
1999-Q1
1998-Q1
1997-Q1
1996-Q1
1995-Q1
1994-Q1
1993-Q1
1992-Q1
1991-Q1
1990-Q1
0
Mortgages
• Rent versus buy?
– What factors do you need to consider?
Try it at:
http://www.ginniemae.gov/rent_vs_buy/rent_
vs_buy_calc.asp?Section=YPTH
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Debt-to-income ratio
• A = Total all your housing expenses (mortgage,
insurance and taxes)
• B = Total all your debt payments A + others (car,
education and credit card)
• C = Total all your monthly income
• Debt-to-income ratio
A/C and B/C determines how much you can afford
Try it at:
http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH
36
How do mortgages work?
Breakdown of Annual Mortgage Payment by Year of Payment
$200,000 at 6% for 30 years
$14,000.00
$12,000.00
Principal
Total $200,000
$10,000.00
$8,000.00
$6,000.00
$4,000.00
Finance Charge
Total $235,893
$2,000.00
$0.00
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10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
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Effect of interest rates
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Adjustable-rate Mortgages
Per
$100,000
Monthly
Payment
5%
$542.10
6%
$605.41
7%
$671.55
8%
$740.23
9%
$811.14
10%
$883.99
11%
$958.54
12%
$1,034.53
13%
$1,111.76
14%
$1,190.02
15%
$1,269.17
You have an adjustable-rate
mortgage for $200,000 that
resets after a year. 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 now 5.03%. What
will your rate be? What
increase will you see in your
monthly payments?
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Effect of term of mortgage
30-year mortgage $200,000
Total Interest $235,894
$16,000.00
$14,000.00
$12,000.00
$10,000.00
$8,000.00
Principal
$6,000.00
Interest
$4,000.00
$2,000.00
$0.00
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2
3
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9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
15-year mortgage $200,000
Total interest $108,888
$25,000.00
$20,000.00
$15,000.00
Principal
$10,000.00
Interest
$5,000.00
$0.00
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Understanding APR
APR 10%
Month
Principal
Interest
1
$7.96
$1.50
2
$8.02
$1.38
3
$8.09
$1.27
4
$8.16
$1.15
5
$8.23
$1.03
6
$8.30
$0.91
7
$8.36
$0.78
8
$8.43
$0.66
9
$8.50
$0.53
10
$8.58
$0.40
11
$8.65
$0.27
$0.14
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Principal
Interest
APR 18%
$ 100.00
$ 10.00
$8.72
$ 100.00
$ 10.00
$100.00
41
$10.02
Evaluating a mortgage - APR
Company Interest
rate
A
5.75
Points
0
Down
payment
0 – 20%
B
5.875
1
0 – 20%
C
4.875
5.875
0 – 20%
D
5.25
2.875
0 – 20%
APR
– http://www.dinkytown.net/java/MortgageApr.html
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Mortgage Shopping Worksheet
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What could you afford?
Down payment
APR
Points
Private mortgage insurance
Fees (Application, origination, lender, appraisal,
attorney, document preparation, broker’s fee,
credit report fee
• Other closing fees
• Other costs
43
Mortgages
• Adjustable versus fixed rate?
• 30-year versus 15-year?
• How much down payment?
Try it at:
http://www.ginniemae.gov/2_prequal/le_intro
_questions.asp?subTitle=YPTH
44
Activity – Shop for a mortgage
• Break into groups.
• Using the mortgage evaluation form,
evaluate 3 mortgages
45
What do you mean I didn’t get the job? The
low-down on credit reports.
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Which of the following factors can a lender use to evaluate
your credit?
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Gender
Age
Childbearing plans
Marital status
Change in marital status
Loans
Public assistance
Dependents
How long you’ve lived at
your house
Alimony
Race
Color
National origin
People in the
neighborhood where you
want to buy
• How long you’ve had your
job
• Salary
47
Activity – Reading a credit report
• Read the sample credit report
• Identify the main areas of interest to the
consumer reporting companies
• What factors do consumer reporting
companies use in calculating a credit
score?
48
Your credit score
Types of credit
used
10%
Credit Rating
New credit
10%
Payment history
35%
Length of credit
history
15%
Source: www.myfico.com
Amounts owed
30%
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Credit Scores
50
credit ratings and cost of credit
If your FICO
score is
Your interest
rate is
and your monthly
payment is
760 - 850
5.78%
$1,264
700 - 759
680 - 699
6%
6.18%
$1,295
$1,320
660 - 679
640 - 659
620 - 639
6.39%
6.82%
7.37%
$1,350
$1,411
$1,491
Source: www.myfico.com 3/21/07
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FICO score
To get a rough estimate of your FICO score,
go to:
http://www.bankrate.com/brm/fico/calc.asp?l
pid=BKRATE29
52
Protecting yourself
• Get a free credit report every year
annualcreditreport.com or call 877-3228228
• Correct any errors by contacting the
company in writing – they must resolve
the error in 30 days
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Credit repair – helping yourself or others out
of a tough spot.
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Common causes of financial problems
• Reduction in income from job loss, divorce or
death in the family
• Emergency and/or unexpected expenses (such
as hospital bills)
• Defective goods and services, such as your car
needing a new transmission or your house
needing a new roof
• Fraudulent use of credit cards
• Poor money management from overspending,
compulsive shopping and buying things you
can't afford
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Need to admit there is a problem
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Are you consistently charged late fees on all your bills?
Is it hard to decide which bills to pay each month?
Are you only able to buy groceries by using your credit card?
Be honest about your credit cards and loans:
Do you spend more than 20% of your net monthly income to pay for
your credit cards?
Have you ever borrowed money to make payments on existing
loans?
Are your credit cards maxed out most of the time?
Do you have so many credit cards that you can only pay the monthly
minimum? :
Have you ever put off something important, like going to the doctor,
because you didn't have enough money?
Do you work a lot of overtime or have a second job just to pay your
basic living expenses?
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Credit Repair
• Correct any inaccuracies in your credit report
– Tell the consumer reporting company what
information you think is inaccurate (they must
respond within 30 days)
– Provide copies (not originals) of documentation
• It is best to work with a free credit counselor to
work out a plan to pay off your debt
• Only the passage of time will remove accurate
negative information from your report
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Coping with credit problems
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Stay calm and work your way slowly and surely through the problem. Don’t delay.
Take action now and make it a priority.
If you feel that an error caused your credit problem, tell the credit rating service. Be
diligent about monitoring your credit report.
Seek financial counseling right away. Use free counseling services that are listed in
www.usdoj.gov/ust. Be aware of credit counseling services (even though they claim
to be nonprofit) that charge you fees.
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.
Prepare a realistic spending plan to pay down your debt.
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.
It might take longer than you thought for your financial crisis to go away. Be
persistent with your creditors and payment plan.
As you start to pull yourself out of the financial crisis, remember to set aside money
for savings.
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Restoring credit
• There are a lot of scam artists and
disreputable credit repair companies
• Research and check before you use a
credit counselor
• Watch out for wild promises and illegal
practices
• It’s best to use a free credit counselor and
do it on your own
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Protect yourself
• Safeguard all your financial information. Shred or burn all old
financial documents. Lock up your financial documents.
• 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.
• 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.
• Review your credit report annually and correct any errors.
• Report fraud or file complaints when you find financial service
companies have violated the law.
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