What We’ll Talk About: Budgeting for Beginners How does Credit Work? It’s all in the Math – The True Cost of Credit Smart vs. Expensive Uses of Credit The Benefits of Good Credit The Burdens of Bad Credit What to do if you get behind Protecting your Credit Budgeting for Beginners How does Credit Work? It’s all in the Math – The True Cost of Credit Smart vs. Expensive Uses of Credit The Benefits of Good Credit The Burdens of Bad Credit What to do if you get behind Protecting your Credit

Budgeting for Beginners Why do I care about Budgeting? Money only comes from 3 places What you earn What you have saved or been given What someone will lend you Debt only comes from 3 places Current Consumption Past Obligations Future Savings A budget is a plan Failure to Plan is planning to Fail. If you have a budget and stick to it, you can do the things you want to do. Budgets change over time as your priorities and responsibilities change

How does Credit Work? Credit Back Then “Buy it new, wear it out, pay with cash or do without” Signature loans – Small Loan Companies Rent to Own Mortgage Lending – 15 years, 20% down The wide, daily use of credit is a relatively recent phenomenon Most often people only purchased things with the money they had then and there Typically, people obtained bank loans for houses, cars and other larger priced items, nearly always secured by property purchased Banks and Small loan companies made “signature loans” for balances of less than $5,000 Mortgage loans rarely exceeded 15 years or 80% loan-to-value Meaning that you had to have a significant amount of savings to purchase a house

How does Credit Work? How Does Credit Work Today? Terminology: Auto Finance Purchase Price Down Payment Rebates Add ons Credit Life Credit Disability Extended Warranty The financial services industry (people who earn a living by lending others money) is very highly competitive. In order to take advantage of this competition, you need to be able to understand the moving parts and terms that are used by the lenders For example, few people are able to purchase a reliable car that they wish to drive without financing that purchase Often, inexperienced buyers will look only at the monthly payment to determine if they can afford the purchase. While it is very important that the monthly payment be able to fit in your budget, you should be prepared to evaluate other factors to avoid paying more than you have to when buying a new or a used car. The starting place is the purchase price, if the cost of your credit is consistent, you can save a significant amount by shopping around or negotiating a lower purchase price. Consider this: If you finance a car for 4 years at 8%, a $1,000 savings in the purchase price translates into $320 in interest. If you borrowed $9,000 to buy the car, that would be a full 6 months of the $220 payment A down payment includes any money you have saved or any equity in a vehicle you trade-in. Rebates are an important feature in many automotive purchases. Make certain that you know whether the purchase price does not does not already reflect deductions for the manufacturer’s rebates Finally, you are often permitted to finance certain additional services, such as credit life/disability or an extended warranty into the purchase price. Credit life and disability make sure that if you die or become disabled, the obligation to pay the remaining debt may be delayed or forgiven. These policies only provide that the lender be paid their remaining balance and do not ever pay money to you. An extended warranty will provide that specified problems with the vehicle will be paid for by the extended warranty provider. As a general rule, each of these add-ons are available at lower prices, and better benefits from other sources, but if convenience is an important factor for you, what the dealer offers may be more desirable than spending alot of time shopping for alternatives.

