# Presentation: 182547

##  C.A.R.E.

**Credit Abuse Resistance Education**
** **
**A program of:**
**U.S. Bankruptcy Courts  of West Virginia**
**The West Virginia State Bar**
**The WV Bankruptcy Law Committee**

## Slide 2

## Credit Card Issuer

- Uneducated
- consumer

## Presentation Overview

**Different card types**
**Using cards wisely**
**Choosing best card for you**
**Your credit rating**
**Consequences of credit abuse**
**Avoiding credit problems **

- BEWARE!

## Credit Education Badly Needed

**68% teens report never discussing responsible credit card use with any family member**
**31% teens, 18-19, have credit card in own name**
**71% of young adult card holders revolve their balances compared to 55% of all cardholders**

## Why Do We Need This Discussion?

**People under age 25 are one of the fastest growing group of bankruptcy filers**
**One out of five young adult households are in debt hardship (over 40% of income goes to debt payments each month)**
**In last decade, youngest adults (18-24) saw credit card debt increase 104%**
**Graduating college students average $20,402 of debt-- $3,262 on credit cards**

## What is Credit?

**Credit is the ability to borrow money**
**Borrowing is the creation of debt**
**Debt is what you owe**

## Make the Credit-Money Connection

**When you pay by credit card, you still have to pay for the purchase with “real” money.**
**If you cannot afford to buy something with cash, you likely can’t afford it using credit.**
**Using credit  means paying for today’s purchases with tomorrow’s income.**

## Reasons for Having a Credit Card

**Emergencies**
**Establish a credit history**
**Identification**
**Safety**
**Large purchases (necessities)**
**Facilitate other transactions**

## Types of Cards

**Debit Cards**
**When used, money is drawn directly from your bank account, just like writing a check**
**Beware: If there is no money in the account, you can still become overdrawn and incur penalties.**
**Debit cards do not extend credit**

## Charge Cards
Issued by retail stores to be used exclusively at that particular store (such as Macy’s, Best Buy or Sears)
If a balance is carried from month to month, the interest rate is usually higher than other card issuers

**Issued by retail stores to be used exclusively at that particular store (such as Macy’s, Best Buy or Sears)**
**If a balance is carried from month to month, the interest rate is usually higher than other card issuers**

**Types of Cards**

## Types of Cards

**Credit Cards**
**Involves the extension of credit by the card issuer**
**Credit cards are accepted at almost any store**
**If a balance is carried from month to month, interest rates are set forth in the cardholder agreement****   **

## Choosing a Card

**Annual Fee**
**Interest Rate**
**    **--Introductory
-     --Balances v. Cash Advances
-     --Fixed v. Variable
-     --Default Interest
**Grace Period**
**Method of Computation**
**Rewards**

## What is Interest?

**Interest is the amount that a lender charges to borrow money**
**The higher the interest rate, the more money you pay**
**Interest rates vary from company to company**
**18% - current avg. starting interest rate for students and young adults**

## Costly to Maintain a Balance

**The average American consumer has over $10,000  in credit card debt**
**At an average of 14%, they pay $117 a month in interest alone**
**If they could invest that $117 every month of their work life, it would grow to $307,103  (7% return)**

## Making the Minimum Payment

**Sometimes people think they are handling their debt by making the **_***minimum***_** payment**

## The Minimum Payment vs. a Fixed Minimum Payment

- There is a BIG difference between making the _*Minimum*_ Payment each month versus (4% of the principal balance) making a Fixed Minimum Payment each month (a fixed set amount, for example $300).

## The Minimum Payment

**For many years it was 2% of the balance.  On most cards that was just 1⁄2% (.5%) going toward principal with the rest paying the interest owed.  It seemed like you were paying **_**forever**_**.**
**Now a **_***minimum***_** payment is 4% of the balance, which makes the **_***minimum***_** payment higher (double) but balance goes down faster.  Now it only takes **_**almost forever**_**.**

## Paying the Minimum on $2000with a 31% Interest Rate

| Amount
Paid |  |  | Minimum of 4% of balance
(not below $10) |
| --- | --- | --- | --- |
| Years to 
Pay Off |  |  | 
15.6 |
| Total Interest Paid | 
 |  | 
$3,348.15 |
| Total Purchase Cost
 | 

 |  | 

$5,348.15 |

## Paying the Minimum on $2000with a 18% Interest Rate

| Amount
Paid |  |  | Minimum of 4% of balance
(not below $10) |
| --- | --- | --- | --- |
| Years to 
Pay Off |  |  | 
9.5 |
| Total Interest Paid | 
 |  | 
$1,115.69 |
| Total Purchase Cost
 | 

 |  | 

$3,115.69 |

## Paying the Minimum vs. Paying a Fixed Minimum

**On $2000 at 18% paying **
**the **_***Minimum***_**    **
**(4% of  the balance) **
**         **
** ****It will take ****15.6 years**** (187 months) at a total cost of ****$3,115.69****  (including ****$1,115.69**** in interest) **

**On $2000 at 18% paying **
**a***** *****Fixed Minimum of $80 per month **
**       **
** ****It will take ****2.6 years**** (31 months) at a total cost of ****$2477.99****  (including **
**$477.99**** in interest) **

## Cash Vs. Credit

|  | Store A | Store B | Store C |
| --- | --- | --- | --- |
| Cash Price | $379 | $388 | $410 |
| APR | 27% | 13% |  |
| Number of Monthly Pmts. | 12 | 12 |  |
| Monthly Pmt. | $36.25 | $35.00 |  |
| Finance Charge | $56.00 | $32.00 |  |
| Amount Repaid | $435 | $420 | $410 |

