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BORROWING  BASICS

WHAT  STUDENTS  NEED  TO  KNOW  TO  USE  CREDIT  WISELY  

“Financial  educaAon  supports  not  only  individual  well-­‐being,  but  also  the  economic  health  of  our  naAon.”        Ben  S.  Bernanke,  former  Chairman        Federal  Reserve  

 WHY  FINANCIAL  LITERACY  MATTERS  

 Americans  who  are  less  financially  literate  are:  

 

Less  likely  to    invest  wisely  

Less  likely  to  save  and  plan  for  the  future  

More  likely  to  rely  on  high-­‐cost  

borrowing  services  

More  likely  to  have  difficulty  navigaAng  

today’s  complex  financial  system  

Source:  Annamaria  Lusardi,  Director,  Global  Center  for  Financial  Literacy,  The  George  Washington  University  School  of  Business,  TesAmony  before  the  Subcommi\ee  on  Children  and  Families  ,  Senate  Commi\ee  on  Health,  EducaAon,  Labor  and  Pension,  April  24,  2013  

FOUR  KEYS  TO  THE  WISE  USE  OF  CREDIT

Learn  basic  credit  concepts  

Develop  well-­‐honed  problem-­‐solving  skills  

Know  how  to  locate  sources  of  reliable,  unbiased  informaAon  

Get  moAvated  to  set  personal  financial  goals  

FOUR  KEYS  TO  THE  WISE  USE  OF  CREDIT      

1.  LEARN  BASIC  CREDIT  

CONCEPTS  

THINKING  ABOUT  CREDIT  

Credit  is  borrowing  money  with  the  promise  to  repay  

Most  of  the  Ame,  credit  is  not  free  

A  debit  card  is  plasAc,  but  it  is  not  credit  

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THINKING  ABOUT  CREDIT  

Types  of  Credit  

Installment  loans  

Revolving  loans  

Categories  of  Credit  

Secured  loans  

Unsecured  loans  

EVALUATING  CREDITWORTHINESS  

 CREDIT  REPORT  

 CREDIT  SCORE  

CREDIT  REPORTS  

Three  major  credit  reporAng  agencies  

•  Equifax  •  Experian    •  TransUnion  

Categories  of  informaAon  included  

•  Personal  informaAon  •  Credit  history  •  Inquiries  • Hard  inquiries  •  Sod  inquiries  

•  Public  records  and  collecAons  

5  FACTORS  USED  BY  FICO  TO  CALCULATE  A  BORROWER’S  CREDIT  SCORE  (300-­‐850)

Payment  history  35%   Amounts  owed  30%  

Length  of  credit  history  15%   New  credit  10%  

Credit  mix  10%  

BORROW  FOR  LESS  

     

How  you  use  credit  impacts  your  credit  score  

• Pay  bills  on  Ame  • Verify  informaAon  in  your  credit  report  • Don’t  apply  for  credit  you  don’t  need    • Don’t  apply  for  a  lot  of  credit  over  a  short  Ame  • Don’t  max  out  available  credit  

FOUR  KEYS  TO  THE  WISE  USE  OF  CREDIT      

2.  DEVELOP  WELL-­‐HONED  PROBLEM-­‐SOLVING  

SKILLS  

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CREDIT  SMARTS  IN  THE  REAL  WORLD  

Analyzing  the  need  for  credit  • Do  I  need  the  product  now?  • Can  I  pay  cash  or  do  I  need  credit?  • How  much  more  will  it  cost  me  if  I  use  credit?  • How  does  the  addiAonal  cost  of  credit  affect  my  budget?  

• How  will  using  credit  now  affect  my  ability  to  get  credit  later  

CREDIT  SMARTS  IN  THE  REAL  WORLD  

Which  credit  opAon  is  best?  • What  are  the  repayment  terms?  • What  is  the  annual  percentage  rate?  • What  other  fees  and  charges  apply?  • Do  I  understand  the  credit  agreement  terms?  

FOUR  KEYS  TO  THE  WISE  USE  OF  CREDIT    

3.  KNOW  HOW  TO  

LOCATE  SOURCES  OF  RELIABLE,  UNBIASED  

INFORMATION  

The  iGENERATION  AND  MONEY  SKILLS  

Technology  has  made  a  wealth  of  resources  accessible  

Not  all  informaAon  is  reliable  and  unbiased  

Many  resources  are  available  through  social  media  

The  iGENERATION  AND  MONEY  SKILLS

Some  recommended  government  and  non-­‐profit  sites:  

•  www.mymoney.gov  •  www.smartaboutmoney.org    •  www.jumpstart.org  •  www.360financialliteracy.org  •  www.feedthepig.org  •  www.federalreserveeducaAon.org  •  www.extension.org/personal_finance    

 

•  Some  recommended  financial  services  sites:  •  www.bankrate.com  •  www.pracAcalmoneyskills.com  •  www.creditcards.com  (credit  card  calculator)  

•  www.foolproofme.com  

FOUR  KEYS  TO  THE  WISE  USE  OF  CREDIT    

4.  GET  MOTIVATED  TO  

SET  PERSONAL  FINANCIAL  GOALS  

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GOOD  CREDIT  REQUIRES  PLANNING  

Borrow  what  you  know  you  can  repay  

Repay  on  Ame  

Repay  small  debt  to  earn  credit  for  “big  Acket”  items  

GOOD  CREDIT  REQUIRES  PLANNING  

What’s  my  goal?  

