The Dangers of The Dangers of CreditCredit

Provided by:Provided by:

The Credit Education BureauThe Credit Education Bureau

585-256-6080

Purpose:Purpose: To learn the To learn the right way to handle credit right way to handle credit and avoid credit pitfallsand avoid credit pitfalls

What Can be Learned?What Can be Learned?

How credit affects our livesHow credit affects our lives

The cost of creditThe cost of credit

Common credit trapsCommon credit traps

Ways to keep good creditWays to keep good credit

1. How Credit Affects our 1. How Credit Affects our LivesLives

Understanding the Understanding the importance of having a good importance of having a good

history.history.

Credit:Credit:

An arrangement for An arrangement for deferred payment deferred payment of a loan or of a loan or purchase.purchase.

A credit report is a A credit report is a collection of collection of information about information about your credit use.your credit use.

A Credit A Credit Report:Report:4 Basic Elements:4 Basic Elements:

•Personal Personal identificationidentification

•Public records/Public records/ collectionscollections

•Payment historyPayment history

•InquiriesInquiries

Reporting Limits:Reporting Limits:

Inquiries- 2 yearsInquiries- 2 years Collections, judgments, Collections, judgments,

late payments- 7 yearslate payments- 7 years Paid collections and Paid collections and

judgments- 5 years in judgments- 5 years in NYS.NYS.

Bankruptcies- 10 yearsBankruptcies- 10 years Unpaid student Loans- Unpaid student Loans-

No limitNo limit

State Time Limit7

Years

The Good News…The Good News… You Can Get a Copy!You Can Get a Copy!

Call one of the three Call one of the three major credit bureaus:major credit bureaus:

– Experian: 800-422-Experian: 800-422-48794879

– Trans Union: 800-916-Trans Union: 800-916-88008800

– Equifax: 800-685-1111Equifax: 800-685-1111

Each copy is $8.50.Each copy is $8.50.

When Your Credit Report When Your Credit Report is Freeis Free

Recently denied Recently denied creditcredit

Recently denied Recently denied employment or employment or insuranceinsurance

Suspect fraudSuspect fraud Unemployed but Unemployed but

seeking a jobseeking a job WelfareWelfare Certain statesCertain states

Who Cares About Credit Who Cares About Credit Reports?Reports?

Finance Finance companiescompanies

Mortgage lendersMortgage lenders LandlordsLandlords Insurance Insurance

companiescompanies EmployersEmployers

Good Credit Vs. Bad CreditGood Credit Vs. Bad Credit

A good credit history will A good credit history will show: show: – little to no unsecured debtlittle to no unsecured debt– A record of timely A record of timely

paymentspayments A bad credit history will A bad credit history will

show:show:– Large sums of unsecured Large sums of unsecured

debtdebt– Unpaid billsUnpaid bills– A large number of accountsA large number of accounts– A large number of inquiriesA large number of inquiries

SummarySummary

1. How Credit Affects our Lives1. How Credit Affects our Lives Credit:Credit: Reporting Limits:Reporting Limits: The Good News…The Good News… Who Cares About Credit Reports?Who Cares About Credit Reports? Good Credit Vs. Bad Credit.Good Credit Vs. Bad Credit.

2. The Cost of Credit2. The Cost of Credit

Understanding the expense of Understanding the expense of borrowingborrowing

Common Costs:Common Costs:

Interest (Expressed Interest (Expressed as APR)as APR)– FixedFixed– VariableVariable

FeesFees– ApplicationApplication– AnnualAnnual– CancellationCancellation– LateLate– Over limitOver limit

It’s All About the APR!It’s All About the APR!

APR stands for APR stands for AAnnual nnual PPercentage ercentage RRate.ate.

It’s the average total It’s the average total cost of the interest, cost of the interest, principal and finance principal and finance charges over a one charges over a one year period.year period.

