Debt and Credit Management [Autosaved].PPT

Editor's Notes

• #1: Hello! My name is [INSERT NAME HERE], and I am a Student Ambassador with the Society for Financial Education and Professional Development. SFEPD is a nonprofit leader committed to enhancing financial education for college students studying at HBCUs. And we’re thankful for the support of our sponsor(s): [INSERT SPONSOR(S) NAME(S) HERE].   I’d also like to thank [INSERT NAME(S) HERE] for joining us today. (Thank any officials in attendance - SFEPD staff, sponsors, oversight professor, faculty from your college/university and begin the presentation.) Today, the topic of the presentation is Credit and Debt Management. With financial education, consumers may have the skills and knowledge to make informed financial decisions that impact their future. Developing credit management skills is an essential learning process for building wealth. It begins with understanding basic financial concepts that change behavior over time.
• #2: https://forms.gle/ZvW4nX111XQhLBPU9
• #3: We live in a credit-driven society. As such, individuals, households, small businesses, governments, and corporations rely on credit to acquire the goods and services needed to maintain a standard of living, provide services, and in the case of corporations, finance their operations. The standard for acquiring credit varies by who you are or the type of business you own and operate. While race is not explicit in granting credit, surveys show that it does play a factor in credit approval. For example, a survey by Credit Sesame shows that 54% of African Americans report no credit or a poor credit score, which is below 640. This may support many statements made by individuals and organizations that credit scoring models are biased and unfair. In fact, credit scores do not consider on-time apartment rental payments and cell phone payments, which could have a major positive impact on an individual’s credit score. The lack of inclusion of this data in the computation of credit scores affects the credit scores of African Americans and other people of color who live in apartments. Moreover, the long history of discrimination in America also affects the data that credit scoring models use today to determine creditworthiness. The Consumer Financial Protection Bureau reports that Blacks, Hispanics, and those living in low-income neighborhoods have higher credit invisibility rates. This means they do not have a credit history with any credit reporting agencies. As a result, numerous financial consequences will limit a person’s ability to acquire a credit card, purchase a car, get employment, rent an apartment, buy a home, and more. This limits an individual’s financial growth and wealth creation. In this workshop, we will share with you how to acquire and manage credit, establish and maintain high credit scores so that you are able to meet your financial goals, establish and maintain better credit scores, and limit the drainage of your financial resources from your household due to the mismanagement of credit and debt.
• #4: The goal for today is to assist in the overall basic understanding of….
• #5: Credit is an asset when managed and monitored correctly. Opening and successfully managing financial products is the key to building and maintaining a good credit history. Debt is the sum total of all things owed! Add up the total student loan balance you owe, the remaining amount on your car loan, home mortgage, etc. That is your total debt. Credit is the ability to borrow money and repay the amount borrowed. The amount that you borrow is also added to your total debt.
• #6: Credit is important because it can be used in times of emergency; more convenient and safer than carrying large amounts of cash; it allows you to make large purchases (i.e., car or house) and pay for them over time, and in the most dire cases even take out cash advances. In addition, prospective employers, landlords, and insurance companies may look at how well you manage your credit.
