DIVISION OF FIRMS

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National Association of Black Accountants, Inc.
M ney ense
Managing Credit and Debt
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Managing Credit

• Buy Now, Pay Later

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Financial Aptitude Test

1. Its always smart to send in the minimum payment
   due on a credit card bill each month and stretch
   out the card payments as long as possible instead
   of paying the bill in full. T/F
2. Your credit record can be a factor when you apply
   for a loan or credit card, but cannot affect
   non-credit decisions, such as applications for
   insurance for an apartment. T/F
3. While one or two late payments on bills may not
   damage your credit record, making a habit of it
   will count against you. T/F
4. Theres no harm in having many different credit
   cards, especially when the card companies offer
   free T-shirts and other special giveaways as
   incentives. The number of cards you carry wont
   affect your ability to get a loan what matters
   is that you use the cards responsibly. T/F

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Financial Aptitude Test

1. A debit card may be a good alternative to a
   credit card for a young person because the money
   to pay for purchases is automatically deducted
   from a bank account, thus avoiding interest
   charges or debt problems. T/F
2. It makes no sense for young adults to put money
   aside for their retirement many years away.
   People in their 20s should focus entirely on
   meeting monthly expenses and saving for
   short-term goals. T/F

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Financial Aptitude Test

• Answers
• False
• False
• True
• False
• True
• False

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Credit and Debt

• Terms You Should Know
• Credit is time given for payment for goods sold
  on trust
• Debt is a condition of owing

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Credit Terms

• APR the amount it costs annually when you decide
  to carry a balance (not pay off your credit card
  in full) each month.
• Can range from 0 to as high as 25 annually
• Finance Charge Actual dollar cost of using
  credit

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Credit Terms

• Grace Period the number of days you have to pay
  your bill in full before incurring finance
  charges (typically 25 days).
• Beware of cards with no grace period! Interest
  accrues from the moment you charge an item.
• You dont get a grace period when you carry a
  balance.
• Annual Fee the amount you pay annually as a
  credit cardholder for the privilege of using
  credit
• If you pay your balance each month, you should
  avoid cards with an annual fee.
• Some annual fee cards have lower interest rates,
  so if you carry a balance each month you may
  actually save money with an annual fee card.

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Credit Terms

• Transaction Fees You may be charged additional
  fees for ATM cash advances, balance transfers,
  late charges and exceeding your credit limit.
• Some cards also charge a monthly fee for not
  using the card!
• Late Fee If your payment is not processed by the
  due date, you may be assessed a late fee of up to
  35.
• Avoid this expense by mailing timely payments.
• Remember, creditors must receive a payment at
  least every 30 days.

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Credit Terms

• Minimum Payment the least amount you must pay
  each month to avoid additional transaction fees
  (typically 2 of the balance).
• Credit Limit The maximum amount you can charge

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Type of Credit Lender Advantages Disadvantages
HOME MORTGAGE Commercial bank Savings and loan Credit union Homes often increase in value. Interest rates for mortgages are relatively low The interest paid is tax-deductible. Mortgages are long-term commitments. Obtaining a home loan involves extensive credit checks.
CAR LOANS Commercial bank Savings and loan Credit union Consumer finance company Cars can make it easier to work and earn an income. Cars lose their value relatively quickly. The car you purchase may have little value when the last payment is made.
COLLEGE LOANS Commercial bank Savings and loan Credit union Federal government A college education is a good borrow investment. necessary. Interest rates can be relatively low. Students sometimes borrow more than necessary. New graduates can face difficulty in repaying large loans.
PERSONAL LOANS Commercial bank Savings and loan Credit union Consumer finance company Personal loans allow individuals to purchase today that boat or vacation they want. Personal loans have relatively high interest rates. Some young people may borrow more than their income should allow.
CREDIT CARDS Commercial bank Savings and loan Department store Oil companies Other financial institutions, e.g., American Express Credit cards are convenient to use and useful in an emergency. Credit cards provide a record of charges. Credit cards have relatively high interest rates. Some young people may borrow more than their income should allow.
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Managing Credit Cards

• Teaser rates
• When you receive a credit card offer in the mail,
  examine the fine print that comes with the
  solicitation.
• Many cards will offer great introductory rates,
  such as 3.9 APR.
• Often these rates will rise after a limited
  period of time (usually six months).
• After the introductory time period, your APR
  could go up significantly. Not a good deal if
  youre carrying a balance!