Here’s How it Adds Up:Here’s How it Adds Up: Lets say your credit card Lets say your credit card

has an APR of 18%has an APR of 18% You spend up to your limit You spend up to your limit

of $1000of $1000 You only pay the minimum You only pay the minimum

payment of $20 (2% of your payment of $20 (2% of your balance)balance)

The interest owed would be The interest owed would be $15$15– The APR of 18% = 1.5% The APR of 18% = 1.5%

interest per monthinterest per month You still owe $995You still owe $995 It will take 8yearsIt will take 8years

Cost of Paying the Cost of Paying the MinimumMinimum

ItemItem PricePrice APRAPR Interest Interest PaidPaid

How Much How Much You Really You Really

PayPay

Years to Years to Pay OffPay Off

TVTV $500$500 18%18% $439$439 $939$939 88

ComputerComputer $1,000$1,000 18%18% $1,899$1,899 $2,899$2,899 1919

FurnitureFurniture $2,500$2,500 18%18% $6,281$6,281 $8,781$8,781 3434

SummarySummary

2. The Cost of Credit2. The Cost of Credit Common Costs:Common Costs: It’s All About the APR!It’s All About the APR! Here’s How it Adds Up:Here’s How it Adds Up:

3. Common Credit Traps3. Common Credit Traps

Understanding how to avoid Understanding how to avoid problemsproblems

Credit Trap # 1Credit Trap # 1Borrowing to Extend Borrowing to Extend

IncomeIncome

Purchasing items Purchasing items on credit which on credit which could not be could not be afforded otherwiseafforded otherwise– Debt will snowballDebt will snowball

Multiple store Multiple store credit cardscredit cards– No needNo need– Very high interestVery high interest

Credit Trap # 2Credit Trap # 2Borrowing to Pay DebtsBorrowing to Pay Debts

Cash advancesCash advances– Higher interestHigher interest– Extra fees are Extra fees are

chargedcharged Debt consolidation Debt consolidation

loansloans– You can’t borrow You can’t borrow

you way out of debtyou way out of debt– Can be more Can be more

expensiveexpensive

Credit Trap # 3Credit Trap # 3Borrowing Against Future Income Borrowing Against Future Income

IncreasesIncreases

Tickler interest Tickler interest ratesrates– Interest will be Interest will be

backdated on backdated on unpaid balancesunpaid balances

Delayed payment Delayed payment plansplans– AllAll interest will be interest will be

backdated if not backdated if not paid in fullpaid in full

SummarySummary

3. Common Credit Traps3. Common Credit Traps Borrowing to Extend IncomeBorrowing to Extend Income Borrowing to Pay DebtsBorrowing to Pay Debts Borrowing Against Future Income Borrowing Against Future Income

IncreasesIncreases

4. Ways to Keep Good 4. Ways to Keep Good CreditCredit

Understanding the basics of Understanding the basics of credit managementcredit management

Establishing a Credit Establishing a Credit HistoryHistory

You have to be at You have to be at least 18 years of least 18 years of age.age.

Have a regular Have a regular source of income.source of income.

Open a checking Open a checking andand savings account.savings account.

# 1 Establish a Credit # 1 Establish a Credit HistoryHistory

First, consider a First, consider a “secured” credit “secured” credit card.card.– Requires a bank Requires a bank

account as account as security.security.

– Your limit is your Your limit is your deposit.deposit.

# 2 Avoid Unnecessary # 2 Avoid Unnecessary BorrowingBorrowing

Develop a budgetDevelop a budget A budget helps you:A budget helps you:

– Know how much your Know how much your expenses are each expenses are each monthmonth

– Know how much Know how much income you take income you take home each monthhome each month

– Know where to Know where to control your spendingcontrol your spending

Tips for Budgeting:Tips for Budgeting:

Keep it simple.Keep it simple.– Round off amounts.Round off amounts.

Keep it flexible.Keep it flexible.– Round up expenses.Round up expenses.