## Comparing Loans

|  | Lender 1
Credit Union | Lender 2
Dealership | Lender 3
Bank |
| --- | --- | --- | --- |
| Amount of Loan | $5,000 | $5,000 | $5,000 |
| Monthly Pmt. | $226.14 | $161.34 | $131.67 |
| Number of Pmts. | 24 | 36 | 48 |
| Total Repaid | $5427.27 | $5808.09 | $6,320.12 |
| Finance Charge | $427.27 | $808.09 | $1320.12 |
| APR | 8.0% | 10% | 12% |

## Your Credit Report

**Not everyone has a credit report**
**Getting started can be a Catch 22**
**Found at three national credit reporting agencies**
**Limitation of who can see your credit report**

**Contains extensive information**
**Negative info can result in credit denial or higher interest charge**
**Negative info reported for 7 years; bankruptcy for 10 years**

## What is so importantabout Good Credit?

**Your history of payments, employment, and salary makes you a good candidate for a loan**
**You can get a better interest rate – lower payments**
**You will be viewed as financially trustworthy – better loan terms**
**May help you rent an apartment and obtain employment – most landlords and prospective employers will look at your credit report**

## Consequences of Credit Abuse

**Make it impossible to complete degree**
**Denial of employment**
**Denial of credit**
**Higher interest rates**
**Bad credit rating**

**Higher insurance rates**
**Denial of a lease**
**Denial of student loans**
**Emotional stress**
**Bankruptcy**
**Divorce/family problems**

**Notes:**
Ake it imposs

## Seven Steps to AvoidCredit Abuse

**Step # 1**
**Distinguish between needs and wants**

## Avoid Credit Abuse

**Step # 2**
**Have only one credit card**

**To Further Control Your Credit Use:**** Opt for a low credit limit on your one card**

## Avoid Credit Abuse

**Step # 3**
**Pay off your balance **
**each month**

**A Good Way to Do This:**
**Don’t charge anything unless **
**there is already money in the **
**bank to pay for it.**

##  Avoid Credit Abuse

**Step # 4**
**Never make only *****the***** minimum payment**

## Avoid Credit Abuse

**Step # 5**
**If you must carry a balance**
**monitor it each month**

## Avoid Credit Abuse

**Step # 6**
**Make a monthly budget and follow it**

**Think of it as your**
**“****Personal Financial Survival Guide”**

## What is a Budget?

_**INCOME**_
**  ****Gross wages****	****  $2,000**
**  ****Payroll deductions**** **_**(400)**_
**  ****Net monthly pay****	****  $1,600**

_**EXPENSES**_*****
**Rent****	****	****	****$   480**
**Utilities****	****	****     120**
**Food****	****	****	****     240**
**Transportation****	****     160**
**Installment Payments    360****	****      **
**Insurance           ****	****     120**
**Clothing****	****	****       20**
**Laundry****	****	****       20**
**Recreation                         40**
**Misc. Expenses****	****       **_**40**_
**Total Expenses****	****$1,600**

- A conscious plan to account for your money.
-  Pay needs first, wants second.

- *This budget does not include cost of medical deductible or co-pay;
- day care; student loans; or revolving debt (credit card interest) payments.

## Avoid Credit Abuse

**Step # 7**
**Use cash or a debit card whenever possible**

**Two Personal Rules**

**Don’t use a credit card for any **
**purchase less than $10**

**If you can eat it or drink it, **
**don’t charge it**

## Hours of Work to Pay Interest on $1000 Debt

| Wage | 12% | 15% | 16% | 17% | 18% | 19% | 20% | 21% |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| $  5.50 | 22 | 27 | 29 | 31 | 33 | 35 | 36 | 38 |
| $  6.00 | 20 | 25 | 27 | 28 | 30 | 32 | 33 | 35 |
| $  6.50 | 18 | 23 | 25 | 26 | 28 | 29 | 31 | 32 |
| $  7.00 | 17 | 21 | 23 | 24 | 26 | 27 | 29 | 30 |
| $  7.50 | 16 | 20 | 21 | 23 | 24 | 25 | 27 | 28 |
| $  8.00 | 15 | 19 | 20 | 21 | 23 | 24 | 25 | 26 |
| $  8.50 | 14 | 18 | 19 | 20 | 21 | 22 | 24 | 25 |
| $  9.00 | 13 | 17 | 18 | 19 | 20 | 21 | 22 | 23 |
| $  9.50 | 13 | 16 | 17 | 18 | 19 | 20 | 21 | 22 |
| $10.00 | 12 | 15 | 16 | 17 | 18 | 19 | 20 | 21 |

**Interest Rate**

## Simple Rules to Remember

**Have a budget and live within it**
**Don’t have more than one credit card**
**Shop around and get the best deal**
**If you can eat it, drink it, or it costs less than $10, don’t charge it**
**Use a debit card, check or cash whenever possible**
**Pay off the balance every month**
**Never make just a minimum payment**
**Understand the difference between needs     and wants**
**SAVE!!!!!**

## How Much Could I Save?

**	****If you take $2,000 and invest it together with $38.45 every week  ($2,000/year) until age 60, at  a 7% return, you have.......**** **

## $470,074.22

**	****And if the same investment**
**made 10% interest, you**
**would have.......**

**	**

**$1.16 Million!!!**