Debt Know How

1
Debt Know How

• A Debt Education Program
• created by
• MasterCard in partnership with the
• University of Minnesota Extension Service

2
Welcome to Debt Know How

• Resource to help consumers get out of debt
• Includes
• Website www.debtknowhow.com
• Debt education workshops

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Workshop Goal

• Participants will
• Increase knowledge about debt issues
• Assess personal debt
• Develop action plan to pay off debt and improve
  credit score

4
Debt Overview
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Debt in America

• Consumer spending accounts for more than
  two-thirds of total economic activity (FDIC)
• Approximately 45 of Americans carry no
  outstanding balance on their credit cards (Staff
  Working Paper, Federal Reserve 2004)
• 1 in 20 American households are in high debt (MSN
  Money)

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Debt in America

• Consumer credit comes from mortgage debt, home
  equity loans and credit cards
• Consumer debt was 9.8 trillion in 2004
• Almost 80 from residential mortgages
• About 8 comprised of credit card debt
• Source The Nilson Report

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Common Reasons for Getting into Debt

• Loss of job
• Divorce
• Medical crisis
• Overspending
• Unexpected home or car expenses
• Bad money advice or fraud

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Debt Warning Signs Quiz
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How Did You Score?

• Total Points from Debt Warning Signs Quiz
• 0 - Congratulations
• 1 - 4 Pay attention to early warning signs
• 5 - 10 Already deep in debt

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Assess Your Finances
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How Much Money Do You Earn?

• Calculate Total Monthly Income
• Salary wages
• Tips
• Commissions
• Bonuses
• Interest/dividends
• Veterans benefits

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Where Does Your Money Go?

• Calculate Total Monthly Expenses
• Housing
• Savings setaside funds
• Food
• Health care insurances
• Transportation
• Personal
• Debt payments fees
• Recreation entertainment
• Past due bills debts

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Where Does Your Money Go?

• Subtract Total Expenses from Total Income
• to get Total Monthly Cash Flow
• Total Monthly Income _____
• Total Monthly Expenses - _____
• Monthly Cash Flow _____

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Assess Your Finances

• Tips
• Positive cash flow means its working
• Negative cash flow means spend less
• Use your budget to make changes
• Track spending
• Find money

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Measure Your Debt

• Calculate Total Monthly Non-Mortgage Debt
• Credit cards
• Home equity loan
• Store cards
• Vehicle loan
• Family loan
• Past due debt

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Measure Your Debt

• www.debtknowhow.com Budget calculator will help
  individuals tailor information to best suit their
  needs

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Measure Your Debt

• Calculate Debt Payments-to-Income Ratio
• 20 or higher take action to pay down debt

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Measure Your Debt
Debt Payments-to-Income Ratio Monthly Debt
Payments Monthly Take-Home Pay

• Example
• 1,105
• 5,275 21 Debt-to-Income Ratio

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Measure Your Debt

• www.debtknowhow.com Understanding your
  debt-to-income ratio is crucial to determining
  the correct path out of debt

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Improve Your Credit Score
21
Credit History

• Positive credit history leads to opportunities
• Problems with credit leads people to action

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Credit History and Score

• Credit reporting bureaus maintain files on
  borrowers
• Experian, Equifax, and Trans Union
• major credit reporting bureaus
• Lenders use the information when making credit
  decisions
• Order your credit report each year

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Request Your Credit Report

• To order your credit report
• on-line
• www.annualcreditreport.com
• or call
• 1-877-322-8228
• or write
• Annual Credit Report Request Service
• P. O. Box 105281
• Atlanta, GA 30348-5281

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Access to Your Credit Report

• You are entitled to free credit reports at any
  time if
• Denied credit or employment
• Victim of fraud
• Receiving welfare benefits
• Unemployed and looking for work

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Whats in Your Report?

• Personal Identifying Information
• Your Name Social Security 123-45-6789
• 123 Current Address Date of Birth February 1,
  1960
• City, State 00000
• Previous Address(es)
• 456 Former Rd., Somewhere, ST 11111
• P.O. Box xxxx, Anywhere, ST 22222
• Last Reported Employment Account Manager, Any Co.

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Whats in Your Report?

• Public Record Information Collections
• Lien Filed 03/03 Good CTY Case or ID 4321
  Amount 26000 Class State Released 07/03
  Verified 07/03
• Bankruptcy Filed 12/02 Northern District Ct
  Case or ID 55HC44 Liabilities - 16000
  Personal Individual Discharged Assets- 800
• Collection Reported 05/96 Assigned 09/94 to
  Oldcoll (800)xxx-xxxx Client ABC Hospital
  Amount-1010 Unpaid Balance 1010 Date of
  Last Activity 09/94 Individual Account Account
  2345

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Whats in Your Report?

• Credit Account Information

Company Name Account Number Whose Account Date Opened Months Reviewed Date of Last Activity High Credit Terms Items as of date reported Items as of date reported Items as of date reported Date Reported
Company Name Account Number Whose Account Date Opened Months Reviewed Date of Last Activity High Credit Terms Balance Past Due Status Date Reported
Department Store 32514 J 10/86 36 9/97 950 0 R1 10/97
Bank 1004735 A 11/86 24 5/97 750 0 I1 4/97
Oil Company 541125 A 6/86 12 3/97 500 0 O1 4/97
Auto Finance 529778 I 5/85 48 12/96 1100 50 300 200 I5 7/97
Previous Payment History 3 times 30 days late
4 times 60 days late 2 times 90 days
late Previous Status 01/97 I2 02/97 I3
03/97 I4
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Whats in Your Report?

