Credit Abuse Resistance Education (CARE) Program

Credit Abuse Resistance Education (CARE) Program
This Credit Abuse Resistance Education (CARE) Program presentation was originally created by Carol Kenner, a retired Bankruptcy judge from the District of Massachusetts, modified by Lindsay Fong, Multimedia Training Specialist, at the U.S. Bankruptcy Court – California Southern, and further modified for use in North Carolina by Pam McAfee, Staff Attorney for the US Bankruptcy Court, EDNC, Elizabeth Berry, CPA, and Pam Keenan of Kirshbaum Nanney Keenan & Griffin. Additions, deletions, and/or corrections to this presentation should be forwarded to Pam McAfee at You also can contact her at (919) Please begin the NC presentation by asking each student to write on a piece of paper the number of credit cards he or she has, and the total balance of all cards. During the presentation, have someone total the numbers and read the total number of cards and total amount of debt at the end of the presentation. While it is always better to buy only things you can pay for, today’s reality is that most people need a credit card for traveling, making large purchases as they set up their households, etc. This presentation is designed to help keep people from getting into financial trouble by educating them about the truths of using and abusing credit.

What do you spend money on?
Suggested script: Teens are constantly bombarded with advertisements to buy and to spend money. These ads most commonly appear in magazines or on billboards; they can be found on television, on the Internet, or in movie theatres before the film starts playing. Much of the spending by young people also can be attributed to peer pressure. They buy things because their friends already have one or it would be very cool to own one. Do you really need 7 Jeans, or will Levis do? Do you need an iPhone, or will a Motorola do? Even though these are the same items, clever marketing people know they can charge more for a name brand. Credit Abuse Resistance Education Seminar

Are the items you buy things you need or things you want?
Suggested script: Teens often can’t always differentiate their spending between things they want versus things they need. Especially if they have credit cards, overspending on things that they want easily may cause them to quickly run up their credit card balances. For example, your need may be transportation, while your want is a hot new car. Credit Abuse Resistance Education Seminar

How do you pay for what you want?
Cash, credit cards, debit cards. 12 months same as cash: only a good deal if you make regular installment payments over the 12 months. If you can’t afford it now, you probably won’t be able to afford the full amount in 12 months, and then you’ll end up putting it on your credit card and paying a high rate of interest. Common pitfalls of using credit cards Charging impulse spending When you use a credit card, you tend to spend more Charging living expenses (rent, utilities, etc.) Opening new accounts to get “free” gifts, perks or reward that turn out to be illusory Opening multiple department store credit cards which rarely have competitive rates and encourage “off-line” spending Having to pay “default” interest rates on credit cards with a universal default clause, which means if you are late or miss a payment with one card, your rate may go up on all your cards. Credit Abuse Resistance Education Seminar

The average college undergraduate owes credit card debt of:
Multiple Choice The average college undergraduate owes credit card debt of: (a) $500 (b) $1,500 (c) $3,000 (d) $5,000 Credit Abuse Resistance Education Seminar

Credit Abuse Resistance Education Seminar
Answer: C The average college student owes about $3,000 in credit card debt. This is a lot of debt when you are coming out of college at the lowest income level of your career, and with lots of startup living expenses. Credit Abuse Resistance Education Seminar

Minimum Payments Matter!
Payments of $10 per month 2/8/2008 through 10/8/ monthly payments required # Date Payment Interest Principal Balance /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ 2008 Totals 2009 Totals 2010 Totals 2011 Totals 2012 Totals 2013 Totals 2014 Totals /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ 2015 Totals Grand Totals $500 purchase on 1/8/2008 Annual Interest Rate 18% Payments of $50 per month 2/8/2008 through 11/8/2008. 10 monthly payments required # Date Payment Interest Principal Balance /8/ /8/ /8/ /8/ /8/ /8/ /8/ /8/ 9 10/08/ 10 11/08/ 2008 Totals Grand Totals If you aren’t going to pay off your cards each month, you really need to know the difference in making a minimum payment or a more substantial payment. Discuss the difference in making a $10 payment each month vs a $50 payment each month for the same purchase. (a) it takes longer to pay it off, and (b) you pay a lot more for the item. Would you have purchased the $500 item if you knew it was actually going to cost $930??? This is how much a $500 debt costs; imagine what it would be if you come out of college with $3000 in debt. Another note, credit cards accrue compound interest. That means, every month you don’t pay your balance in full, the next month you will pay interest on the interest you didn’t pay last month. Plus interest on late fees, etc. Credit Abuse Resistance Education Seminar

