You & Your MoneyClass 3, Part 1 – Your Credit

International Centerat Catholic Charities Community Services

April 2013Instructor: Virginia Guilford

Class Schedule• Class 1 - Thursday April 11, 4:00 – 5:00 PM

– Your Income– Your Taxes

• Class 2 – Thursday April 18, 4:00 – 5:00 PM– Your Budget– Your Bank Accounts

• Class 3 – Thursday April 25, 4:00 – 5:00 PM– Your Credit– Learning More

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Please Be Aware

• This course does not give you professional advice– I am not a lawyer.– I am not an accountant.– I am not a banker.

• This course explains the basic concepts and vocabulary that you need for understanding work, taxes, budgeting, banking and credit.

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Your Credit

• A lender will generally loan you money if:– You have a regular, verifiable source of income– You have a good credit score.

• Sometimes, the lender also wants to have an extra guarantee that you will pay the money back– Security– Collateral

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Managing Credit

• Good Credit vs Bad Credit • How Much Debt is Too Much?

– No more than 28% of your gross income should go to paying all debt for home ownership (mortgage payment, property taxes and home owner’s insurance).

– No more than 36% of your gross income should go to all debt: your home ownership debt plus credit card debt and auto loans.

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Your Credit Score• Your credit score is based on five

factors, each weighted differently.– Payment History – 35% - how

good you are at always paying your bills on time.

– Amount Owed – 30% - how much you owe.

– Length of Credit History – 15% - how long you have been using credit.

– New Credit – 10% - how much credit have you recently asked for.

– Types of Credit Used – 10% - how many different types of credit do you have.

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Improving Your Credit ScoreTo improve your credit score:• Pay your bills on time. • Keep your credit card balances low, ideally,

below 25% of your available credit limit. • Increase the length of your credit history by

keeping the same credit card for a long time. • Minimize the frequency of new card requests.

Don’t sign up for a lot of new credit cards. • Keep a combination of different types of debt

– car loans and mortgages and credit cards.

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Credit Reporting Agencies

• Experian

• Equifax

• TransUnion

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www.annualcreditreport.com/cra/index.jsp - how to request a credit report www.nextadvisor.com/credit_report_monitoring/index.php - compare credit monitoring services

Credit reporting agencies are required to provide you with a free copy of your credit report once a year.

The three main credit reporting agencies:

Consumer Credit

• Bank Credit Cards• Bank Debit Cards• Store Credit Cards• Pre-paid Debit Cards

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Bank Credit Cards

• How do Credit Cards Work?– Accepted widely; many locations in the US

and Worldwide– You receive your purchase, payment is not

due until the next billing date– If you don’t pay the whole amount, you will

owe interest on the remaining amount due

• Rewards Cards– Frequent flier miles– ‘Points’ good for purchases– Cash back

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Choosing a Credit Card• Things to Consider When Choosing a Card

– APR (Annual Percentage Rate) or Finance Charge• “Competitive Rates” – claims to be close to the rates that other card companies

charge. Average for all credit cards is about 14%.• “Introductory Rate” – this may be a low rate, but it may only be good for a few

months• “Variable Rate” – the rate you pay will be different at different times.• “Prime Rate” – the rate that banks charge their best customers, tied to the Federal

Funds rate, which is the rate that banks charge each other.

– Fees – typically cost from $50 - $100 per year• Annual fee• Activation fee• Acceptance fee• Participation fee• Monthly maintenance fee• Account set-up fee

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Choosing a Credit Card• Additional Things to Consider about Cards

– Balance Calculation Method• Average Daily Balance – you pay interest calculated on an average of all you

charges, included new purchases - best for the credit card company• Adjusted Balance – you pay interest calculated on your balance at the beginning of

the billing cycle - best for you

– Grace Period – the amount of time between the end of the billing cycle and when you must pay

• If you don’t pay until after the grace period is over, you will be charged finance charges and late fees

• The Credit CARD Act of 2009 says that the card company must give you at least 21 days to make your payment

• Note – most credit card companies do not allow any grace period for cash advances or transfers – you are charged interest on these as soon as they are made

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Choosing a Credit Card• Web Sites to Help You Choose the Best Card

– www.credit.com– www.CreditCardConnection.org – www.LowCards.com

• Web Sites to Help You Understand Credit Card Terms and Concepts– www.creditcards.com/glossary/ – http://creditcardforum.com/blog/

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Credit Cards “Card Act”• Impact of the Credit Card Accountability

Responsibility and Disclosure Act of 2009 (the “Card Act”)

• Intended to stop unfair practices– Required to give advance notice if interest rates are raised– No penalties for customers who pay on time– No ‘due date gimmicks’– Customers can fix their credit limits– No excessive fees

• Be aware - credit card issuers have made changes to avoid these restrictions– Inactivity fees– New types of cards – ‘professional card’, ‘rebate card’

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Bank Debit Cards

• Bank Debit Cards are not credit cards.– Debit cards can be used in many places that take

credit cards.– The payment is taken immediately from your bank

account.

