1. DON’T GET CAUGHT IN THE CREDIT TRAP

2. FACTS ABOUT CREDIT CARDS
In 2003:
Consumer debt neared the $2 trillion.
Household debt grew by 10.4% while savings dropped 38%.
Credit card companies charged $7.3 million in fees that included late fees, over limit fees, and balance transfer fees. This was up from $1.7 million in 1996.
3.2 billion credit applications were mailed to consumers.
Personal bankruptcies exceeded 1.6 billion people. Go to for current numbers.
Americans have an average of 13.5 cards per household with credit card debt per household exceeding $9,000. Only 1/3 of all users pay off their balances each month.

3. 80% of all households have at least one credit card.
Over 1 billion cards are in circulation.
Americans owe more in credit card debt than for education.
In 2000 Nellie Mae found that 78% of undergraduate students had at least one credit card.
Nellie Mae estimates that undergraduates carry an average monthly balance outstanding of $2,748. Graduate students have an average balance of $4,776.

4. APPLYING FOR CREDIT The Equal Credit Opportunity Act
Creditors look for the “5 C’s”
Character
Has the person declared bankruptcy in the past
Does the person have a good credit record
Does he/she have a stable job
What is the level of education/experience
What is the person earning and what is the earning potential
Stability at the place of residence, whether rented or owned.
Capacity
What is your borrowing history and track record of repayment?
How much debt can you handle?
Will you be able to honor the obligation and repay the debt?
There are numerous financial benchmarks, such as debt and liquidity ratios, that investors evaluate before advancing funds.

5. Capital Collateral Conditions
The financial assets available to the individual.
Collateral
While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call the secondary source of repayment.
Collateral represents assets that the person pledges as an alternate repayment source for the loan.
Most collateral is in the form of hard assets, such as real estate and automobiles.
Conditions
What special conditions pertain to the individual’s current situation?

6. 2 TYPES OF CREDIT Closed-End Credit
Used for a specific purpose and involves a definite amount of money.
Examples:
Mortgages
Auto Loans
Installment Plans for Furniture, Appliances, etc.
Usually have lower interest rates.

7. Open-Ended Credit
Involves borrowing money for a variety of goods and services.
Usually includes a credit limit or line of credit.
Billed periodically with partial payments accepted.
Generally charges a higher interest rate than closed-end credit.
Potentially the “Death of American Retirements!”

8. DEBIT CARDS
Are riskier than the typical ATM card or card. Why? Debit cards can be used with a PIN or can also be used with only a signature, without a secret PIN or password, just like a credit card, over the phone, or in a store. Unlike a credit card, the money is immediately withdrawn from your checking account.
“Blocking” is a problem. Some firms (hotels, gas stations, and rent-a-car companies) routinely block a card in advance for the estimated cost of a transaction that may not be completed for several days. Your card may be blocked for a predetermined amount (i.e. - $50 to $75) even if you just used $10 and the block will not be removed until the transaction is batched for completion; which could be several days.
Never use a Debit card for Internet purchases.
Only use a Debit card at trusted merchants.

9. WHAT ARE APR’s?
Must be disclosed when you apply for credit. The APR is a measure of the cost of credit, expressed as a yearly rate.
A single credit card may have several APRs:
Purchases
Cash Advances
Balance Transfers
Tiered APRs – Different rates for different levels of outstanding balances
$1 to $500 – 16%
$500 plus – 17%
A Penalty APR – The APR may increase if you are late in making payments.
An Introductory APR – offered for a limited time period.
A Delayed APR – A different rate will apply in the future.
A card may advertise that there is “no interest until next March.”

10. FIXED RATE vs. VARIABLE APRs
Fixed Rate APR – the APR doesn’t change, or at least doesn’t change that often. It may change, but the card issuer must notify you in advance of an increase.
Variable Rate APR – the rate is tied to another interest rate, such as the prime rate or T-bill rate, and may change as short-term interest rates are adjusted.

11. WHAT IS THE GRACE PERIOD?
Defined as “the number of days you have to pay your bill in full without triggering a finance charge. If the grace period is 25 days, you have 25 days from the statement date to pay your bill, provided you have paid your previous balances in full by the due date. The statement date appears on the bill.
Applies only to new purchases.
Most issuers do not provide a grace period on cash advances and balance transfers.

12. CALCULATING THE FINANCE CHARGE
The finance charge is the dollar amount you pay to use credit and it depends on your outstanding balance and the APR.
To calculate the Finance Charge:
1. Daily Finance Charges (FC)
2. FC =( APR / 365 * ADB) * # of days in the billing cycle.
Example:
Average Daily Balance = $2,000
APR = 14.99% annually
# of days in the billing cycle = 30
FC = ((.1499 / 365 )* $2,000) * 30 days
= $24.64

13. WHAT’S A FICO SCORE?
FICO stands for Fair Issac Corporation and is the ONLY score that you will ever need to know.
Most lenders base their credit approval decisions on the FICO score.
How does it impact your cost of credit?