True or False? You must be 18 or older to get credit in your name. Suggested script: What do you know about credit cards? Take this quiz to test your knowledge. Credit Abuse Resistance Education Seminar

True Before you become 18, you may obtain a credit card in which an adult is the authorized user. Once you’re 18, you can legally incur debt in your own name. Credit Abuse Resistance Education Seminar

True or False? All credit card companies charge the same annual percentage rate (APR) of interest on the balance you owe. 19.5% 23% APR Credit Abuse Resistance Education Seminar

False Different banks charge different rates. Also, other important terms vary (e.g., annual fees, late fees, grace periods) Activity: You may want to: Define the term grace period – typically a 25-day interest free loan if you pay the balance off in full each month. Discuss the various credit card fees that banks might charge (such as annual fees, cash advance fees, and late fees, to name a few). These made up approximately 35% of credit card revenues in 2005! Default rates and teaser introductory rates Interest on cash advances starts to accrue from the moment you take the cash advance, NOT after the due date for that month’s statement. Credit Abuse Resistance Education Seminar

True or False? If you pay your credit card balance on time and in full each month, it doesn’t matter what rate the bank charges on your credit card. Credit Abuse Resistance Education Seminar

True Because you pay interest on the unpaid amount each month, you never pay any interest charge if you pay the entire amount due each month. Banks hate it when you do this! Make sure you read the fine print … while most cards let you pay the card in full by the due date, some will charge you a fee even for doing this … CHOOSE YOUR CARDS CAREFULLY!!! Credit Abuse Resistance Education Seminar

True or False? You pay no interest on a debit card purchase. Credit Abuse Resistance Education Seminar

True A debit card works like a check. Money is instantly deducted from your checking account. Your ATM card probably serves as a debit card. Activity: If time permits, discuss the advantages and disadvantages of using a debit card for purchases. Are debit cards a good alternative? Only if used like a true debit card ! Automatic overdraft protection is like making a credit advance with interest at the highest legal rate Charges over current bank balance typically approved by lender to get exorbitant overdraft charges for same Credit Abuse Resistance Education Seminar

True or False? Everyone over age 18 has a credit report. Credit Abuse Resistance Education Seminar

False Credit reports exist only for people who have established a credit history. Having no credit history can have adverse consequences. Activity: Discuss why having no credit history may have adverse consequences – you may be required to pay deposits for utilities, you may be denied a lease, and you may be charged a higher interest rate or given a low credit limit until a payment history is established. Credit Abuse Resistance Education Seminar

True or False? If you are late or miss a few credit card payments, the interest rate you pay may increase sharply and your credit report will be adversely affected. Credit Abuse Resistance Education Seminar

True For example on one user’s credit card, the rate jumped from 4.9% to 24% when one payment was late! (Late charges also can accrue.) A missed payment may appear on your credit report, and could remain there for 7 years. Activity: This may be a good time to discuss: We’ve already discussed teaser rates and how the rates may go up after a period of time; rates may also increase dramatically if you are late or miss a payment. Universal default penalties - unexpected and dramatic spike in credit card interest rates for missing a payment, even if they missed a payment on a different card issued by a different company Credit Abuse Resistance Education Seminar

True or False? Bouncing just one check won’t cause you to have credit problems. Credit Abuse Resistance Education Seminar

False If you bounce a check, your bank may put your name in Chex SystemsSM. You could be “blacklisted” for up to five years. This might mean you may not be able to use a checking account. In addition to a bounced check putting you on a national list, you can incur exorbitant fees from your bank and fees from the payee. In some instances it is also a criminal offense to write a bad check. Having a criminal record is even worse than a bad credit report. Credit Abuse Resistance Education Seminar

True or False? If you apply for an auto loan, the lender will probably review your credit report. Credit Abuse Resistance Education Seminar