Be realistic.Be realistic.– Project income on Project income on

the low end. Include the low end. Include AllAll expenses. expenses.

Fixed and Flexible Expenses:Fixed and Flexible Expenses:

Fixed expenses Fixed expenses are things we are things we need need that we pay that we pay the same amount the same amount for each month.for each month.

Flexible expenses Flexible expenses are things we are things we don’tdon’t necessarily necessarily need or that may need or that may vary in amount. vary in amount.

Needs and Wants:Needs and Wants:

NeedNeed: Food.: Food. WantWant: McDonald’s.: McDonald’s. NeedNeed: transportation.: transportation. WantWant: PT Cruiser.: PT Cruiser. NeedNeed: entertainment.: entertainment. WantWant: cable TV.: cable TV. NeedNeed: clothes.: clothes. WantWant: leather coat.: leather coat.

Creating a BudgetCreating a Budget

First, write down First, write down everything you everything you actuallyactually spend spend your money on in your money on in one month.one month.

Second, write Second, write down your actual down your actual take home pay for take home pay for one month.one month.

Evaluating Your FinancesEvaluating Your Finances

Saving

Housing

Food

Transportation

Insurance

Clothing

Health Care

Entertainment

Gifts & Contributions

Family

Credit Obligations

Educational

Personal

Total

$800

$200$15$50$25

$400

$75$10

$75

$50

$300

$50

$300

$50

$2400

$2300$2300

$2400

$-100

Using a Payment Using a Payment CalendarCalendar

1

543

2

876

10

9

131211 161514

191817 222120

2524

23

282726 3029

Rent$800

Phone$50 Groceries

$100

Groceries$100

Car Ins.$75

Credit Card$50

Cable$50

Groceries$100

Groceries$100

Gas/Elec.$200

Car$300

Day Care$75

Day Care$75

Day Care$75

Day Care$75

Day Care$75

Using a Payment Using a Payment CalendarCalendar

1

543

2

876

10

9

131211 161514

191817 222120

2524

23

282726 3029

Rent$800

Phone$50

Income$575Groceries$100

Income$100

Income$575Groceries$100

Car Ins.$75

Credit Card$50

Cable$50

Income$575

Income$575

Groceries$100

Groceries$100

Gas/Elec.$200

Car$300

Day Care$75

Day Care$75

Day Care$75

Day Care$75

Day Care$75

Figuring it out:Figuring it out:

1

543

2

876

10

9

131211 161514

191817 222120

2524

23

282726 3029

Rent$800

Phone$50

Income$575Groceries$100

Income$100

Income$575Groceries$100

Car Ins.$75

Credit Card$50

Cable$50

Income$575

Income$575

Groceries$100

Groceries$100

Gas/Elec.$200

Car$300

Day Care$75

Day Care$75

Day Care$75

Day Care$75

Day Care$75

$800 balance in checkbook$800 balance in checkbook$1150 still to be received$1150 still to be received$1900 left to pay$1900 left to pay$50 balance after expenses are met$50 balance after expenses are met

SummarySummary

4. Ways to Keep Good Credit4. Ways to Keep Good Credit Establish a Credit HistoryEstablish a Credit History Avoid Unnecessary BorrowingAvoid Unnecessary Borrowing Tips for BudgetingTips for Budgeting Fixed and Flexible ExpensesFixed and Flexible Expenses Needs and WantsNeeds and Wants Creating a BudgetCreating a Budget

Final SummaryFinal Summary

How credit affects our livesHow credit affects our lives– Understanding the importance of having a Understanding the importance of having a

good credit history.good credit history. The cost of creditThe cost of credit

– Understanding the expense of borrowingUnderstanding the expense of borrowing Common credit trapsCommon credit traps

– Understanding how to avoid problemsUnderstanding how to avoid problems Ways to keep good creditWays to keep good credit

– Understanding the basics of credit Understanding the basics of credit managementmanagement