1 Debt Know How A Debt Education Program created by MasterCard in partnership with the University of Minnesota Extension Service

2 Welcome to Debt Know How Resource to help consumers get out of debt Includes: Website – Debt education workshops

3 Workshop Goal Participants will: Increase knowledge about debt issues Assess personal debt Develop action plan to pay off debt and improve credit score

4 Debt Overview

5 Debt in America Consumer spending accounts for more than two-thirds of total economic activity (FDIC) Approximately 45% of Americans carry no outstanding balance on their credit cards (Staff Working Paper, Federal Reserve 2004) 1 in 20 American households are in high debt (MSN Money)

6 Debt in America Consumer credit comes from mortgage debt, home equity loans and credit cards Consumer debt was $9.8 trillion in 2004 Almost 80% from residential mortgages About 8% comprised of credit card debt Source: The Nilson Report

7 Common Reasons for Getting into Debt Loss of job Divorce Medical crisis Overspending Unexpected home or car expenses Bad money advice or fraud

8 Debt Warning Signs Quiz

9 How Did You Score? Total Points from Debt Warning Signs Quiz 0 - Congratulations Pay attention to early warning signs Already deep in debt

10 Assess Your Finances

11 How Much Money Do You Earn? Calculate Total Monthly Income Salary & wages Tips Commissions Bonuses Interest/dividends Veterans benefits

12 Where Does Your Money Go? Calculate Total Monthly Expenses Housing Savings & set–aside funds Food Health care & insurances Transportation Personal Debt payments & fees Recreation & entertainment Past due bills & debts

13 Where Does Your Money Go? Subtract Total Expenses from Total Income to get Total Monthly Cash Flow Total Monthly Income + _____ Total Monthly Expenses - _____ Monthly Cash Flow = _____

14 Assess Your Finances Tips Positive cash flow means its working Negative cash flow means spend less Use your budget to make changes Track spending Find money

15 Measure Your Debt Calculate Total Monthly Non-Mortgage Debt: Credit cards Home equity loan Store cards Vehicle loan Family loan Past due debt

16 Measure Your Debt Budget calculator will help individuals tailor information to best suit their needs

17 Measure Your Debt Calculate Debt Payments-to-Income Ratio: 20 % or higher – take action to pay down debt

18 Measure Your Debt Example: $1,105 $5,275 = 21% Debt-to-Income Ratio Debt Payments-to-Income Ratio = Monthly Debt Payments Monthly Take-Home Pay

19 Measure Your Debt Understanding your debt- to-income ratio is crucial to determining the correct path out of debt

20 Improve Your Credit Score

21 Credit History Positive credit history leads to opportunities Problems with credit leads people to action

22 Credit History and Score Credit reporting bureaus maintain files on borrowers Experian, Equifax, and Trans Union –major credit reporting bureaus Lenders use the information when making credit decisions Order your credit report each year

23 Request Your Credit Report To order your credit report: on-line or call or write Annual Credit Report Request Service P. O. Box Atlanta, GA

24 Access to Your Credit Report You are entitled to free credit reports at any time if: Denied credit or employment Victim of fraud Receiving welfare benefits Unemployed and looking for work

25 What s in Your Report? Personal Identifying Information Your NameSocial Security #: Current AddressDate of Birth: February 1, 1960 City, State Previous Address(es) 456 Former Rd., Somewhere, ST P.O. Box xxxx, Anywhere, ST Last Reported Employment: Account Manager, Any Co.

26 What s in Your Report? Public Record Information & Collections Lien Filed 03/03; Good CTY; Case or ID #4321; Amount $26000; Class – State; Released 07/03; Verified 07/03 Bankruptcy Filed 12/02; Northern District Ct; Case or ID #55HC44; Liabilities - $16000; Personal; Individual; Discharged; Assets- $800 Collection Reported 05/96; Assigned 09/94 to Oldcoll (800)xxx-xxxx Client – ABC Hospital; Amount-$1010; Unpaid; Balance $1010; Date of Last Activity 09/94; Individual Account; Account #2345

27 What s in Your Report? Credit Account Information Company NameAccount Number Whose Account Date Opened Months Reviewed Date of Last Activity High Credit TermsItems as of date reportedDate Reported BalancePast Due Status Department Store 32514J10/86369/97$950$0R110/97 Bank A11/86245/97$750$0I14/97 Oil Company541125A6/86123/97$500$0O14/97 Auto Finance529778I5/854812/96$1100$50$300$200I57/97 Previous Payment History: 3 times 30 days late; 4 times 60 days late; 2 times 90+ days late Previous Status: 01/97 – I2; 02/97 – I3; 03/97 – I4

28 What s in Your Report? Inquiries Home Mortgage10/10/01Real estate loan $214, Oak Lanefor state bank with 30 yr. term. Any, MN 22222scheduled until 10/ /29/98XYZ BankCard 04/12/97GHG Department Store 02/24/00Department Store 05/02/00Mortgage

29 Dispute Errors 1.Make a copy of your credit report and mark items you suspect are incorrect. 2.Write a letter to the reporting agency and explain the disputed items. 3.Request an investigation and send copies of supporting documents. 4.Tell the creditor in writing that you dispute an item. 5.Keep copies of all correspondence.

