credit and debt

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Credit and Debt

• www.lifethenfinance.com

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What is credit ?

• Credit is a loan from a bank, store or company.
• The lender makes the purchase for you and
  overtime you must pay them back.
• A credit card is the tool used to make purchase.
  
• The lender of your credit card, charges interest
  each month until you pay them back in full.
• When you use a credit card, if you do not pay off
  the card in full each month you are paying more
  than what you purchased the item for because of
  fees.

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Credit Cont.

• Many credit cards offer bonuses like gifts and
  airline miles with each purchase.
• Credit card users that pay their bills off in
  full each month can reduce the cost of other
  purchases.
• In some cases, credit cards have a more
  streamlined process incases of fraudulent charges.

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What is a debit card?

• This card is linked to a bank account.
• Automatically deducts purchase amount from your
  bank account
• Cannot make a purchase for more than the balance
  in your account
• If you have 400 in your account and want to make
  a 500 purchase you cant not with a debit card

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Debit card Cont.

• Exception
• If you have overdraft protection on your account,
  you can overdraw your account up-to the maximum
  amount allowed by your overdraft protection
  policy.
• A debit card is an alternative to carrying cash.
• When you use a debit card at some stores you can
  ask for cash back with your purchase.

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What is a credit report or credit history?

• Credit Report
• A detailed report about a persons credit
  history, which outlines payback history, debt
  owed and paid to help lenders determine credit
  worthiness for future lending.

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Importance of a good credit score

• Credit Score
• A measure of credit risk determined from ones
  credit history using a standard form of
  measurement.
• For example
• A score of a 740 equals a grade A, where as a
  score of a 550 equals a grade F.

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Financial Reputation

• The worthiness of a persons personal financial
  payback history the lower the reputation the
  less likely one-will payback debts.

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Good Credit

• Purchases 1000
• Interest Rate 7
• Monthly Payment 10
• Years to Pay off amount 12 months
• Interest Paid 440
• Actual Cost 1,440

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Bad Credit

• Purchases 1000
• Interest Rate 27
• Monthly Payment 23
• Years to Pay off amount 12 months
• Interest Paid 2,312
• Actual Cost 3,312

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Buying with Cash

• Purchases 1000
• Amount Saved each month 125
• Months to save up 1000 8
• Interest Earned the money in savings 30
• Actual Cost 970

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Interest Rates

• A rate that is charged for borrowing money from a
  lender usually in the amount of a percentage of
  your total balance owed.
• Interest
• The fee that is charged by a lender for borrowing
  money this amount is usually determined from an
  interest rate.
• Lender
• A company, organization or person that lends
  money to a consumer.
• Grace Period
• The time a lender allows between your purchase
  and payment where they do not charge you any
  interest. This is typically around 30 days.

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What is considered Good Debt ?

• Home Loans
• Purchasing a home may be a good investment
  because, in many locations, the value can
  increase over-time
• Business Loans
• For entrepreneurs looking to expand and grow
  their business
• Education Loans
• Student loans and other investments that finance
  ones education.

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What is considered Bad Debt ?

• Credit Cards
• Any type of credit card is considered a bad debt.
  Credit cards carry high interest rates, finance
  charges and other charges.
• Personal Loans
• Cash loans from a bank or company. They carry
  high interest rates.
• Pay Day Loans
• These are similar to personal loans, in most
  cases you
• guarantee to pay it off with your next paycheck.
• Auto Loans
• Since a car declines in value and offers no
  income this classifies it as bad debt.

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Auto/Car Loan

• A car loan is considered a bad debt since the
  value of the car declines in value and no income
  is received (unless driving a limo, cab or bus)
• Your credit report score determines the type
  of car loan you will qualify for. The better the
  credit the better the loan you will be able to
  get

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What is identity theft ?

• This is when someone who uses your personal
  identifying information to commit fraud or other
  crimes, usually for personal gain.

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Personal Identifying information

• Examples
• Social Security Number/ Taxpayer ID number
• Drivers License Number or State Identification
  Card Number
• Credit Card Numbers
• Bank Account Information

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Incase of identity theft....

• Contact
• The three credit bureaus Trans Union, Equifax,
  Experian
• The Federal Trade Commission
• The IRS
• Internet Crime Complaint
• Local Police department
• You can check it at www.annualcreditreport.com
  for free once per year

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What is collateral ?

• Collateral
• Lenders estimate the value of the collateral
  offered to reduce their risk.
• if you are purchasing a car and get an auto
  loanyour collateral would be the car.
• If you dont pay back the loan the lender will
  take the car.

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Determining the value of the collateral ?

• The collateral is determined by calculating the
  difference between the cars value and how much a
  person pays down.
• For example
• if someone purchases a 20,000 car and puts down
  10,000the lender would have 10,000 in
  collaterala safer loan.

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High and low risk loan

• Low-risk loan
• A friend borrows 200 but gives you his laptop
  valued at 400 until he repays you.
• ?If he doesnt repay you then you can sell the
  laptop and get your 200 back plus make some
  money.
• High-risk loan
• A friend borrowed 250 and gave you a bike valued
  at 50 even if you sold the bike at full value
  you would still lose 200.

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Finding a mortgage thats right for you

• How long do you plan to keep the property?
• What are your real estate market predictions over
  that time?
• What payments can you afford?
• What is your risk tolerance?
• If its a rental property, what kind of cash flow
  are you looking to achieve?
• Are you trying to pay down the principle balance?
• How does this property fit into your overall
  financial plans?

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What lenders are looking for?

• Credit
• Maintain an excellent credit status and
  qualifying for a home loan will be much easier.
• Equity
• On a home purchase, equity is equal to the amount
  of money you put down on a property.
• Assets
• Lenders want to see on average at least three
  months of mortgage payments in an account.

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What lenders are looking for? Cont

• Debt to Income Ratio
• Shows the lenders you have the ability to afford
  monthly loan payments.
• If you make 3500 per month and your mortgage
  payment is 3000, that doesnt look good for you.
  
• The lender will be thinking, How can they afford
  to pay me?? This is why you make a sensible
  budget planto avoid getting into indebted
  situations.

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