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Store Credit Cards

• Can only be used in the store that issued the card.

• Don’t open a store credit account unless you really need it and will use it.

• Too many store credit card accounts may reduce your Credit Score.

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Prepaid Debit Cards

• Examples– Green Dot Visa or MasterCard– Rush Visa– Net Spend Visa or MasterCard

• Technically, not credit cards at all• You purchase the card with cash, and

then use the card until it is empty.• Most Prepaid debit cards charge a

monthly fee.

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Other Kinds of Credit

• Mortgages

• Auto Loans

• Student Loans

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Collateral or Security for Loans• Most loans require more than just a promise

from you that you will pay back the money• You may be required to set aside an asset as

‘collateral’ or ‘security’ for the loan– For a mortage, the house will be your collateral– For a car loan, the car will be your collateral– For a loan of cash, stocks or bonds or other assets

might be your collateral

• If you stop making your payments on the loan, the lender then can take back the collateral

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Mortgages

• Down Payment• Term Length• Mortgage Rate – Fixed or ARM• Interest or Principal• Risk of Foreclosure

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Mortgage Down Payment

• Down Payment – a percentage of the value of the home paid in cash– The down payment proves to the bank that you

are disciplined enough to be able to save money– A bigger down payment means less that you need

to borrow with the mortgage

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Mortgage Term Length

• Term Length – the amount of time that you have to pay back the mortgage– A mortgage usually gives you a longer time than

other kinds of debt• 15 years• 20 years• 30 years

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Mortgage Rate

• Mortgage Rate – Fixed– Rate is fixed for the entire term of the mortgage– Is good if you want to know for sure how much you will have to pay

each month

• Mortgage Rate – ARM– ARM – Adjustable Rate Mortgage– Rate is adjustable and can change.– Often starts at a low rate, but can increase– Some ARMs have a limit on the amount of increase, or when the first

increase can occur– Might be good if you are only planning to live there for one or two

years

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Mortgages – Interest & Principal

• Interest – the amount you are paying extra as a charge for the loan

• Principal – the basic amount that you borrowed• Each mortgage payment will include some payment

for interest, and some payment against the principal. – The balance between principal and interest in each

payment will change over the life of the mortgage.– If you ever get extra money, you might make an extra

mortgage payment. But make sure that the payment goes toward paying off the principal that you owe.

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Mortgages - Foreclosure

• Your home is your collateral for your mortgage• Risk of Foreclosure• If you stop making your mortgage payments, or

if you don’t make your payments on time, the bank can foreclose (take back) your home.– You can no longer live in your home– You lose all the payments you have made so far

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Auto Loans• Your Car is your Collateral

– If you miss some car loan payments, or if your payments are late, the lender can ‘repossess’ the car

– You will lose the car– You will lose any of the payments you have made up to that date

• Auto Loan from a Bank– Check out the cost of an auto loan at your bank

• A bank auto loan may have a lower rate• Knowing what you qualify for helps in negotiations

• Auto Loan from the Car Dealership– Dealers sometimes offer a special rate, but you won’t know if it is a good

deal or not unless you can compare it to your bank’s offer

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Student Loans

• Types of Student Loans– Federal– Private– Available from a bank, credit union, or directly from the government

• Repayment of Student Loans– Repayment does not start until you have left school– Missing one semester may trigger the start of repayment

• Student Loans and Bankruptcy– Your earning potential is the collateral for your student loan– You cannot use bankruptcy to avoid paying back your student loan

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You & Your MoneyClass 3, Part 2 – Learning More

International Centerat Catholic Charities Community Services

April 2013Instructor: Virginia Guilford

Learning More

• This course cannot be the final word about your finances.

• Banks and Credit Card companies are always changing.

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Evaluating Information & Advice

• Credible Information– Believable information.– Trustable information.

• Disinterested Advice– Advice from someone who will not be affected by

what you choose to do.

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General Sources

• finance.yahoo.com/personal-finance • money.cnn.com/pf/ • www.nytimes.com/pages/your-money/index.

html

• www.forbes.com/ • www.kiplinger.com/ • www.bloomberg.com/

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Financial Institutions & Organizations

• www.bankofamerica.com/studentbanking/ • www.schwabmoneywise.com/home/index.php • https://

online.citibank.com/US/JRS/pands/detail.do?ID=PlanningOverview

• www.findabetterbank.com/

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Loans & Credit Cards

• www.finaid.org/calculators/loanpayments.phtml • www.annualcreditreport.com/cra/index.jsp• www.credit.com• www.CreditCardConnection.org • www.LowCards.com• www.nextadvisor.com/

credit_report_monitoring/index.php

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Government Sites

• http://www.fdic.gov/quicklinks/consumers.html• http://www.occ.treas.gov/ • www.tax.state.ny.us/• www.irs.gov

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You & Your Money Word Doc

• Contains all the information in this class, plus a glossary of terms.

• Go to www.virginiaguilford.com and download the Word document from the “Docs and Links” page. (The PowerPoint presentations used in this class are also available there)

• Or send your request tovg@virginiaguilford.com

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