How does Credit Work? How Does Credit Work Today? Terminology (cont.) Revolving Line of Credit (Credit Card) Charge Now, Pay When Billed Credit Limit Grace Period “Fixed Rate” Teaser Rate Default Interest Rate Universal Default Rejection of Change in Terms One of the most popular forms of credit is the open-end, revolving line of credit account – the credit card account Benefit: Charge now and pay later A credit card comes with a credit limit. You can often charge more than the credit limit, but the result is that you must pay a surcharge, an “over the limit” fee for doing so. The Grace Period is the period between when you charge on your account and when you must pay it off in order to avoid a finance charge. Keep in mind there may be a different grace period for purchases as opposed to cash advances. Credit cards may charge a fixed or an adjustable interest rate. An adjustable rate changes periodically tied to some independent index like the “Prime Rate.”. A fixed rate is not tied to some outside index, but the creditor may always change the rate of interest for future extensions of credit. The financial services industry is very highly competitive. They often offer “teaser rates” or very low short term interest rates to persuade you to move your credit account or purchases to their account. Pay attention to the details of the offer. When does it make sense to take advantage of a 1.99% rate fixed for 3 months, compared to a 5.99% rate until paid back. The interest rate that the bank agrees to charge you is usually based upon your compliance with the terms of your credit agreement. If you are not in compliance with the contract terms, the contract may change the interest rate that is assessed against your balance. Making late payments and going over your credit limit are things which may change your interest rate to change to the default rate. Sometimes the credit agreement specifies that events outside of the relationship between you and the creditor may cause the interest rate to change to the default interest rate. The creditor may decide that your current credit risk is greater because of other factors, such as defaulting on other accounts, rapidly increasing your debt amounts or filing for bankruptcy protection. It is very important to note that the terms of credit under a credit card agreement are subject to change, but that at any time you can reject a change in terms and then the account is subject to the terms in effect before you rejected the change in terms. While you may not use the account for additional charges, you may pay off the account under the last agreed upon terms.

How does Credit Work? Alternative Finance Options PAYDAY LOANS High Fee, Short term borrowing PAWN SHOP Sell $300 item for $75 Buy back for $150 After 60 days, they own it RENT TO OWN Weekly Rental, no future obligation, eventual ownership, available to those w/ poor credit. $1,000 couch, $25/week 36 months = $3,600 final cost Payday loans, also known as cash advance loans typically work like this: If you want to borrow $100 for two weeks, you write a check for $115 and they give you $100 in exchange. While $15 to borrow $100 may not seem like much, it amounts to 390% APR interest. Pawn shop lending is fast becoming a thing of the past, but still exists today. There is no credit required as you are essentially selling something to a lender at a significant discount with the option to buy it back for less than the value of the item. If you don’t buy it back, they can sell it to recover their money. Rent to own again is an option for those with bad or no credit history. While generally a very expensive way to purchase an item compared to other options, the rent to own industry can be a good bargain for someone who is looking to obtain items for a short term, such as furnishing an apartment for just a few months.

It’s all in the Math – The True Cost of Credit The Miracle of Compounding Interest Interest for past period is added to the basis for calculating interest for next period: Year 1: $100 @ 10% + $10 = $110 Year 2: $110 @ 10% + $11 = $121 Year 3: $121 @ 10% + $12 = $133 Year 4: $133 @ 10% + $13 = $146 Year 5: $146 @ 10% + $15 = $161 Let’s look at some basic principles of credit math One is the difference between “simple” and “compounding” interest. The “miracle” of compounding interest is the computation that makes people love their 401k investments and hate credit cards. When the interest that accrues on an investment is added to the basis upon which future interest accrues, the interest grows much more rapidly than when it does not. Step by step through the years on the screen Now compare $100 with $100,000. The difference between simple and compounding interest in just 5 years would be $11,000. Vs. Simple Interest = $150

It’s all in the Math – The True Cost of Credit Credit Math $10,000 20 years @ 10% Simple Interest = $30,000 Monthly Compound Interest = $73,280 Daily Compound Interest = $73,870 Earning vs. Paying I invested $10,000 and now I have $73,870 I spent $10,000 but had to pay $73,870 The longer the loan/investment period, the greater the difference. Let’s look at the situation where you invest/spend $10,000 for 20 years at 10% interest 10% of 10,000 is $1,000 Add $20,000 to your original $10,000 investment is the simple interest formula. But if the money is reinvested each year, the principal increases every year and earns more interest. The difference is dramatic – compounding interest is great when you are receiving, and painful when you are paying.