• #7: These are the three main categories that all the major credit rating agencies and lenders review. Capacity - helps financial institutions determine the risk associated with lending to you by researching: How long have you been in a job? How much money do you make each month? Character - your present and future ability to meet your payment obligation, such as: Have you had credit in the past? Have you made late payments? How many credit accounts do you have? Have you ever filed for bankruptcy? Do you consistently pay lenders as agreed? Collateral - do you have assets to secure the loan beyond your capacity to pay it off? (i.e., Checking/Savings Accounts, Investments, House, Other Assets)
• #8: Secured Credit – secured by collateral such as a bank account or an asset. Unsecured Credit – is where there is no collateral. A signature loan is where you have good credit and can walk into the bank, sign your name, and walk out with a check for, say, $10,000. That would be unsecured debt. Installment Credit – is a loan that is repaid over time with a set number of scheduled payments. An example of an installment loan is a car loan that you have to pay back over 48 or 60 months. Revolving Credit – is a type of credit that can be used repeatedly up to a certain limit as long as the account is open and payments are made on time. With revolving credit, the amount of available credit, the balance, and the minimum payment goes up and down depending on the purchases and payments made to the account. Credit Lines - A credit line is a pool of money available for borrowing. Also known as a line of credit, these loans have a maximum limit, and borrowers can borrow any amount up to that limit (or not use any of the money at all). Types of credit lines are credit cards, home equity lines of credit (HELOCs), and business lines of credit for working capital for small businesses. Alternative Credit - The term “alternative” or “non-traditional” credit refers to check cashing, payday lenders, auto title loans, rental centers, pawn shops, and other predatory lenders…who, for the most part, tend to be in more underserved communities only. Be very careful with these sources because some charge interest in the hundreds of percent. Collateral - is an asset pledged by a borrower to a lender, usually in return for a loan. The lender has the right to seize the collateral if the borrower defaults on the obligation. -.(if you don’t pay your car note, what will happen? They will take your car. If you don’t pay your mortgage, what will they do? They can’t take the house, but they can kick you out and sell it to someone else.) The collateral of the house and car secures those secured loans.
• #9: Let’s look at the pros and cons of credit. The pros are that it’s convenient. Instead of us walking around with a stack of cash in our pockets at all times, having access to credit can help when there is something we need right away. It can be there to cover emergencies. And by emergency, I mean a real emergency! We all have definitions of what emergencies are, but I don’t mean the emergency of “the concert is next week, and I need to make sure I have a new outfit.” I mean the emergency of…a family member is sick, and I need to get a last-minute plane ticket. Or you’re driving down the highway, hitting a pothole, blowing two tires, and bending one of your rims. Now you need to get your car fixed to get to work. Credit can help you build assets. A show on CNBC mentioned that over the last decade, more millionaires had been created through capital gains than in any other place. A capital gain is when you buy something which increases in value. One of the main places for that is through home ownership. Good credit can help you buy a house or even investment property that can significantly grow in value over time. -When you’re responsible with your credit, it allows you to acquire even more credit in the future. -Now, cons of credit….just as a pro…..it’s convenient! By it being easily accessible, we are sometimes tempted to spend excessively. -But by doing that, we limit our ability to save and invest. -Also, using credit increases the cost of items or services due to the interest we are charged, and it’s a constant drain on financial resources because we spend a lot of time and money playing catch up.
• #10: When you have good credit, you have “peace of mind” knowing you can go to almost any financial institution, and they will grant you credit, AND you have a good chance of getting the lowest and best interest rates.
• #11: When we have bad credit, we are not so fortunate. Bad credit will result in a limited number of places to even get credit, AND the interest rates they charge will be much higher. Higher premiums on simple things like car insurance. Difficulty in obtaining credit overall, and here’s the big one…..employment opportunities! Yes, when you apply for jobs, now they will pull your credit report as part of their background check. Just think about that… you may be the most dynamic, most qualified person for the job, but you don’t get it because of a back credit report….. Let’s make sure our credit report is an asset to us, not a liability.
• #12: When working with your finances, you have to become your own accountant. You are going to have to keep track of where the money comes from and where it goes. One way to track your debt is by using a debt tracker. A Debt Tracker is an efficient way to keep track of your debt obligations. It allows you to stay out of financial trouble and manage surprises when they happen. It also allows you to properly manage your cash and better understand how your money is being used. So, let’s say you buy a $1000 computer. In the first space, you put 1000. as you make payments, that will decrease.
• #14: Throughout our financial lives, there are a lot of formulas. It would be best if you remembered the credit formula. Quite often, people buy items or acquire new loans, not realizing they have spent or committed their future income. They spend their time working and paying bills or working and spending. This is not the life that we want to live. Look at the items listed…by setting financial goals, you can minimize what you have on the left side of the formula to maximize your income.
• #15: -These are relatively new Buy now, pay later arrangements are point-of-sale installment loans that allow consumers to make purchases and pay for them at a future date. Consumers typically make an upfront payment toward the purchase, then pay the remainder off in a predetermined number of installments. Buy now, pay later plans often don't charge interest and are often easier to get approved for than traditional credit cards or lines of credit are. Normally, BNPL doesn't affect your credit score; however, late payments or failing to pay can damage your credit score.
