Money Managementand the

Cost of Credit

understand borrowing choices and

consequences

Linda Pacewicz

Chase / Education Finance

How?

• Understanding the terms of credit• What is a credit score?• The costs of credit cards• The importance of budgeting• Tips to manage your money and keep debt low

Creating a comfort level with decisions• One size doesn’t fit all!

Understanding the TermsPrime vs Libor

“Just 2 ways a bank chooses to conduct business” Like you choosing Visa or Mastercard; Coke or Pepsi

Check with your lender for actual rates

Prime + _ #__ Based on Federal Reserve

transactions (internal US) Usually fluctuates more often

– Monthly– A larger number

Libor + __#__ Based on International Lending

transactions (more global) Usually fluctuates less often

– Quarterly

– A smaller number

T-Bill (Treasury Bill) (Tbill + _#_ ) Gov’t. issued short term debtThe rate is used for Stafford and PLUS education loans - Variable rate for loans disbursed before 7/1/06 - Fixed rate for loans disbursed after 7/1/06

Understanding the Terms APR – Annual Percentage Rate

“the actual cost of credit”

The cost of your loan expressed as a yearly percentage rate. • A look at the rate you'll be paying over the course of one year

• Includes the cost of interest, service charges and fees

– APR must be indicated clearly on your lending documents• Rules by the Federal Truth and Lending Act

– Variable vs Fixed• Variable changes / Fixed stays the same

Borrowing money…..

Private loan Interest rates are determined by your FICO score

“Credit Score”

credit cards; car loans; private student loans; personal loans; home loans; ….and…..ability to rent an apartment; get a job

Credit Scores and ReportsCredit Scores are a “Snapshot” of your credit behavior

Predicts future performance by analysis of past payment behavior

Allows lenders to identify who is likely to perform well in the future – even if their information reveals past problems.

It’s your “risk factor”

Computer programs transform information from your credit report into a number – ‘a score’

To create a score – need at least 1 account open for 6 months or greater

The Three Credit Bureaus

Equifax 1-800-525-6285www.equifax.com

Experian 1-800-397-3742www.experian.com

TransUnion 1-800-680-7289www.transunion.com

The Breakdown

What is a good score?Computers assign numbers to certain factors to tell creditors

the likelihood that you will repay on time.

Scores generally range from 400’s to 900’s

remember different lenders interpret results differently, but all are consistent

Above 850: Excellent Credit725 – 850: Good Credit625 – 725: Creditors may want to take a closer look at

your factors, but overall an average risk550- 625: Higher risk. Not be eligible for the best ratesBelow 550: Poor credit risk. Most likely will be turned down

for most credit/loans unless there are factors like good

collateral

Increasing your score

Scores will improve, as credit obligations are continuously handled responsibly

Check that credit report information is accurate Make a list of what you owe – now you know! Try and refinance high interest debt Pay bills on time – the most important! Get current if you’re past due Set limits to amounts you really need Cancel credit cards that are no longer used (open accts) Keep balances low and pay them off as soon as you can Don’t continually apply for credit

Get your credit report free

New law from the FTC and Fair Credit Reporting Act as of Sept.2005

www.annualcreditreport.com

Once / year – from all 3 agencies– Free detailed reports– minimal cost for your score

Watch for copy cat scams and pop-ups

Credit Cards 101-what to know-

Interest rate/finance charges– fixed or variable rates

Annual Percentage Rate (APR) Introductory Rates

– Read the fine print – what happens next

Balance Transfers– Can hurt your credit score if moving too much– Can also help reduce interest charges

Grace Periods– Interest accrues– When are you considered past due

Credit Cards 101-what to know-

Amount Due– Read your agreement - % of the balance– Min’s usually low (can be 2%)READ YOUR STATEMENT= interest can be higher than the min.

due! Annual Fees

– Read your agreement Other Fees

– Late fees, over limit Cash Advances

– Different and always higher interest rates Credit Limit

– The maximum amount of credit on the card

Credit Card Advantages

Build a positive credit history Security in event of emergencies Reduced need to carry cash Enhance personal responsibility and

independence Good management allows lower interest rate

negotiation!

Credit Card Disadvantages

Ruin your credit rating Unable to obtain car loan or mortgages, High cost of carrying balances Many college students don’t realize the

outcomes of credit card abuse Too convenient, easy to misuse Easy to become deep in debt, hard to get out;

bankruptcy

Credit Card Do’s Limit yourself to 1 or 2 major cards Keep your limits low ($500 limit) Use only for emergencies Only charge what you can afford to pay off Pay off the balance in full each month or plan for short term debt Only charge tangible items if you’re carrying balances

Credit Card Do’s File your card to avoid impulse buying Make payments on time to avoid late fees Comparison shop for best credit card deals

– Annual Percentage Rate– Interest rate– Fees– Rewards

Credit Card Don’ts

Don’t have a card if you don’t have self- control with purchases

Don’t EVER pay only the minimum payment Don’t take cash advances Use low cost student loans before using a credit

card for tuition

Costs of Credit -an example-

$2,000 debt at 18% interest

$35.00 - minimum payment made

= 11 years to pay off the $2,000

You’ve paid $2,574.48 in interest!

You’ll pay $4,574.48 for the $2000 purchase – DOUBLE your original cost

Looking at that example again

$2,000 debt at 18% interest

$60.00 – ABOVE minimum payment made

= 4 years to pay off the $2,000

You’ve paid $793.44 in interest!

You’ll pay $2,793.44 for the $2000

One more look at the example

$2,000 debt at 8% interest (good risk factor)

$35.00 – same minimum payment made

= 6 years to pay off the $2,000

You’ve paid $526.16 in interest!