Lower interest rate does not always result in lower total cost It’s all in the Math – The True Cost of Credit Compare the Cost of Credit Loan 1 $10,000 / 36 months 5.5% interest $500 origination fee $317.06 Monthly pmt $11,414.16 Total Cost Loan 2 $10,000 / 36 months 7% interest No origination fee $308.77 Monthly pmt $11,115.72 Total Cost Does a lower interest rate always mean a better deal? You need to look at all of the costs to borrow money - - not just the interest rate - - to compare different borrowing options. Let’s look at two options – a 5.5% interest rate loan with a $500 up front fee or a 7% fee with no origination fees Assuming that you capitalize the origination fee or at least give it the same return on investment as the loan, you end up paying a higher monthly payment and more money overall than the higher interest rate loan. Origination fees may include such things as a cash advance fee to use a check drawn on your credit card account or a loan application fee. Tip of the day: Pay attention to the total cost of credit, not just the interest rate when comparing finance options. Lower interest rate does not always result in lower total cost

Smart vs. Expensive Uses of Credit Other Wise Uses of Credit Purchase Home • Car • Durable Goods Finance Education Emergencies Home Renovations Refinance Higher Cost Credit Generally, the wise use of credit involves the purchase of durable goods and things, like education, which provide a return on the investment. Emergencies are also an important as wise use of credit. If you need your car to get to work, the need to spend $500 to get it repaired typically exceeds the amount of money you would lose at work if you didn’t get it repaired. One important wise use of credit is shopping around for lower cost credit. The financial services industry is highly competitive. Use that to your advantage by replacing higher cost borrowing with lower cost sources, whenever you can.

Charging Dinner & Entertainment Charging daily expenses Smart vs. Expensive Uses of Credit Potentially Expensive Uses of Credit Charging Dinner & Entertainment Charging daily expenses Charging luxury purchases Paying one card with another (“Surfing”) Speculating or gambling Now let’s compare that with some expensive uses of credit. While you can certainly use credit to enjoy the luxuries of life and finance speculative ventures, the cost is potentially quite expensive if there is no return on investment for the purchases you have made. Paying one credit account with another “surfing” is potentially very expensive, because the lenders often charge a “cash advance fee” which when included in the true cost of credit, can make the total finance charges paid very expensive.

Smart vs. Expensive Uses of Credit What If You Bought ... A New Surround System. CD Player $500.00 Speakers $1,200.00 Tuner $300.00 Now let’s look at an example of a purchase on a credit card which could potentially work well with you budget or, turn out very expensive. What if you bought . . A really nice Stereo. TOTAL $2,000.00

Smart vs. Expensive Uses of Credit And what if you use your credit card to buy the system and you make monthly payments of $300? Assume you never miss a payment and the annual percentage rate on your card is 8%. What will the system end up costing you? Is this a good idea Norsemen? How long will it take you to pay for it?

Smart vs. Expensive Uses of Credit Your total cost will be $2052.00 It will take you SEVEN MONTHS to pay for it The total cost is only $52.00 above paying cash. Not bad for working an expensive item into your budget and paying it off in just over half a year.

Smart vs. Expensive Uses of Credit Now, instead of an 8% rate of interest , assume that, because of your poor credit rating , you must pay interest at the rate of 24.9%. Also assume that you pay only the MINIMUM MONTHLY PAYMENT of $45 per month (2.25% of the balance). How long will it take you to pay for it? BUT . . Look at what happens if you either have poor credit or don’t shop for a competitive interest rate. When you are paying a high interest rate and low monthly payments the story is very different. What will the system end up costing you?

Smart vs. Expensive Uses of Credit Your total cost will be $5,595.84! It will take you Nearly 125 Months! (over ten years) to pay for it Wow! Look at the difference between paying $300 a month for seven months And paying $45 / mo. I don’t think the stereo would last that long!! It probably wouldn’t be called a stereo . . Does anyone still buy “records?”

Smart vs. Expensive Uses of Credit Your choices: Pay $2,000 cash Pay $2,052 over seven months Pay $5,595 over ten years Consumer finance is about choices. Borrowing money to have things today means paying for them tomorrow Make wise choices and you can save money and be able to afford the things you want – tomorrow.