• #16: One of the most popular you will see is what’s called the 4 pay. The first payment is due at checkout. Then they split the remainder over 3 more payments, 1 every two weeks. No interest is charged.
• #17: -Now, let’s look at the most common are of credit. Credit cards. There are several types. We always try to get the point across to know whom you do business with. Bank cards are the most common. Those are the regular Visa and Master Cards. But we don’t directly do business with Visa and Mastercard. You might have a Bank of America Mastercard, Wells Fargo, Citi, Capital One, or PNC….but that’s the bank we are in business with. It helps to do a little research, look at their terms and conditions, and even go so far as to look at their financial strength and customer service history. With bank cards, you can keep a monthly revolving balance. Your account will remain in good standing if you pay the minimum amount due. The remaining amount carries over to the next billing cycle, which is how we are charged interest. The more you leave on there, the more interest you’ll owe. -Charge cards are travel and entertainment cards. The traditional Green American Express card is not a bank card. It is a charge card. You really don’t have a limit. You can put $5000 on it this month. But at the end of the month, guess what…you have to pay the entire balance of $5000. You cannot pay a small amount and let the rest carry over. So be careful with those.
• #18: -You can’t get a Best Buy credit card and go shopping at Macy’s. Always review the terms and conditions because some retail cards have the highest interest rates. -Secured credit cards are a great place to establish or re-establish credit if it somehow gets messed up. You send the bank $300-$5000. Let’s say I send them $500. They will then send me a card with a limit of $500. Now some ask, well, if I have the $500 and that’s all they’re going to send me, then why should I even bother? Well, if you travel quite a bit. No matter how much cash you have in your pocket when you get off the airplane and head to the rental car counter, they will not give you the keys unless you pull out a credit card. When you get to your hotel, even if you’ve already paid for the room, you can’t get the room key unless you give them a credit card. So, to think that in 2023 and beyond, we can maneuver without any credit is getting to be pretty unrealistic. But the bigger picture is that a secured credit card works just like an unsecured credit card. There is no difference. And if you are responsible with the card for a year or two, most of these companies will send that $500 deposit back and turn your secured credit card into an unsecured credit card which is where we want to be. You can ask your bank if they offer secured credit cards or google secured credit cards and see what’s available. Be careful because there have been some with a 91% interest rate. -Affinity Cards: Every time you make a purchase, a percentage goes back to the charity or organization
• #19: How do credit card companies make money? -APR is your finance charge expressed as an annual rate. -The periodic rate equals the annual interest rate divided by the number of periods. It could be monthly or even daily -GRACE PERIOD _As a rule of thumb, a credit card grace period is usually 30 days.
• #20: Know what questions to ask before signing on the dotted line for any loan agreement. Federal law requires lenders to disclose the answers to these questions. The more information you have, the better you will be able to compare terms and conditions to other available loans, therefore, being able to get the most affordable loan and that best meets your needs.
• #21: If your credit is less than perfect, with a few late payments or no payments, take a look at what can be done to bring it back up. -First, you have to pull your credit report. This is done right there at annualcreditreport.com. That’s where you go to get all 3 full credit reports free. Not the websites you see in the commercials with the little jingles. They only give you two reports, and those are partial reports. You get all three full reports at annualcreditreport.com. If you apply for credit and are denied, you can get another free report within 60 days of being denied. The big 3 are Equifax, Experian, and TransUnion. You do not get your credit score free. If you have some credit monitoring service or other services for which you might pay a monthly fee, they might give you your fico score for free. Otherwise, you’ll need to pay for it. Now those websites mentioned give you a free vantage score, but the problem is that 99%of lenders use the FICO score, not the vantage score.
• #22: First, look to see if the information on your report is accurate. If it’s not, you can dispute the information. You can dispute one of 3 ways. Please pick up the phone and call the 800 number, write them a letter or go directly to their website and dispute it online. They have 30 days to respond to a dispute. If they don’t, it will drop off your credit report. Any information older than seven years has to come off, and bankruptcy information older than ten years has to come off.