30 Credit Scoring Credit score is an evaluation of a persons credit worthiness Credit scores change overtime Scores range from about 350 to more than 800 Lenders use scores plus other information Most well known score is FICO (Fair Isaac Corporation.)

31 Base for Credit Scores Payment history - 35% Amounts owed - 30% Length of credit history - 15% Taking on more debt - 10% Types of credit used - 10%

32 Tips to Improve Your Score Pay bills on time Missed a payment? Get current and stay current Keep balances low on credit cards and other revolving credit Pay off debt rather than move it around

33 Tips to Improve Your Score Dont close unused credit cards as a short term strategy Dont open unnecessary lines of credit Shop for rates within a focused time (ex. auto loan, home equity loan) Its okay to request and check your own score

34 Action Plan

35 Pay Off Your Debt Take Action Now Assess the problem Set a goal Generate new income Create your plan Track spending Save on interest and late fees

36 Pay Off Your Debt Take Action Now Choose a method to pay off debt Contact creditors Consider a loan consolidation Seek help if overwhelmed Bankruptcy

37 Pay Off Your Debt Take Action Now Assess the problem –Determine why you are in debt –Curb spending –Determine amount of debt accumulated Set a goal –Set smaller goals –Keep motivated

38 Debt Reduction Goal Action Plan Overall Goal: Reduce my debt by $__________ in __________months Monthly Goals: Reduce my debt by $_________ every month Increase my income by $________ each month Reduce my expenses by $________ each month Additional action steps I will take to reach my goal: 1. 2.

39 Pay Off Your Debt Take Action Now Generate new income –Take a second job –Sell assets –Use money in low-interest bank accounts Create your plan –Spending decisions –Stick to a budget –No new debt

40 Pay Off Your Debt Take Action Now Track spending –Find daily savings Save on interest and late fees –Ask each credit card lender for a lower interest rate –Prioritize your debts by interest rates

41 Pay Off Your Debt Take Action Now Choose a method to pay off debt –Highest interest rate first –Smallest debt first –Pay more than the minimum Contact creditors –Explain the problem –Try to work out a modified plan –Make the agreed upon payments

42 Pay Off Your Debt Take Action Now Consider a loan consolidation –Multiple loans consolidated into one loan –Lower interest rate –Easier to focus on one loan than several –Dont add new debt Seek help if overwhelmed –See a reputable credit counselor –Renegotiates loan terms –Ask about fees

43 Pay Off Your Debt Take Action Now Bankruptcy Bankruptcy Reform Act –Based on income and ability to pay –Chapter 7 or Chapter 13 –Means test is required –Will vary according to state average income –Must receive credit counseling before bankruptcy –Must complete debt education before being discharged

44 Resources Government Sites Federal Reserve Board – Federal Trade Commission – U.S. Department of Justice – Cooperative Extension – U.S. Bankruptcy Courts – Financial Literacy & Education –

45 Resources Debt & Credit Management Freddie Mac – MasterCard International – MasterCard – Your Credit Card Companies –

46 Resources Accessing Your Credit Report Annual Credit Report – Equifax – Experian – Trans Union – MyFico, a division of Fair Isaac Corporation

47 Evaluation Help us for future trainings!

48 For information about MasterCard s Debt Know How program Patrick Dwyer MasterCard International 2000 Purchase Street Purchase, NY Tel: (914) Fax: (914) Cindy M. Petersen University of Minnesota Regional Extension Educator Family Resource Management nd Avenue SE Hutchinson, MN Tel: (320) or Fax: (320)

49 Bibliography Materials have been adapted from the following sources: Anthes, William L., Ph.D. Twelve Ways to Get Out of Serious Debt, National Endowment for Financial Education, February 3, 2003 U.S. Department of Justice and Cooperative Extension Service conference call, July 21, 2005 Bankruptcy Reform, BankruptcyAction.com MyFICO Whats in Your Credit Report, myfico.com Lifelong Money Management, Home Ownership Center, St. Paul, MN

50 MasterCard International in partnership with the University of Minnesota Extension Service Cindy M. Petersen, M.Ed., A.F.C University of Minnesota Extension Service Regional Extension Educator Family Resource Management In consultation with: Jean W. Bauer, Ph.D. Family Economist University of Minnesota Extension Service