The Benefits of Good Credit What are the Benefits of Good Credit? Lower cost to borrow money Larger amounts available to borrow Many more credit options available Satisfy security clearance checks Satisfy employment background checks Insurance rates may be lower Easier access to credit in emergencies Read the Slide Good Credit is used a more than just a measure of credit risk. Employers, insurance companies and other entities regularly use credit history part of decisions that are made about your future.

The Burdens of Bad Credit What are the Consequences of Bad Credit? Higher cost to borrow money Less money available to borrow Many less credit options available Unable to get security clearances Denied employment in some positions Insurance rates may be higher Difficult to access credit in emergencies Poor credit history can have negative consequences for the range of choices available to you in life. Having a poor credit history can result in: higher costs to borrow money, less available credit; Fewer borrowing options; difficulty getting security clearances A harder time finding a good job Less attractive insurance options and difficulty getting credit for emergencies for such things as car/home repairs as well as medical problems.

Credit Tips How to Establish Credit Using a checking account or debit card instead of a credit card Pay bills in full and on time Do not have many open credit card accounts Do not have a balance on your credit card exceeding more than 20-30% of your credit limit So how does a Norseman establish credit?? .

What is a Credit Bureau Report? Voluntary Association of Merchants & Credit Grantors Each member submits information on its customers to the Bureau Each member has access to the information submitted by other members Bureau may obtain information from other sources: Court records, property records, motor vehicle records, etc. Information from all sources are collected into one report for each person 3 largest Consumer Credit Bureaus: TransUnion, Experian, Equifax There are many misconceptions about credit reporting. First of all, they are voluntary associations of creditor members There is no requirement any creditor belong to a credit bureau. Second, the information in a credit bureau report is not required to be updated. If, in July 2006 you were behind in your account with a creditor and they reported that in July 2006, even if you got current an paid the account off in January 2007, the creditor’s report that you were behind in 2006 is accurate.

www.annualcreditreport.com Credit Bureau Reports Look back 7 to 15 years depending on basis for request. Shows the information last reported by the creditor to the bureau. May not show information of credit history with non-members. Consumers may request a copy of their credit bureau report once each year or if a creditor notifies you that they have denied you credit based on your credit report. Any inaccurate listing may be disputed by a consumer, triggering a re-investigation process. Do credit reports only look back 7 years? No. In fact national security, FBI and requests for more than $150,000 in credit authorize a look back period of 15 years. Can you buy a house where you live for less than $150,000? Credit reports are a helpful tool which lenders rely on, but they can contain inaccurate information - - just because of the large volume of date involved. Consumers should request a free copy of their credit bureau report every year or so, just to make certain that no incorrect information is influencing your credit history. www.annualcreditreport.com

FICO Credit Scores Determined by Fair ISSAC Corporation Analyzes data from credit report to determine a comparative score to compare your future likelihood to repay consumer credit advances Determined by past use of credit as recorded by the 3 credit reporting agencies Consumer credit score typically a 3-digit number between 300-850, 850 being the best Lenders purchase the score to evaluate creditworthiness The information in a credit report can be complicated to analyze. One company has made a specialty of analyzing credit reports and giving creditors an easy way to compare the liklihood that one consumer will repay their debts, compared to another. The comparison is known as a credit score. FICO has different score formulas for each of the three major credit bureaus. While they are intended to be similar, you may have 3 different scores like: 620, 635 & 615 from each of the bureaus.

FICO Credit Scores (cont.) Also used by lenders: To approve your credit application To increase your credit limit To determine treatment if you make a very late payment FICO Scores are not part of your credit report. Learn more and obtain your scores; visit: www.myfico.com Even after you have a loan, a creditor may us your credit score to make other decisions about you Such as how to treat a late payment or whether to increase your credit limit In addition to lenders, Employers, landlords and even the government use FICO scores to: Decide who to hire Decide who to rent to Decide whether to approve security clearances

Young Adults People under age 25 are fastest growing group of bankruptcy filers One out of five young adult households are in debt hardship (over 40% of income goes to debt payments each month) In last decade, youngest adults (18-24) saw credit card debt increase 104% Graduating college students average $20,402 of debt-- $3,262 on credit cards Individuals seeking credit counseling have average annual salary of $29,425; average debt excluding mortgage or rent of $23,184 Young adults rarely have high credit scores. First, because they have little credit history But also because of some of these facts (