True Lenders almost always will review your credit report. TransUnion Equifax Experian Credit-reportingagencies Activity: Lenders will almost always review your credit reports, as will apartment leasing companies. With your permission, an employer might review your report. Utility companies, graduate schools, and insurance companies may also review your report. So, it is important both that you have good credit AND that your credit report be accurate. You should review your credit report regularly, and you can do so for free once a year by going to annualcreditreport.com. 80% of credit reports contain errors; you should contact the credit reporting agency when you discover mistakes. Visit AnnualCreditReport.com for a free copy of your credit report. Credit Abuse Resistance Education Seminar

FICO Credit Scores A score determined by your past use of credit, as recorded by the three credit-reporting agencies A 3-digit number between 300 & 850 Created by Fair Isaac Corporation You have three FICO scores, one from each reporting agency What are the lenders looking for? They are looking for your credit score, called a FICO score, a 3-digit number between 300 & The higher the number, the better your credit. Credit Abuse Resistance Education Seminar

FICO Credit Scores (continued)
The cost difference between the highest and lowest credit scores for the $200,000 loan: 5.79 5.92 6.46 7.61 8.53 9.29 0.00 2.00 4.00 6.00 8.00 10.00 FICO Score Interest Rate (%) $478 per month $5,736 per year $172,221 for the entire 30-year loan The higher your FICO score, the more favorable credit terms you can negotiate. This slide shows a calculation of the cost difference between the highest and lowest credit score for a $200,000 loan. You can see that the difference over time is dramatic, almost doubling the cost of the house just with the interest differential! While you may not be looking at 30-year mortgages right now, your spending habits now will affect your credit ratings, and will affect the mortgage rate you will get in 5-10 years when they do buy a house. . Average interest rate for a $200, year, fixed-rate mortgage on August 5, 2005, based on credit scores nationwide Credit Abuse Resistance Education Seminar

Tips: Establishing Credit
Establish good credit by Taking out a small loan and repay it in a timely manner to establish a good credit record Getting a single credit card with a low credit limit Getting a prepaid or secured credit card This slide shows some suggested ways of establishing credit before obtaining a credit card. The most important things about each of these options is to PAY ON TIME. These will report favorably to the credit bureaus. Credit Abuse Resistance Education Seminar

Tips: Obtaining a Card ANNUAL MEMBERSHIP FEE: Refer to your statement in the month in which the fee is billed. RENEWING YOUR ACCOUNT: You may have your annual membership fee credited to your account if you close your account within 30 days from the mailing or delivery date of the statement containing the fee, even if you use your card during that period. You may call the Customer Service number or write to the Customer Service address on your statement during this 30 day period and your account will be terminated; we will credit your account for the amount of the annual fee. ANNUAL PERCENTAGE RATE: Refer to the Rate Summary section of this statement. Your periodic rates and APRs may vary. RATE AND ACCOUNT SUMMARIES: The purchase and advance features of this account may be listed in the Rate Summary Section of this statement under the following titles: Standard Purch, Purch/Adv, Standard Adv, and various numbered Offers. The Account Summary section of this statement includes on the PURCHASES line subtotals for all purchase features, and on the ADVANCES line subtotals for all advance features, of the Previous Balance, new Purchases & Advances, Payments & Credits, FINANCE CHARGE and New Balance amounts. PERIODIC RATES: (D) and (F) indicate a daily periodic rate. (M) indicates a monthly periodic rate. “Shop” for a credit card with the best terms that suit you Read and understand the terms in the disclosure Pay close attention to various late fees and penalties Evaluate whether a rewards card is worth extra fees and costs It may be helpful to: Discuss information found in the disclosure, such as annual fees, finance charges, annual percentage rates (APRs), and how different rates apply to different types of transactions (cash advance, purchases, balance transfers) and how the bank can apply your payments to the lowest rate items first, leaving your higher rate items to continue accruing interest at a high rate. Remind students that a low introductory rate does not necessarily mean the best terms. If you're going to carry a balance on your card from month to month, the fees and penalties may be more critical than the initial interest rate. If the card has high fees, a short grace period, or a universal default policy, you may want to keep shopping for a “friendlier” card. You should be particularly careful when you accept an offer to transfer balances. Credit Abuse Resistance Education Seminar

