aarp foundation finances 50+ part 2_final_llos

AARP FOUNDATION FINANCES 50+Sponsored by and developed in collaboration with

PART 2 – TAKING CONTROL OF CREDIT AND DEBT

Overview

• Know how to find your interest rate and fees on your credit card statement

• Know how to obtain and read your credit report

• Understand what your debts are and some ways to manage them

• Understand your options in a debt crisis

2 Part 2

Introductions

3

• What interested you about this program?

• What is one thing you hope to understand better after this workshop?

• What would make you consider this session time well spent?

Part 1

Marjorie’s Net Worth

4 Part 2

Assets Value Liabilities Value

Home $185,000 Mortgage at 6% interest (APR or annual percentage rate – see page 128)

$155,000

Car 6,000 Student loan balance at 5% interest (APR)

5,000

Savings account 1,000 Car loan at 6% interest (APR) 4,000

Furnishings 4,000 Credit card 1 at 18% interest (APR)

7,000

Credit card 2 at 16% interest (APR) – maxed out

2,000

Credit card 3 at 20% interest (APR) maxed out

2,000

TOTAL $196,000 TOTAL $175,000

Net worth (assets minus liabilities) $196,000 - $175,000 = $21,000

Monthly Budget

5 Part 2

Inflow Value Outflow ValueMarjorie 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

Credit & Debt Go Hand in Hand

6 Part 2

Good Debt vs. Bad DebtGood 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

7 Part 2

Understanding Credit Card Terms• Annual Percentage Rate (APR) for purchases:

Tells you your interest rate and, if there’s an introductory rate, when and how much it will go up.

• APR for Cash Advances and Penalty APR: These rates are higher than your usual interest rate. This means it’s expensive to use your credit card to get a cash advance, and you get charged extra for paying late or going over your credit limit.

8 Part 2

Understanding Credit Card Terms• Fees: Your annual fee, finance charges, and any

other fees, such as penalties for late payments or exceeding your credit limit.

• Due dates: When payments are due, and the grace period for payments. The grace period is the amount of time before interest is charged on your current purchases (usually 21 days before your bill is due). Most credit cards have no grace period for cash advances.

9 Part 2

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.

Part 210

Credit Cards Dos and Don'ts• DO know the minimum finance charge when you

carry a balance.

• DO make sure you know what incentives or features you’re signing up for, such as rebates or cash back on purchases, frequent flyer miles, or car rental or travel insurance.

Part 211

Credit Cards Dos and Don’ts• DON’T carry a balance if you can avoid it. It’s best

to pay off the entire balance before the end of the grace period so you don’t have to pay interest.

• DON’T pay bills late. Late fees are expensive and, over time, they accrue interest. They can also harm your credit rating. Spend only as much as you can afford—or less.

Part 212

Credit Cards Dos and Don’ts

• DON’T use a credit card for purchases less than $10. These small purchases can add up fast. Use cash instead.

• DON’T pay for any extras you don’t want or need.

Part 213

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?

Part 214

Reducing Credit Card Debt1. Review your statement to see what you’re really

paying.2. Review your budget & net worth to see where you

stand. Figure out how much you can devote to paying down your existing balance each month.

3. Stop using your credit cards.4. Make a plan and prioritize which cards to pay off

first.5. Commit to a payoff schedule.6. Make savings part of your budget.

Part 215

Your Credit Report & Credit Score• Your credit report is the history of how you have

paid your obligations. It also includes current balances on outstanding debts, the amount of available credit you have, public records, and inquiries about your credit from various companies.

• 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.

Part 216

Did you know?

17

• www.annualcreditreport.com 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.

Part 1

The 2 Best Things You Can Do To Improve Your Credit Score

Part 218

1. Pay your bills on time2. Keep your credit balances low.

Taking Charge• 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.

19 Part 2

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.

Part 220

Next Steps

21

• Action Plan (Turn to page 75)

• Money Mentors (Visit aarp.org/finances50plus or send an email to finances50plus@aarp.org for more information)

• http://www.aarp.org/finances50plus

• Resources (Turn to page 103)

Part 2

Thank You!

22

• “In God we trust; all others must pay cash.” - American Proverb

Part 2