Test Your Financial Knowledge TRUE FALSE Let’s test your financial knowledge on some key facts:

Test Your Financial Knowledge True or False? All credit cards charge the same annual percentage rate of interest on the balance you owe. Different banks charge different rates. Other important terms vary also, such as annual fees, late fees, grace period. Check out this website for a comparison of terms: www.cardtrak.com. www.bankrate.com FALSE Read the question and answer Credit card interest rates are very competitive. There are a number of sites on the internet that compare the interest rates offered by credit card banks. Use them to locate and take advantage of lower cost credit card offers

Test Your Financial Knowledge True or False? The Annual Percentage Rate (APR) on a credit card can be changed at any time by the credit card issuer. The APR on your credit card can be changed AT ANY TIME by the credit card issuer. Change may take place as soon as the beginning of the next billing period. You may reject the change and payoff the account under the old terms, but may not also make future charges to the account. Rejection of the change must be made in writing and often sent to a specified address. TRUE Read the question and the Answer Note the exception for teaser rates that are guaranteed and the borrower is in compliance with the terms.

These are some of the terms in a typical credit card agreement Note that you are not required to sign anything to be bound by the credit card agreement. Use of the account alone constitutes acceptance of the terms. Note paragraph 5, which allows the lender to change the terms at any time

Is That Fair?? Understand what an open end revolving line of credit account “Credit Card”) is, and what it is not: The bank gives you access to credit to make purchases at most merchants. You agree to pay the charged amounts off as soon as you are billed. If you don’t pay off the balance in full, you agree to pay the bank the finance charge in the current agreement. You may always reject a change in the account terms by contacting the bank to terminate the account. If you reject a change in terms you cannot use the card and must pay the account bank according to the terms prior to the proposed change. It is NOT an agreement to lend you money forever at the rate first agreed to. Understand what an open end revolving line of credit account is and what it is not: The best way to think of a credit card is that you can use it to buy things all month long, and then pay the bill at the end of the month. Any balance not paid at the end of any month is subject to the terms charged by the lender at that time If a lender increases your interest rate, call them and ask them to lower the rate or simply close the account and transfer your balances to another lender. The difference between an open end line of credit (credit card) and a closed end line of credit (car loan) is that the interest rate can change to reflect the current interest rate charged by the lender.

Test Your Financial Knowledge True or False? If you pay your credit card balance in full each month, it doesn’t matter what rate of interest the bank charges on your credit card. Since you only pay interest on the unpaid amount each month, you never pay any interest charge if you pay the entire debt. Exception: Some cash advances incur finance charges immediately TRUE Read the question and answer This rule is true for purchases made, But most banks both charge a cash advance fee and begin to accrue interest immediately on cash advances.

You pay no interest on a debit card purchase. Test Your Financial Knowledge True or False? You pay no interest on a debit card purchase. A debit card works just like a check. Your ATM card is probably a debit card. TRUE Read the question and answer You don’t pay any interest because you are not borrowing money. You are transferring money that you already have in the bank to pay the merchant

There is a credit report for everyone over the age of 18. Test Your Financial Knowledge True or False? There is a credit report for everyone over the age of 18. There is a credit report only for those who have established a credit history. Having no credit history can also have adverse consequences. FALSE Remember Norsemen you need to establish credit

Test Your Financial Knowledge True or False? If you are late making a few payments on your credit card, the interest rate you pay may increase sharply. TRUE For example, on one Platinum VISA card, the rate jumps from 4.9% to 24% if you pay late or miss even one payment. Late charges also accrue. One of the fastest ways to get in trouble with a credit card is to miss a payment ALWAYS make sure that you make your payment on time. CALL your lender if you are going to be late for any reason

Test Your Financial Knowledge True or False? If you miss just one or two payments on your credit card, it won’t hurt your credit rating. FALSE That negative information can legally remain on your report for 7 - 15 years. Not only does a late payment make your credit card account expensive, but it also affects your credit score and can make future credit with other creditors expensive as well.