Credit card solicitations on the Notre Dame University campus One of the reasons we’re here is because you are faced with this kind of promotion every time you go to a sporting event on campus. Other common solicitation methods on campus: Materials in the bookstore and checkout bags Tables with solicitations in student union with students encouraging you to sign up “for free stuff.” School logo cards promoted in various ways Solicitations on your or flyers under your door offering free pizza/sub but when you get there you have to sign up for a card to get the free items Solicitations in your mailbox Solicitations to the general public on websites, at dept stores, airports, shopping malls Credit Abuse Resistance Education Seminar

Tips: Using Your Credit Card Wisely
Before you make a purchase using credit, determine: How much the purchase will really cost you Whether you can actually afford the purchase If it is better to wait and pay in cash Sometimes you have to pay for the convenience of using credit – and sometimes it can cost a lot! Remember – would you have bought those jeans if the price tag read $300?? Credit Abuse Resistance Education Seminar

Limit credit card use for essential purchases only (i.e., needs, not wants) Try to pay the entire amount due each month by the due date Don’t max out on your credit limit Watch card balances to avoid overlimit fees Keep your card balance below 30% of your limit Top 10 tips: 1. Keep track of ALL monthly charges as you make them! 2. Avoid large impulse purchases and don’t charge anything you can eat or drink (a good rule of thumb is not to charge anything less than $10) 3. Don’t use cash advances for normal spending – usually have higher interest rate. 4. Don’t go over your credit limit – overlimit fees are exorbitant 5. Don’t overcharge – understand “wants” vs. “needs” 6. Use 1 card with low limit responsibly before raising limit or obtaining additional cards -- less is more ! 7. Close accounts you don’t use – they hurt your credit score ! 8. Pay at least 10% of the outstanding balance each month 9. Keep your card in view when you hand it to a merchant. Take all carbons and receipts home and destroy them 10. Store your card in a safe place Credit Abuse Resistance Education Seminar

Keep track of where your cards are If you hand a credit card to a merchant, try to keep it in view Close accounts you don’t use. Try to avoid cash advances Credit Abuse Resistance Education Seminar

Tips: Maintaining Your Card
Monitor the interest rate section on your monthly statement Worth mentioning: Read the fine print on notices from your credit card company. Lenders need to give you only 15 days notice to increase that “fixed rate” – and they don’t need a reason. Additionally, some discussion exists as to whether canceling unused credit cards adversely affects your credit. Some lenders consider unused cards a factor in extending credit. Time permitting, you may want to discuss whether or not it is a good idea to cancel unused credit cards. Credit Abuse Resistance Education Seminar

A Warning Sign of Credit Abuse
You pay credit card bills with other credit cards! This is known as credit kiting. Activity: Solicit from students other ways that they might recognize that they are in trouble with their credit cards Credit Abuse Resistance Education Seminar

Tips: Getting Out of Credit Card Debt
Stop charging purchases Pay cash, write a check, or use a debit card Avoid store charge cards Calculate how long it will take to pay off credit cards. Visit Bankrate.com Make a plan to pay debt and stick to it Credit Abuse Resistance Education Seminar

Tips: Getting Out of Credit Card Debt
Pay more than just the minimum payment amount Ignore offers to skip payments Interest continues to accrue on unpaid balance Pay higher-interest cards first, but don’t miss any payments on any card Credit Abuse Resistance Education Seminar

New vs. Used Cars The average new car depreciates 20-25% when you drive it off the lot. Used cars depreciate over time, but don’t have as far to go. Manufacturer’s warranties typically transfer when vehicle has been previously leased by or used as a “demo” by the dealership Reasonable price for a used car in good mechanical shape is more important than any warranty Price today:$175,000 Price tomorrow: $140,000 2004 Honda Civic 2dr $12,757 Credit Abuse Resistance Education Seminar

Do your homework Consider total transportation cost before buying Comparison shop online for your purchase and your sale Comparative shop and don’t overspend 1. Don’t start shopping until you know exactly what your budget can support for total transportation costs each month [insurance, fuel, regular maintenance, periodic repairs, tire replacements, annual renewal of registration/tags, inspections, brakes] 2. Internet searches available for MSRP and invoice price on all new cars and “Blue Book” guides and “Black Book” (auction) guides are available for all used cars – do your homework ! 3. Internet searches available for all makes/models of cars for sale throughout the U.S. or just in your area 4. Check out comparable styles of the car(s) you like by other manufacturers – difference in sticker prices for essentially the same car can be dramatic Credit Abuse Resistance Education Seminar

