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1 Welcome! Please Sign in and Fill out the forms: AARP Participant Agreement Student Information/Pre-Assessment 1

2 Sponsored by and developed in collaboration with AARP FOUNDATION FINANCES 50+ TAKING CONTROL OF CREDIT AND DEBT The information provided here is for informational purposes only, and should not be considered an individualized recommendation or personalized investment advice. Copyright 2014 by AARP Foundation. All rights reserved.

3 Taking Control of Credit and Debt Presented by Gerry Homovec, Certified Educator in Personal Finance (CEPF) instructor at the 2014 NC Workforce Development Partnership Conference 3

4 Overview Assess your credit and debt situation Learn how to improve your credit and pay down your debt Learn to read your credit report Understand the difference between good debt and bad debt Receive action plan worksheets and list of resources 4

5 Credit & Debt Go Hand in Hand Debt is an amount you owe Debt can influence your credit score. If the amount you owe is close to your credit limit it will probably hurt your score. People with lower credit scores face higher interest rates on credit cards and loans. Your credit score can influence how your debt grows. Credit is a form of trust. 5

6 Marjorie s Net Worth Assets Value Liabilities Value Home $185,000 Mortgage at 6% interest (APR or annual percentage rate see page 128) Car 6,000 Student loan balance at 5% interest (APR) Savings account 1,000 Car loan at 6% interest (APR) Furnishings 4,000 Credit card 1 at 18% interest (APR) Credit card 2 at 16% interest (APR) maxed out Credit card 3 at 20% interest (APR) maxed out $155,000 5,000 4,000 7,000 2,000 2,000 TOTAL $196,000 TOTAL $175,000 Net worth (assets minus liabilities) $196,000 - $175,000 = $21,000 6

7 Marjorie s Monthly Budget Inflow Value Outflow Value Marjorie take-home pay $1,400 Mortgage $960 Rachel take-home pay 1,100 Property taxes 200 Utilities 200 Groceries 200 Auto Loan 150 Other car expenses 100 Student loan 55 Total minimum credit card payments 275 Medical bills 50 Clothing 50 Entertainment 50 Eating Out 175 Miscellaneous 35 Total $2,500 Total $2,500 7

8 Good Debt: Good Debt vs. Bad Debt Carries a lower interest rate Can help you build assets May be tax deductible Bad Debt: Usually carries the highest interest rates Can be the most costly over time Means you re borrowing to own something that loses value over time 8

9 Example: Cost of Credit Card Debt Credit Card Info. Current Balance $ 2,000 $ 2,000 Interest Rate (APR) 17.5% 17.5% Monthly Charges $ 0 $ 0 Annual Fee $ 0 $ 0 Current Payment $ 45/month $ 72 / month Time to Pay Off??? months??? months Total Cost (Interest + Principal) $???? $???? 9

10 Example: Cost of Credit Card Debt Credit Card Info. Current Balance $ 2,000 $ 2,000 Interest Rate (APR) 17.5% 17.5% Monthly Charges $ 0 $ 0 Annual Fee $ 0 $ 0 Current Payment $ 45/month $ 72 / month Time to Pay Off 72 months 36 months Total Cost (Interest + Principal) $ 3, 247 $ 2,583 Sources: credit card payoff calculators from AARP.org and 10

11 Understanding Credit Card Terms See page 110 Sample Credit Card Disclosure Box See page 113 Sample Credit Card Statement Annual Percentage Rate (APR) Cash Advance APR and Penalty APR Fees: annual fee, finance charges, and other fees Due dates, grace period Most credit cards have no grace period for cash advances 11

12 Credit Cards Dos and Don'ts DO shop around for the right card. Look for low interest rates and no annual fee. Always read and understand the fine print DO keep track of every credit card purchase each month. Review your statements to make sure they are correct DO know the minimum finance charge when you carry a balance. 12

13 Credit Cards Dos and Don ts DON T carry a balance if you can avoid it DON T pay bills late. Late fees are expensive, accrue interest, and can harm your credit rating. Spend only what you can afford or less DON T use a credit card for purchases less than $10. Small purchases add up fast. Use cash instead 13

14 Five Questions to Ask Yourself Before Paying with a Credit Card Do I really need what I m buying? Can I pay for this when the bill comes? Will I be happy paying for this on credit after the item is gone or the experience is over? What will it cost if I don t pay in full? Can I afford the monthly payments? 14

15 Marjorie s Debt Grows Housing costs close to 50% of income Only $1,000 in emergency fund Pays only minimum on credit cards; debt is growing Expenses = income; no regular savings Needs to replace washing machine Gets and maxes out new credit card $1,500 at 18% Expenses now > income! 15

16 Reducing Credit Card Debt Review your statement: see what you re really paying Review your budget & net worth. Calculate how much you can pay down your existing balance each month Make a plan and prioritize which cards to pay off first. Commit to a payoff schedule. Make savings part of your budget. Stop using your credit cards. 16

17 Your Credit Report & Credit Score Your credit report is the history of how you have paid your obligations: current balances on outstanding debts amount of available credit public records inquiries Your credit score is a number that helps lenders determine how likely you are to make your payments on time. It is a summary of your credit risk. 17

18 Did you know? is the ONLY federally authorized site to get free credit reports. By law, each of the 3 main credit reporting agencies is required to provide you with your credit report free once a year. To stay up to date year-round, consider requesting a free report from each agency every 4 months on a rotating basis. 18

19 How to Improve Your Credit Score 1. Pay your bills on time 2. Keep your credit balances low 19

20 Marjorie s Debt is Now a Problem Expenses > income Puts borrowing to buy a newer car on hold Breaks her leg and owes $4,000 out-of-pocket Feels overwhelmed! Were there any debt warning signs for Marjorie? What can she do now? 20

21 Debt Warning or on the Right Track? Debt Warning Signs Using credit cards with a balance on them Using 2 nd credit card after maxing out 1 st card Not sure you can pay the bill when it arrives Buying more of/better model than you can afford Signs You re on the Right Track Keep # of cards to a minimum Have a clear plan to pay your debt off Balances go down each month Buy the same way as if you used cash 21

22 Taking Charge If a debt collector calls, know your rights. Ask your creditors for more favorable lending terms: lower finance charges and/or a lower minimum monthly payment Avoid debt relief or debt settlement companies, or services that claim they can eliminate debt or fix a credit score. Debt consolidation is an option if handled by a reputable organization such as a nonprofit with financial expertise. 22

23 Key Takeaways I understand how to compare credit cards to find what s best for me, how to read a credit card statement, and how to obtain and read my credit report. I know what my debts are. I understand better how to manage my debt and how to reduce debt. I understand I have options when a credit/debt issue arises. 23

24 Next Steps Action Plan (Turn to page 75) Resources (Turn to page 103) 24

25 Content adapted from AARP Foundation Finances 50+, a financial capability program sponsored by and developed in collaboration with Charles Schwab Foundation. More information at 25

26 Want a Finances 50+ Class in Your Area of North Carolina? For anywhere in NC Suzanne LaFollette-Black, AARP-NC Associate State Director, sblack@aarp.org For anywhere in Wake, Durham or Orange County Gerry Homovec, CESI Outreach Coordinator, ghomovec@cesisolutions.org 26

27 Thank You! In God we trust; all others must pay cash. - American Proverb Please Complete and Turn In Evaluations Post-assessments AARP Participant Agreements 27