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Managing Credit Cards

• Stick with one or two
• Pay in full every month
• Pay on time
• Avoid cash advances

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Managing Credit Cards

• Stay within the limit
• Review your statements
• Report a lost or stolen card immediately
• Protect your history
• Protect personal information

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Managing Credit Cards

• Read your credit card contract carefully and be
  sure to examine any letters that subsequently
  arrive announcing changes to the terms of your
  contract. Many cards are eliminating grace
  periods and adding annual fees for customers who
  pay in full each month.
• Contact your creditors if you cant make your
  payment on time or at all. They may be willing to
  work out a deal for you if youre in good
  standing.
• Ask your creditor to reduce your APR if youre
  being charged a high interest rate and carrying a
  balance. Many creditors may be willing to do this.

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Managing Credit Cards

• Think before you buy an item on sale with your
  credit card. Will you really save money? Probably
  not.
• Remember that offers to reduce your minimum
  monthly payment will only cost you more in
  interest during the long run.
• Develop a sound spending plan for yourself. This
  will help you avoid using credit cards to make up
  for any shortfalls in your cash flow.
• Shop carefully for a credit card! The offer you
  get in the mail may not be the best deal. Check
  www.bankrate.com to compare credit cards and
  their rates.

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So Many Credit Card OffersWhats the Difference?

0 110 annual fee 129 set-up fee (one-time)
4.99 9.9 (initially)
25 days if the new balance is paid in full by the payment due date 25 days
2.5 of the new balance, minimum of 15 0
15 if balance is less than 200 35 if balance is greater than 200 25 and an increased APR
3 of advance, 10 minimum 3 of balance, 5 to 50, Late 35 if over 2 over limit LOTS OF FEES
Credit Card A (Providian) Credit Card B
Annual fee
Interest rate (APR)
Grace period
Minimum payment
Late fee
Other fees

• If you were to choose one of these credit cards,
  which one would it be?
• What are the benefits of the card you chose?
• What are some of the costs of the card you chose?

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Common Lenders of Credit

• 1. Commercial banks and savings and loans
• Very similar in the types of financial services
  they provide their customers, but regulated by
  different agencies
• Include loans, savings accounts, and checking
  accounts.
• 2. Credit unions
• Not-for-profit cooperatives enterprises owned by
  their members
• Provide many of the same financial services as
  commercial banks and savings and loans.
• 3. Consumer finance companies
• Lend money to individuals usually for things such
  as automobiles or household appliances
• Often their customers do not qualify for bank
  credit and therefore pay a higher rate of
  interest.

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What Are Lenders Looking For?

• Lenders look for certain qualities in loan
  applicants. These qualities are called the Four
  Cs of Credit capacity, character, capital and
  collateral.
• Capacity the ability of the consumer to repay
  the debt.
• The basic question is Have you been working
  regularly in an occupation that is likely to
  provide enough income to support your use of
  credit?
• ?Do you have a steady job?
• ?What is your salary?
• ?How reliable is your income?
• ?Do you have other sources of income?
• ?How many other loan payments do you have?
• ?What are your current living expenses?
• ?What are your current debts?
• ?How many dependents do you have?
• ?Do you pay alimony or child support?
• ?Can you afford your lifestyle?

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What Are Lenders Looking For?