Financing Your Car Comparison shop for the best interest rate and terms Agree on a price BEFORE you talk about financing or trade-ins! 1. Check available financing (interest rates and terms) from your own bank/credit union/etc. before starting to shop. Remember, it may cost less to do a 3-year loan at a higher interest rate than a 4-year loan at a lower rate. 2. Don’t talk about financing until you have agreed on a firm price for the car – low interest rate financing often translates into a higher sales price for the car ! 3. Don’t trade in your existing car as part of the purchase of a replacement car – dealers will only pay you wholesale value so they can turn around and sell for retail, which you can get if you sell yourself and pocket the difference 4. If you can’t afford to pay for the car within 3-4 years, you can’t afford the car ! 5. Carefully consider a GAP insurance policy 6. NEVER purchase and finance life insurance, credit insurance and/or disability insurance with a car loan – these products are available in the marketplace for a fraction of the cost ! 7. NEVER roll over an unpaid balance on a trade-in into the loan for the new car. 8. Critically analyze the cost/benefit of any extended warranty offered by the dealership ONE OTHER THOUGHT on cars: Leases are NEVER a good deal … monthly payments may be lower than purchase, but you will end up paying twice for the car. The negotiated purchase price at the end of the lease will be more than the car is worth; you won’t have a car to trade in and no down payment, and invariably you will end up with lots of fees for going over the mileage limit, etc. If you can’t pay for it in 3-4 years, you can’t afford the car Credit Abuse Resistance Education Seminar

Student Loans Student loans are not a sacred cow. Everyone has a budget, even when it comes to educational spending. Shop as carefully for your student loans as you do for your college. Student loans = 10 year mortgages One note: naïve use of credit cards in college may impact availability of student loans for graduate school; in fact, media reports now show that this is happening for college juniors and seniors who can’t get loans because of their credit abuse in their freshman and sophomore years. Credit Abuse Resistance Education Seminar

Student Loans Work study programs help defray the need for loans and give you a jump start for your résumé Explore need-based scholarships before you borrow ( Use your loans for tuition, but earn your spending money Pay off your student loans as quickly as possible; look at consolidation possibilities at 1. Is the job you are likely to get out of college going to justify the student loan debt to get it ? 2. Financial Aid a. Free Application for Federal Student Aid that can be found at b. College Foundation of North Carolina (a non-profit group that helps NC residents plan, apply for and pay for college) c. Any individual aid applications required by the particular school(s) you are considering attending. 3. Comparative shop a All student loans are not created equal ! b Federal, state, institution-based loans c Student loans available through your own bank, credit union, parents’ employer(s), etc. 4. Do the math – the longer the term, the higher the true cost even at a low interest rate 5 Don’t borrow for spending money or to support an expensive lifestyle ! Credit Abuse Resistance Education Seminar

Common Financial Mistakes
Rationalizing credit card spending as “outside” the budget Trying to maintain parents’ lifestyle on a college budget Paying fees for small cash advances and for withdrawals at non-member ATMs Using cell phones over the monthly allowed minutes Using a payday loan or check-cashing establishment ATM fees are really hidden interest charged on taking out your own money ! Payday loan and/or check cashing establishments charge up to 1,800% per annum Credit Abuse Resistance Education Seminar

Common Financial Mistakes (continued)
Paying fees for not using your credit card Paying almost the full balance on your credit card, but not quite all of it Obtaining multiple credit cards without any need or use for them Paying almost the full balance but not quite all of itcancels a grace period and triggers interest on all items from the date of purchase until paid in full Obtaining multiple credit cards without any need/use for them lowers your credit rating solely due to “credit availability” Credit Abuse Resistance Education Seminar

Words of Wisdom “Wealth is not the same as income. If you make a good income and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.” Announce results of credit survey. Credit Abuse Resistance Education Seminar

Credit Abuse Resistance Education (CARE) Program

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