You’ll pay $2,526.16 for the $2000

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$60 (above min) payment = 3 years to pay off and only $269.39 interest

Credit Card Smarts

You know you’re in trouble when you... 1. Are borrowed to the max

2. Owe more every month

3. Barely make the minimum payment

4. Use credit cards for groceries and clothing

5. Get cash advances to make payments

6. Spend more than 15% of monthly income on credit card payments

Credit Card Help

Contact family, financial aid office, consumer credit counselors

Cut expenses Pay off highest interest rate cards first Work out new repayment schedule Consolidate for a lower interest rate Rebuild credit rating – pay on time Check your credit rating www.nfcc.org National Foundation

for Credit Counseling

Debit Cards

Alternative to credit cards Replaces check writing Doesn’t replace balancing account Register all deposits and withdrawals Fees 24 hour access Online banking

When borrowing, Compare the Costs Immediate Repayment

– Begin to attack the debt; less costs Deferred payments

– Interest accrues; more costs Interest

– Capitalized; more costs– Interest only payments – less costs

Finance charges – variable costs– Dependent on a borrower’s risk factor– Dependent on the type of borrowing

• Unsecured loans vs secured loans

UNIQUE decisions and determined by your lifestyle

Budget Tips: Stop and take a lookBudgeting correctly will ensure good credit ratings which

makes debt more affordable

First: Determine how much you have to spend Second: List all your expenses

– Estimate how much you spend on each item– Determine Needs vs Wants

Third: Examine the difference– Set some goals

If expenses exceed income 2 options:

– Increase income, or– Cut expenses

Top 3 Causes of Budget Failure1. Negative Attitude

* If you think of budgeting in negative terms (diet; handcuffs) you are sure to fail

2. Lack of Motivation* Are you doing it for someone else like a nagging relative or a repayment plan set up by a consumer counseling agency

3. Unrealistic Expectations* Setting up a budget will reveal large caches of hidden cash!!

You WILL see steady, measurable progress toward goals that really matter to you .

6 Reasons Why Budgeting Can Improve Your Life

A budget…

1. Let’s you control your money instead of your money controlling you.

2. Tells you if you are living within your means.

3. Helps you meet your savings goals.

4. Helps you prepare for emergencies or large unanticipated expenses.

5. Can improve family and personal relationship – reduces those money conflicts.

6. Helps you sleep better at night – eliminates lying awake worrying about how you’re going to make ends meet.

Cutting Expenses

– Log and track ALL expenses for a month– Reduce variable expenses: clothing, entertainment, eating out– Avoid impulse purchases and peer pressure– Pay bills on time to avoid extra finance or late fees

• Pay above the minimum

– Plan a social budget– Cook or use cafeteria meal plan– Make a list before shopping – and stick to it

• Use coupons, try generic brands

– Watch ATM and checking fees – don’t abuse!– Used books instead of new– Walk, ride share, use public transportation– Email instead of long distance

• Beware of over the limit cell phone usage

Checking Accounts Safer than carrying cash

– Avoids impulse buying with ‘pocket money” Questions to ask when opening an account:

– Is there ATM fees? Do I need a branch or can I use internet?

– What is the monthly service charge?

– Does it pay interest – is there minimum balances?

– Is there a charge or limit on writing checks?

– How much does it cost to print checks?

– What is the fee for a bounced check?

– How much does overdraft protection cost?

– What other fees might be charged? Don’t assume ATM balances are correct

– Checks may not have cleared

– Keep receipts and write amounts in your register

Savings AccountsMake money work for you

Get in the habit of saving! Questions to ask:

– Are there monthly fees for small balances– Is there a minimum balance– Can your check & savings balances be combined to meet minimum

balance requirements or earn interest Tips to save:

– Pay yourself first – put $ aside before spending– Keep loose change in a jar – and deposit it– Deposit monetary gifts from family– Think ‘do I need that’ if not, deposit the money

• Deposit anyway and then see….

Investments

Earn more on your money = higher risk– Ie: Savings –> 3%, Mutual Funds –> 10%

Long term investments add up– Compounded interest– Reinvest earnings– Example: $78.01/month at 18 years old (2.30/day)

• Earn 10% monthly, compounded monthly • = 1 Million dollars at age 65

Do research, visit websites

What I did with my money$4.13 Starbucks Grande Pumpkin Spice Latte $4.25 with tip x 5 days/week = $21.25/week

= $85.00 per month = 1,020.00 per year!!

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Set aside just $5 a day--maybe by not eating out--and it will grow to about $22,400 in 10 years at 4% interest, compounded monthly

SOURCE: Bankrate.com

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Deposit $100. / month for 40 years (from age 18) into an IRA account at a 6.9% investment return = $250,000 at age 58.

SOURCE: FundAdvise.com

Organize Your Documents

“Bills to be paid”“Documents to be filed”Use a calendar & write ‘due dates’

FoldersFoldersFoldersFolders

Passport, birth certificate, SSN card Credit card and Student LoansCredit Report Information

FileFileFileFile

Filing SystemFiling SystemFiling SystemFiling System Use desk and file cabinetSet up folder system

Avoid ID Theft

Know what your credit reports say Keep track of bills and mail Be aware of surroundings Don’t give out sensitive information unless

justified Don’t leave receipts and personal info

unattended

Goals

Create a budget and monitor your expenses

Keep more of your money– Savings; less spending; control cash

Work toward better interest rates– Higher credit scores = lower rates

Use common sense– Respond, don’t react

THANKS !

Comments/Questions

Chasewww.ChaseStudentLoans.comwww.ChaseSelectLoans.comwww.ChasePrivateLoans.com