Does  it  require  money?  

Where  do  I  get  it?  

CREDIT  DECISIONS  FOR  YOUNG  BORROWERS  

Student  loans   Car  loans   Credit  cards  AlternaAve  Financial  Services  

CREDIT  CARDS  

CREDIT  CARD  SHOPPING  

     

Check  online  resources  for  card  opAons  

• Under  21?  Need  either  •  Cosigner  •  Proof  of  the  ability  to  repay  

• Use  “best  card”  websites  with  cauAon  • Some  to  check:  •  www.creditcards.com  •  www.nerdwallet.com  •  www.creditland.com  •  www.cardhub.com  

WHICH  CARD  TO  CHOOSE?  ISSUES  TO  CONSIDER  

•  Can  I  pay  bill  in  full  each  month?  • What  is  the  interest  rate  and  when  can  it  change?  • What  is  the  credit  limit?  • What  are  possible  fees  and  penalAes?  • Does  the  card  offer  rewards  I  will  use?  • Without  a  good  credit  history  is  a  secured  card  an  opAon?  

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ARE  CREDIT  CARDS  GOOD  OR  BAD?  

PROS   • Build  credit  history  

• Raise  credit  score  • Buy  online  • Limit  liability  

CONS   • Create  tendency  to  

overspend  • Demand  good  budgeAng  habits  

• May  incur  interest  

PROS   • May  provide  

rewards    • Help  keep  track  of  expenditures  

• Provide  leverage  to  dispute  defecAve  products  

• Make  travel  easier  

CONS   • May  impose  late  

fees  • May  impose  over  limit  fees  

• May  hurt  credit  score  if  misused  

• Can  lead  to  “snowballing”  debt  

USING  CREDIT  CARDS  WISELY  

Develop  a  budget  and  use  it  

Keep  track  of  purchases  and  review  statements  

Try  to  pay  off  bill  every  month  

Pay  on  Ame  

Stay  well  below  credit  limit  

Guard  your  credit  card  informaAon  

CAR  LOANS  

CAR  BUYING  BASICS  

• Cost  of  car  is  more  than  purchase  price  • Maintenance  • Insurance  • Gas  

CAR  BUYING  BASICS  

Issues  to  consider  before  

applying  for  a  loan:  

Do  I  have  a  co-­‐signer?  

What  is  my  credit  score?  

How  much  do  I  have  for  a  down  payment?  

Who  will  lend  me  the  money  I  need?  

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CAR  CREDIT  BASICS:  IT  PAYS  TO  SHOP  

COMPARE  

OFFERS  AT  WEBSITES  LIKE  BANKRATE.COM  

RATES  AT  LOCAL  BANKS  AND  CREDIT  

UNIONS  

COMPARE  

INDEPENDENT  FINANCING  TO  

DEALER  FINANCING  

REBATE  OFFERS  TO  0%  FINANCING  

REVIEW  

APR,  NOT  JUST  MONTHLY  PAYMENT  

CONTRACT  TERMS  AND  FEES  CHARGED  

STUDENT  LOANS  

BURDEN  OF  STUDENT  LOAN  DEBT  

Student  loan  debt  exceeds  all  household  debt  except  mortgages  

25-­‐year-­‐olds  with  student  loan  debt  increased  from  25%  in  2003  to  43%  in  2012  

Student  loan  balances  grew  by  91%  between  2003  and  2012  

Level  of  student  loan  debt  may  delay  entry  into  housing  and  auto  markets  

Source:  Federal  Reserve  Bank  of  New  York  Consumer  Credit  Panel/Equifax  

IMPACT  OF  STUDENT  LOAN  DEBT  ON  CREDIT  SCORES  

MORE  STUDENTS  ARE  BORROWING  FOR  COLLEGE  

             69%                      62%                              49%            

     

                         1992-­‐93          1999-­‐00  2011-­‐12  

   PERCENTAGE  OF  STUDENTS  BORROWING  TO  FINANCE  COLLEGE              

Source:  Pew  Research  Center  

IMPACT  OF  RISING  STUDENT  LOAN  DEBT  

Creates  obstacle  to  starAng  a  business  

Delays  first  home  purchase  

Delays  purchase  of  car,  furniture  and  appliances  

Creates  greater  likelihood  of  default  on  other  debt  

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ALTERNATIVE  FINANCIAL  SERVICES  

WHAT  ARE  THEY?  • Payday  loans  • Car  Atle  loans  • Tax  refund  anAcipaAon  loans  • Rent  to  own  • Peer  to  peer  loans  

MOST  “ALTERNATIVE”  LOANS  ARE  COSTLY  

Issues  to  consider  • What  is  the  true  cost  of  the  loan?  

• Are  there  less  costly  opAons?  

• Am  I  in  danger  of  losing  my  property  if  I  default?  

CLOSING  THOUGHTS    “Improving  basic  financial  educaAon  at  the  elementary  and  secondary  school  level  is  essenAal  to  providing  a  foundaAon  for  financial  literacy  that  can  help  prevent  younger  people  from  making  poor  financial  decisions  that  can  take  years  to  overcome.”  Alan  Greenspan,  former  Chairman,  Federal  Reserve