• #23: If they update your report and it still shows negative information, you can contact your lenders and see if they will establish new payment arrangements. You can negotiate your debts yourself. You don’t have to pay anyone to do that. And possibly settle them for a lesser amount. If you owe $1000, you can call them and say I’ll settle that debt in full for 30 cents on the dollar. $300. They might come back and say we can’t do $300…..but we can do $400. Either way, you just saved yourself 6 to 700 dollars and, more importantly got that debt off of your credit report. Now, a debt settlement can reduce your credit score even more but remember it’s more important to get that bad debt off. You can then add a couple of secured credit cards and start paying on time, which will start to pull your credit score back up. If they agree to the $300, they may say you can pay us $100/month for the next 3 months. Whatever they agree to get it in writing first.
• #24: A lot of what we’ve been talking about is habits. We have to change our habits of being spenders to start being savers and investors. Read slide… -maybe pay the minimum on one while you pay off another, then go to the next card, then the next, and do the same thing.
• #26: Let’s take a look at your credit score. Your Fair Isaac Corporation or FICO Score is a number that helps lenders determine how much of a credit risk you may be. Your credit score is based on the information in your credit report.
• #27: So how is your credit score calculated? -Your payment history, paying on time every month is 35% of your credit score -That debt-to-limit ratio I’ve been talking about is 30% of your score. Those two little things, paying on time and keeping the debt under 50%, make up 65% of your total credit score. -Credit history or how long you’ve had credit is 15% of your score. The longer you have a credit history, the higher your score goes. -Type of credit is 10%. That’s that secured vs. unsecured debt we talked about in the beginning. Unsecured debt is looked at worse than secured debt because there’s no collateral. -And inquiries or pursuit of new credit is 10% of your score. When you check your credit, it does not hurt your credit. You can check your credit every day, and it won’t hurt your credit. That’s what we call a soft hit. When you get the solicitations in the mail, also soft hits. A hard hit is only when you authorize someone actually to pull your credit by a signature or online. You have to check the box that says authorization. Hard hits drop your credit score by 2 points each and stay on your report for two years. -Here’s the industry standard for how to get your credit score to 700 and higher. Three open lines of credit. Paid on time for 6 to 24 months. And a debt-to-limit ratio under 50%! It can be a car, a house, and a credit card. Two credit cards and a car. Or three credit cards. But three open lines paid on time and under 50% usage.
• #29: Credit bureaus gather information from creditors, such as banks, credit card companies, and car financing companies. They also collect information from public records such as courts and property records.   In addition, some lenders provide their information at the start of the month, others in the middle, and some at the end. That means not only will the information change on different days at different bureaus, but the information at each bureau may not match because it was received at different times. -Putting a pin there….your three different credit scores from each bureau will always be different. They will never be the same and don’t have to be. They just have to be in the same universe. They might be 748, 735, and 740. Now, if one is 748 and one is 650, you have a problem. That’s when you need to pull your report, look at what information is different, and get it corrected.
• #33: Of course, in this period of time, we couldn’t cover every single thing about credit, but our hope is that we gave you a good foundation and starting point. When looking at what we do next….
• #35: SFEPD is pleased to announce an 8-part online financial literacy certificate. Upon completion, individuals will receive a digital badge credential issued through Credly, an industry-leading credentialing organization. Our online certificate consists of eight modules: Budgeting, Values, & Financial Goal Setting, Credit & Debt Management, Student Loan Management, Insurance, Homeownership, Investor Education, Retirement Planning, and Estate Planning. You can scan the QR code to register or visit sfepd.org/flc.
• #36: Are you interested in getting some assistance with your finances? Have money questions? Need help with budgeting? Or have questions about credit or student loans? If so, you can schedule a virtual peer financial coaching session with our trained peer financial coaches. These coaching sessions are FREE and CONFIDENTIAL. Feel free to take a picture of this slide. You can use the link or scan the QR code to schedule a session.
• #37: https://forms.gle/nxsbCrkJk2WzjA8V7