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Buy Now Pay Later What Is Credit?
Average number of credit obligations Average number of credit cards Average available credit Credit Statistics www.myfico.com
Percent of consumers who carry more than $10,000 in non-mortgage debt Credit Use www.myfico.com
Basic Terms Consumer Credit Credit –Goods, services, money received for promise to pay later –Debt used by consumers –Expenditures other than home mortgages
Credit Rule Credit Payments = no more than 15-20% of take-home pay or no more than 1/3 of spendable income Take-Home Pay – Basic Needs Spendable Income
Installment Credit Pay for items in regular payments Interest varies with item Usually requires down payment Seller owns until all payments made
Revolving Credit Interest can be 1 – 2% monthly Required payment varies by card May pay in full or make minimum payment No finance charge if bill paid in full
Credit Agreement Annual percentage rate (APR) Finance charge (in dollars) Service charges, loan fees, life insurance premiums & interest Date for payment with no charge Balloon payments
Credit Cost Variables Interest rate Length of loan Amount of loan
Cost of Time Loan = $500 Number of Months Payment / Month Total Interest Total Payment 12$44.89$38.68$538.68 18$30.96$57.28$557.28 24$24.01$76.24$576.24 30$19.85$95.50$595.50
Cost of Credit Simple Interest Interest Paid on Outstanding Balance Each Month Pre-computed Interest Interest Is Calculated on Entire Loan Amount Up Front
Simple vs. Pre-Computed 123456789101112 Simple Interest: Total Cost = $54.95 8.337.667.006.325.644.964.273.572.872.161.450.72 Pre-Computed Interest: Total Cost = $100 15.3 9 14.1 1 12.8 3 11.5 4 10.2 6 8.977.696.415.123.842.561.28
Credit Card Interest Average Daily Balance (ADB) = What You Owe Each Day ___________________ # Days in Month ADB ($400) x Monthly Periodic Interest Rate (1.5%) = Finance Charge for Month ($6.00)
Other Considerations Average daily balance, including new purchases, or Average daily balance, excluding new purchases (better) Two-cycle billing method
Reducing Credit Costs Find the best price Make large down payment Shop for low APR Pay back as soon as you can Pay bills on time Pay extra with each payment Use only when needed
Credit Card Fees Annual Late Payment Over Credit Limit Cash Advance
Cash Advances Interest begins immediately Service fee applies
Smart Card Habits Develop system for paying Save receipts Pay card in full Avoid no minimum payment due offers Avoid endless repayment periods
Loan Amount = $1,000 Interest rate: 19.8% Monthly payment: 3% of balance not less than $15 Years to pay: 8.3 Finance Charges
Loan Comparisons Loan Amount = $1,000 Loan ALoan BLoan C Interest Rate 8.5%14%19.8% Interest Paid 1 st Year $75.06$126.72$183.95 Years to Pay Off 5.75 6.7 8.3
Applying for Credit 1.Fill out application 2.Lender reviews and scores Capital Character Capacity 3.Approval or denial
Credit Bureaus TransUnion (877) 322–8228 www.transunion.com Equifax (800) 685–1111 www.equifax.com Experian (888) 397–3742 www.experian.com
Credit Bureaus Information varies Scoring varies Charge for scores and reports
Free Reports Once a year Do not include score www.annualcreditreport.com (877) 322–8228
Credit Report Records Personal information Credit history Inquiries Public records
Personal Information Name Social Security Number Addresses Birth date Employment history
Credit History Your credit accounts (Delinquent accounts removed after 7 years) Loan and credit limits Loan balance Available credit
Credit History Payment terms Payment history Closed or inactive accounts (Removed between 7 and 10 years)
Inquiries Landlords Lenders Employers Insurers
Public Information Bankruptcies (Removed after 10 years) Overdue child support payments Liens
Not Included Checking and saving accounts Marital status Gender Ethnicity Race Medical information Criminal record Religion Political affiliation
FICO Score Ranges between 350 and 850 Higher the better Varies by reporting bureau Based on Fair Isaac Corp. (FICO) www.myFICO.com (800) 319–4433
FICO Score Creditworthiness determined by –Credit history –Payment history –Outstanding credit –Existing accounts –Inquiries
FICO Score Payment History Amounts Owed Length of History New Credit Types of Credit 10% 35% 10% 15% 30% www.myfico.com
FICO Score APR Monthly Payment 720 – 8507.213%$619 690 – 7198.120%$628 660 – 6899.865%$644 620 – 65911.799%$662 590 – 61915.226%$696 500 – 58916.092%$704 $20,000 Automobile Loan (36 months) Aug. 8, 2007 / www.myfico.com
FICO Score APR Monthly Payment 760 – 8506.228%$1,843 700 – 7596.450%$1,886 660 – 6996.735%$1,943 620 – 6597.548%$2,107 580 – 6199.041%$2,423 500 – 5799.661%$2,558 $300,000 Mortgage (30-year fixed) Aug. 8, 2007 / www.myfico.com
Applying for a Loan Review all 3 credit reports beforehand Correct errors Contact reputable lender Compare several offers
If Denied Credit Ask for specifics as to why Reapply after resolving credit issue (e.g., pay down your debts) Correct false information on credit report
Debt Management 1.Find out where you stand Income Expenses Bills 2.Find out Who you owe How much you owe
Debt Management 3.Decide how much you can pay back 4.Consider Secured status of debt Legal action that has been taken Interest being paid What happens if you dont pay
Debt Management 5.Set up a plan for paying back your debts Reduce expenses Sell assets Increase family income Loan consolidation, second mortgages, refinancing
Debt Management 6.Discuss plan with creditors Why you are behind Your current income Other obligations How you will catch up 7.Stick with plan until all debts repaid 8.Revisit plan
Final Thoughts Pay Bills when Due!
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