14. Your FICO Your Interest Your Monthly
Score Rate Payment
% $888
700 – % $900
675 – % $952
620 – % $1,069
560 – % $1,157
500 – % $1,238

15. FACTS ABOUT CREDIT SCORING
Credit scoring is used to determine credit worthiness and the likelihood and timeliness of loan repayment.
5 Factors Used in Determining Your Credit Score:
Payment History – 35% of your score may be based on this.
Amounts Owed – 30% of your score is based on this area. Your score is negatively impacted if your outstanding balance is close to your credit limit.
Length of Credit History – 15% of your score is focused on this area. The longer your accounts have been open, the better your score will be.
Taking on More Debt – 10% of your score focuses on how much new debt you have taken on. A number of recently opened accounts will negatively affect your score.
Types of Credit in Use – 10% is based upon the types of credit currently in use. Loans from finance companies reduce your score.

16. CREDIT BUREAUS Collect credit and other information about consumers.
Receive information from banks, finance companies, stores, credit card companies, court records, and other lenders.
The Big 3 each maintain over 200 million credit files on individuals.
Generate their income by selling their compiled information to creditors who are considering loan application.

17. WHAT’S IN YOUR CREDIT FILE?
Name
Address
Social Sec. #
Birth Date
Employer
Position
Income
Former Addresses
Former Employers
Spouse’s Name & Info.
Whether you rent or own a house
Checks returned for insufficient funds
Updated purchases
Payment history
Lawsuits & judgements

18. WHAT’S IN A CREDIT HISTORY?
List of credit card accounts.
How promptly you’ve paid off credit cards and loans.
How well you have handled your other bills, such as rent and utilities.
Your checking and savings account histories, including bounced checks.
Your total outstanding debts.
How much credit you still have available on your cards.

19. THE FAIR CREDIT REPORTING ACT
Accurate and Fair Credit Reporting is Vital to Both Creditors and Consumers.
1971 – Congress Enacted the FCRA.
The law requires the deletion of out-of-date information and gives consumers access to their files as well as the right to correct any misinformation.
Places limits on who can obtain a copy of your credit report.

20. WHO IS ALLOWED TO VIEW YOUR REPORT?
By court order
For use in a credit transaction – including credit card issuers, auto financing companies, and college loan issuers.
Underwriting of insurance
Other legitimate business needs
Employers
Landlords

21. KEEPING AN EYE ON YOUR CREDIT
Know your credit rights
If you are at least 18, you cannot be discriminated against in the application of credit.
A financial institution’s decision must be solely based on your credit history and other personal information.
Protect your personal information
Never give out your credit card number, address, or phone number unless making a purchase.
Never use your credit card for identification purposes.
Keep a record of all receipts when credit is used.

22. FREE REPORTS
Consumer advocates have long encouraged people to check their credit reports at least once a year. Until now, you had to pay $9.50 to receive a report from the three credit bureaus.
Congress has now adopted a new rule that will allow you to obtain a free copy of your report annually from each of the “big 3.”

23. When can you order your free report?
Residents of Florida can order their report beginning June 1, 2005.
To order your report, go to where you can order your reports directly or download the Annual Credit Report Request form to mail in your request.

24. WHAT IF I’M TURNED DOWN FOR CREDIT?
The Equal Credit Opportunity Act gives you the right to obtain the reasons why within 30 days. You are also entitled to a free copy of your credit report within 60 days.

25. KNOW HOW TO DISPUTE A BILING ERROR
When you have a dispute, be sure to put everything in writing – including your account information and explanation of the dispute.
Note these requirements:
Billing Errors – The Fair Credit Billing Act protects you in billing disputes with creditors. Write to the billing dispute address on your statement within 60 days after they send you the first bill containing the error. Note: you do not have to pay any amount in question during the investigation, but you are still obligated to pay any undisputed charges. Your creditor is legally obligated to respond to you within 30 days, and must either correct the error or explain it to you in writing within two billing cycles.
The creditor is not allowed to threaten your credit rating while you are negotiating a billing dispute; nor are they allowed to take any action to collect payment until the dispute is resolved.

26. REPORT STOLEN OR LOST CARDS IMMEDIATELY
Always keep a copy of your financial institution’s name, address, phone number, and your account number in a convenient place.
Legally, your ultimate liability for fraudulent use of a credit card is generally only $50. With a debit card, the thief robs your checking account. Potentially, all of the money could be drained out and it could take the bank 10 or more days to investigate the matter. Worse, under the law, your debit card liability could be as much as $500 if you notify the bank more than 48 hours after you learn of the problem. The loss is limited to $50 if you notify the bank within two business days after learning of the loss or theft of your card or code.

27. 5 WAYS TO RAISE YOUR CREDIT SCORE
Obtain a copy of your credit report
Three credit bureaus:
Experian – .com – score called “FICO”
Trans Union – – score called “Empirica”
Equifax – – score called “Beacon”
Each service will give you a different score.
Pay your bills on time
35% of your credit score comes from your payment history.
Missing just one payment can knock 50 to 100 points from your score.
The single best way to start rebuilding your rating and raising your score.