• Inquiries
• Home Mortgage 10/10/01 Real estate loan 214,000
• 10 Oak Lane for state bank with 30 yr. term.
• Any, MN 22222 scheduled until 10/2003
• 07/29/98 XYZ BankCard
• 04/12/97 GHG Department Store
• 02/24/00 Department Store
• 05/02/00 Mortgage

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Dispute Errors

1. Make a copy of your credit report and mark items
   you suspect are incorrect.
2. Write a letter to the reporting agency and
   explain the disputed items.
3. Request an investigation and send copies of
   supporting documents.
4. Tell the creditor in writing that you dispute an
   item.
5. Keep copies of all correspondence.

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Credit Scoring

• Credit score is an evaluation of a persons
  credit worthiness
• Credit scores change overtime
• Scores range from about 350 to more than 800
• Lenders use scores plus other information
• Most well known score is FICO (Fair Isaac
  Corporation.)

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Base for Credit Scores

• Payment history - 35
• Amounts owed - 30
• Length of credit history - 15
• Taking on more debt - 10
• Types of credit used - 10

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Tips to Improve Your Score

• Pay bills on time
• Missed a payment? Get current and stay current
• Keep balances low on credit cards and other
  revolving credit
• Pay off debt rather than move it around

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Tips to Improve Your Score

• Dont close unused credit cards as a short term
  strategy
• Dont open unnecessary lines of credit
• Shop for rates within a focused time (ex. auto
  loan, home equity loan)
• Its okay to request and check your own score

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Action Plan
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Pay Off Your DebtTake Action Now

• Assess the problem
• Set a goal
• Generate new income
• Create your plan
• Track spending
• Save on interest and late fees

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Pay Off Your DebtTake Action Now

• Choose a method to pay off debt
• Contact creditors
• Consider a loan consolidation
• Seek help if overwhelmed
• Bankruptcy

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Pay Off Your DebtTake Action Now

• Assess the problem
• Determine why you are in debt
• Curb spending
• Determine amount of debt accumulated
• Set a goal
• Set smaller goals
• Keep motivated

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Debt Reduction GoalAction Plan

• Overall Goal
• Reduce my debt by __________ in __________months
• Monthly Goals
• Reduce my debt by _________ every month
• Increase my income by ________ each month
• Reduce my expenses by ________ each month
• Additional action steps I will take to reach my
  goal
• 1.
• 2.

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Pay Off Your DebtTake Action Now

• Generate new income
• Take a second job
• Sell assets
• Use money in low-interest bank accounts
• Create your plan
• Spending decisions
• Stick to a budget
• No new debt

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Pay Off Your DebtTake Action Now

• Track spending
• Find daily savings
• Save on interest and late fees
• Ask each credit card lender for a lower interest
  rate
• Prioritize your debts by interest rates

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Pay Off Your DebtTake Action Now

• Choose a method to pay off debt
• Highest interest rate first
• Smallest debt first
• Pay more than the minimum
• Contact creditors
• Explain the problem
• Try to work out a modified plan
• Make the agreed upon payments

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Pay Off Your DebtTake Action Now

• Consider a loan consolidation
• Multiple loans consolidated into one loan
• Lower interest rate
• Easier to focus on one loan than several
• Dont add new debt
• Seek help if overwhelmed
• See a reputable credit counselor
• Renegotiates loan terms
• Ask about fees

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Pay Off Your DebtTake Action Now

• Bankruptcy
• Bankruptcy Reform Act
• Based on income and ability to pay
• Chapter 7 or Chapter 13
• Means test is required
• Will vary according to state average income
• Must receive credit counseling before bankruptcy
• Must complete debt education before being
  discharged

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Resources

• Government Sites
• Federal Reserve Board www.federalreserve.gov
• Federal Trade Commission www.ftc.gov
• U.S. Department of Justice www.usdoj.gov
• Cooperative Extension www.csrees.usda.gov
• U.S. Bankruptcy Courts www.uscourts.gov
• Financial Literacy Education www.mymoney.gov

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Resources

• Debt Credit Management
• Freddie Mac www.freddiemac.com
• MasterCard International www.mastercard.com
• MasterCard www.debtknowhow.com
• Your Credit Card Companies www.yourcreditcardc
  ompanies.com

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Resources

• Accessing Your Credit Report
• Annual Credit Report www.annualcreditreport.com
  
• Equifax www.equifax.com
• Experian www.experian.com
• Trans Union www.transunion.com
• MyFico, a division of Fair Isaac Corporation
  www.myfico.com

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Evaluation

• Help us for future trainings!

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For information about MasterCards Debt Know How
program

• Patrick DwyerMasterCard International2000
  Purchase StreetPurchase, NY 10577Tel (914)
  249-6637Fax [phone]patrick_dwyer_at_masterc
  ard.com

• Cindy M. PetersenUniversity of
  MinnesotaRegional Extension EducatorFamily
  Resource Management980 - 2nd Avenue
  SEHutchinson, MN  55350Tel [phone] or
  1-888-241-3207Fax [phone]peter210_at_umn.ed
  u

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Bibliography

• Materials have been adapted from the following
  sources
• Anthes, William L., Ph.D. Twelve Ways to Get Out
  of Serious Debt, National Endowment for Financial
  Education, February 3, 2003
• U.S. Department of Justice and Cooperative
  Extension Service conference call, July 21, 2005
• Bankruptcy Reform, BankruptcyAction.com
• MyFICO Whats in Your Credit Report, myfico.com
• Lifelong Money Management, Home Ownership Center,
  St. Paul, MN

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• MasterCard International in partnership with the
  University of Minnesota Extension Service
• Cindy M. Petersen, M.Ed., A.F.CUniversity of
  Minnesota Extension Service Regional Extension
  EducatorFamily Resource Management
• In consultation with
• Jean W. Bauer, Ph.D.Family EconomistUniversity
  of Minnesota Extension Service