• Character whether you possess the honesty and
  reliability to pay credit debts
• ?Have you used credit before?
• ?Do you pay your bills on time?
• ?Do you have a good credit report?
• ?Can you provide character references?
• ?How long have you lived at your present
  address?
• ?How long have you been at your present job?
• Collateral serves as a type of insurance for the
  creditor
• The creditor is interested in determining whether
  you have any assets that could be sold to pay off
  your loan in the event that you are unable to do
  so.
• ?Do you have a checking account?
• ?Do you have a savings account?
• ?Do you own any stocks or bonds?
• ?Do you have any valuable collections or
  jewelry?
• ?Do you own your own home?
• ?Do you own a car?
• ?Do you own a boat?

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What Are Lenders Looking For?

• Capital having personal items of value.
• ?Do you have a car?
• ?Do you have a home?

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Credit

• Credit Reports and Scores

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Credit

• How Credit Works For and Against You
• Maintaining Good Credit
• A good rating on a credit report means that in
  the past bills have been paid on time.
• How Bad is Bad Credit?
• A poor rating indicates overdue or unpaid items.

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Your Credit Report

• Your ability to qualify for a loan depends on a
  credit report.
• A credit report is a record of an individuals
  personal credit history.
• When a person applies for a loan, the lender will
  order a credit report to see how well the
  applicant has managed credit in the past.
• A credit report will tell, in detail, how much
  the person has borrowed, from whom, and whether
  the bills have been paid on time.
• Credit reports are compiled by credit bureaus,
  which regularly collect information on millions
  of consumers.
• Credit bureaus get information from a variety of
  sources, including stores, credit card companies,
  banks, mortgage companies, and medical providers.

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Credit Reporting Agencies

• Mistakes can and do occur on credit reports. For
  example, a credit report may contain
• information about someone with the same name, or
  paid accounts may be listed as
• unpaid. The law provides individuals with a means
  of requesting and reviewing their credit
• report and having mistakes corrected. Under the
  Fair Credit Reporting Act you have the
• right to get a copy of your credit report from a
  credit bureau. The three largest credit
• bureaus are

Equifax P.O. Box 105496 Atlanta, GA 30348-5496 www.equifax.com 800.997.2493 Experian P.O. Box 2104 Allen, TX 75013-2104 www.experian.com 888.397.3742 Trans Union P.O. Box 1000 Chester, PA 19022 www.transunion.com
Free annual credit report www.annualcreditreport.
com (only authorized source)
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Information on FICO Scores Credit

• Whats In Your FICO Score
• http//www.myfico.com/CreditEducation/WhatsInYour
  Score.aspx
• The Federal Trade Commission
• http//www.ftc.gov/bcp/conline/edcams/credit/inde
  x.html\

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Other Credit Items

• Credit Traps and Predatory Lending
• Credit Counseling
• Identity Theft
• The Golden Rule

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Credit Advantages

• Access to cash in an emergency
• Ability to use it now
• Safety and convenience

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Debt

• Debt is the entire amount of money you owe to
  lenders

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TYPES OF DEBT

• Secured debt the creditor has given you credit
  to buy an item that they can take back
  (repossess) if you dont make your payments.
• Generally secured debt involves major purchases.
  Examples of include
• House or condominium, Land, Time share,
  Automobile, Boat
• If you allow a secured debt to be repossessed for
  non-payment, youll damage your credit rating.
• Unsecured debt credit granted to you where
  property cant be repossessed. Examples include
• Credit cards, Student loans, Payday loans,
  Medical bills not covered by insurance

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GOOD VERSUS BAD DEBT

• Good debt
• Example borrowing to pay for a home--considered
  good debt because youre purchasing a tangible
  asset that will generally be worth more over
  time.
• Most secured debts are usually considered good
  debt but there are some exceptions. For instance,
  new cars lose as much as 20 of their value as
  soon as they are driven off the lot.
• Bad debt
• Most unsecured debts are considered to be bad
  debt with the exception of student loans.
• If you complete your degree, the money you
  borrowed to pay for your education will be
  returned to you throughout your lifetime by the
  type of job. Youll obtain and the higher wages
  youll earn.
• Its never good to carry credit card debt.
  Interest rates can be staggering, and balances
  and interest costs will grow when you make
  irregular or minimum payments.