Test Your Financial Knowledge True or False? If you apply for a car loan, the lender will probably review your credit report. TRUE People who lend you money will almost always review your credit report. If your credit is poor you may be unable to get a loan or your interest rate will be higher. You may receive free copies of your credit report each year. Nearly anyone who is considering lending you money will review your credit report. It is a good idea to review your credit report once each year to make sure the information on it is accurate You can get one free copy of your credit report from each credit bureau each year.

Test Your Financial Knowledge True or False? When you apply to rent an apartment, your prospective landlord may review your credit report. TRUE Because you are promising to make future payments a landlord would want to know your past payment history. Many landlords belong to Associations that retrieve and report information to the credit bureaus for them. Read the question and answer A poor history of paying your rent on time is another thing which may show up on your credit report

Test Your Financial Knowledge True or False? When you apply for a job, your prospective employer may review your credit report. TRUE A prospective employer can review your credit report if you give written authorization. More employers are asking to see credit reports. What happens if you refuse to let employers see report? Read the question and answer Why do employers care about your credit? Many employees handle the employers money People with better credit are considered less likely to embezzle funds from an employer

Bouncing just one check won’t cause you credit problems. Test Your Financial Knowledge True or False? Bouncing just one check won’t cause you credit problems. If you bounce a check your bank may put your name in ChexSystems. You could be “blacklisted” by financial institutions for up to 5 years - this means you cannot use a checking account at many stores. FALSE Read the question and answer If you ever write a check and you see the cashier punch in your account number or feed the check into the register, your account number is being compared with a list of accounts which have bounced checks before. Many merchants will not accept checks from people who have a history of bouncing checks.

Test Your Financial Knowledge True or False? The average college student owes several thousand dollars in credit card debt today. TRUE Credit card debt is rising rapidly among young adults. Don’t fall into the trap of spending money you don’t have. Doing so may result in you having to file bankruptcy. Read the question and answer Being a student is very expensive Most students owe much more money when they graduate than they will make in the first few years after they graduate – TOTAL Credit cards are a convenience, but they don’t create money you don’t have. Filing for bankruptcy will probably cut off our access to credit at a time when you need it most: For a car or house To get a job To rent an apartment

What if you get behind? Budgets only work when everything goes as planned. Job loss, illness & change in living situation most common reasons people get behind. EVERYONE gets behind in their finances at one time or another. You know how the economy in Michigan is.

What to do if you get behind Adjust your budget Contact creditors Come up with a realistic plan Stick to your plan Look for ways to increase income or limit expenses DON’T Ignore the problem and hope that it will go away. Try to maintain your old habits/budget Get upset or embarrassed Talk about the local united way credit counseling agency Talk about the perils of debt consolidation companies that advertise on TV

Ignoring your creditors when you get behind Telephone calls/letters from the creditor Telephone calls/letters from a collection agency Communication from an attorney Filing of a lawsuit Issuance of Judgment Simply ignoring your creditors when you are behind is the worst thing you can do. Follow the path of what happens to a debtor when they simply ignore the creditor.

Ignoring your creditors when you get behind (cont.) Involuntary enforcement remedies Wage Garnishment Bank Account Seizure Property Lien – Foreclosure Vehicle seizure Mandatory Court Appearances Talk about the costs that get added onto the debt by the time you get to involuntary enforcement

Tips for protecting your credit Make a budget and compare it to your actual experience monthly Pay your regular bills in full and on time Always know your current credit balances Review your credit report from each Bureau each year Contact your credit cards every now and then to ask them to lower your rates

Tips for protecting your credit (cont.) Contact and work with creditors if you get behind – Don’t avoid them – It will only make it more expensive Keep creditors and the post office notified of address changes Research credit options closely when financing a home, car or other large purchase to compute the total cost of credit. Keep an eye out for opportunities to refinance your existing credit obligations “Buy it new, wear it out, pay with cash or do without”