28. Don’t close old accounts
Pay down your debt
Credit card companies report your outstanding balance once a month.
Credit bureaus don’t distinguish between those who carry a balance on their cards and those who don’t.
Don’t close old accounts
Closing old or paid off accounts lowers your total credit available. Long established accounts show a longer history of managing credit which is good for a credit score.
Stay out of bankruptcy
The single worst thing that can destroy your credit rating.
Once your score falls below 620, any loan you get will be more expensive.
Bankruptcies stay on your credit report for up to 7 years, and 10 years for credit transactions of $75,000 or more, or for an application to purchase life insurance of $150,000 or more.

29. NEW BANKRUPTCY LEGISLATION AWAITING THE PRESIDENT’S SIGNATURE
Under the new law, more debtors will be forced into filing ch. 13 bankruptcy, which requires years of repayment; as opposed to ch. 7 bankruptcy which erases debt by selling off certain personal assets.
Repayment plans will be mandated, requiring people whose earnings exceed a threshold – the annual median income – in the state where they live.
FL’s annual threshold would be $39,000 in 2005.

30. Debtors would only be allowed to exempt $125,000 in a home exemption, on homes purchased at least 40 months prior to the bankruptcy filing.
Consumer advocates state that the big winners in this are the credit card companies which stand to reap billions of dollars in new revenue through Credit card companies already rake in about $2.5 billion a month in profit from fees and interest charges.
Consumer advocates state that the credit industry is to blame for being a contributor to the increase in bankruptcy filings. By marketing high-risk debt to consumers who are a substantial risk, or who have just come out of a bankruptcy proceeding, companies often do not receive payment on the outstanding debt of these individuals. Why would a credit company provide credit to someone who just filed for bankruptcy? By law, such individuals cannot file another bankruptcy for 6 years.
The cost of filing for bankruptcy is anticipated to increase by as much as double. In Central Florida, costs currently range from $700 to $1,000.
In summary, the law will require any debtor that surpasses the income threshold to pay a monthly payment on their debt for a maximum of five years, if the court determines that the debtor can pay it.

31. DECLARING BANKRUPTCY
Defined as the “legal announcement that you are unable to pay your debts.”
The players:
The Debtor
The Trustee
Creditors
The Judge

32. TWO TYPES OF BANKRUPTCY
Chapter 7 – (Straight Bankruptcy)
A person is required to draw up a petition listing his/her assets and liabilities. The debtor submits the petition to a U.S. district court and pays a filing fee.
Under Ch. 7, most debts are forgiven. Most of the debtor’s assets are sold to pay off the creditors. Certain assets, however, receive some protection.

33. Chapter 7 Protected Assets:
Social Security Benefits
Unemployment Compensation
The FMV of your home, car or truck, household goods and appliances, tools used in your work, and books.
Ch. 7 does not affect alimony, child support, certain taxes, fines, certain debts from educational loans, or debts that you fail to properly disclose to the bankruptcy court.
Debts arising from fraud, driving under the influence, or other acts or crime may also be excluded from protection.

34. CHAPTER 13 PROTECTION – The Wage Earner Plan
A debtor with a regular income stream proposes a plan for using future earnings or assets to eliminate his/her debt over a period of time.
The debtor usually keeps all or most of his/her assets.
The period of protection can be as long as five years, with the debtor making regular payments to an appointed trustee who then distributes the money to the creditors.

35. THE EFFECTS OF A FILING
Bankruptcy reports are kept for a period of 10 years by the credit bureaus.
Loss of assets and future income; the court can “garnish your wages” if it so desires.
During the 7 to 10 year window, the debtor is characterized as being a “credit risk.”

36. GETTING OUT OF TROUBLE If you get caught in the credit trap:
Pay off your higher APRs first.
Start with your first card and make as big a payment as you can.
Move on to the next card when you have zeroed out the highest APR card.
Continue until all debts are removed.
If you cannot pay your bills on time, communicate this to the creditor. Ask them if they will either reduce your payment or the APR. the worst thing that you can do is not communicate with the creditor.
Apply for a low interest credit card and transfer the balances of the other, higher interest cards.

37. If you own a home, you may consider a debt consolidation loan
If you own a home, you may consider a debt consolidation loan. This is a 2nd mortgage on your home with allows you to consolidate your debt into one monthly payment. The interest paid on the loan provides a taxable deduction that can be itemized.
Make an appointment to see a credit counselor. Just be careful if the agency asks for a large sum of money up front to assist you.
Develop a master budget to see where your money comes from and where it is going.

38. PROTECTING YOURSELF Can you afford the item you are buying on credit?
Do you have the money currently available to buy the item?
If you do use credit, never let your card out of your sight.
Always draw a line through blank spaces about the total when you sign receipts.

39. You only pay the minimum balance each month.
WARNING SIGNS THAT MAY INDICATE THAT YOU ARE GETTING YOURSELF IN TROUBLE
You only pay the minimum balance each month.
Your total balance increases each month.
You miss payments or send them in late.
You use savings to pay for necessities such as food and utilities.
You borrow money to pay off your debt.
You transfer balances of one credit card to another to receive a lower APR.
You are denied credit.
You avoid going to the doctor or dentist because you cannot afford it.