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A Word About Debt

• What is a debt load? What is a safe amount of
  credit for you to carry? How do creditors find
  out what a persons debt load is? How do I know
  my own debt load?
• DEBT/INCOME RATIO
• This debt/income ratio is figured with monthly
  amounts
• To figure this ratio add all of your non-housing
  monthly payments except for your utilities or
  taxes. Then compare that total with your total
  gross annual wages divided by 12. If you dont
  have fixed monthly payments on revolving debts
  such as credit cards, estimate your monthly
  payments at 4 of the total amount you owe.
• Monthly debt payments/Total monthly income
  monthly non-housing debt/income ratio. Its
  usually expressed as a percentage so move the
  decimal point 2 places to the right and add the
  sign.

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Rule of Thumb

• A conservative rule of thumb the 20-10 Rule.
• Total household debt including your housing
  payments shouldnt exceed 20 of your net
  household income.
• Remember your net income is how much you bring
  home in your paycheck and monthly payments on
  the debt shouldnt exceed 10 of net monthly
  income.
• Another conservative rule of thumb for mortgage
  debt is the 28/36 rule.
• Your non-housing debt shouldnt exceed 28 of
  your gross (your total) income, and your total
  debt consumer debt plus housing debt
  shouldnt exceed 36 of your gross income.

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How Much Debt Can You Afford?

• Example
• Yearly income after taxes and deductions 28,000
• Monthly income 2,333 (28,000/12)
• Amt. of consumer pmts. per month you can afford
• (15-20 of your after tax income)
• 2,333 .15 355 to 2,333 .20 467

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HOW TO REDUCE YOUR DEBT

• So youve got a bunch of debt. What do you do?
  Add up your debts and find out where you stand.
  You cant make payoff decisions without a clear
  picture of what you owe. Look at the amounts owed
  and determine how much you are paying to all of
  your creditors.

Amt. Owed APR Monthly Pmt. Payoff Goal
VISA 2,500 18.0 40 5 years
Dentist 150 5.0 25 6 months
Student Loan 25,000 8.2 340 10 years
Car 10,000 9.0 200 5 years
Total 37,650 605
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Manage Your Debt

• Paying 605 every month is going to pay off your
  debt. The secret to getting rid of debt is to
  keep paying at least 605 a month until the debt
  is gone. In six months when the dentist is paid
  off, take the extra 25 and apply it to the Visa
  card since it has the highest interest rate.
• Keep the payments at 605. To quickly reduce your
  debt, apply any extra cash to high interest debt.
  Using this payment strategy, the debt in this
  example would be paid off in less than 10 years.

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Managing Debt

• Negotiating with Creditors
• The Perils of Credit Card and other Consumer Debt
• Debt Consolidation Options
• The IRS

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Tips How to Get Out of Debt

• Dont wait to act
• Create a plan to get out of debt
• Cut expenses
• Honestly assess your ability to pay and take
  appropriate action
• Try to increase income
• Keep making payments when debt is paid off
• Consolidate loans
• Limit the number of credit cards you own
• Try to stop most credit card offers from arriving
  in the mail (call (888) 5OPT-OUT
• Debt Counseling

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Financial literacy isnt just a matter of
knowing what you have and knowing your options.
It is a matter of planning for lifes milestones.
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Thank You!

• National Association of Black Accountants, Inc.
• M ney ense
• For more information visit www.nabainc.org

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360 Degrees of Financial Literacy

• 360 Degrees of Financial Literacy is a national
  effort of the CPA profession to improve the
  financial understanding of Americans. It
  provides a comprehensive approach to financial
  education, focusing on the information Americans
  need at every life stage, from childhood to
  retirement. CPAs volunteer their time and
  expertise to educate members of their communities
  about financial issues.
• Visit www.360financialliteracy.org for tools to
  help you make sound financial decisions.