Personal Finance &

The Cost of Consumer Credit

John M. Beckem II, PhDRalph A. Armenta, MBA, MS Finance

SUNY/ESC CDL Conference April 30, 2011

Where should your money go first?

#1 Contribute to Company Retirement Plan up to the Maximum Match

Some employers offer to match a percentage of your contributions to a 401(k) or similar plan.

Why go for the match?You’re getting paid to save

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#2 Pay off nondeductible, high-interest rate debt

Paying off your debt will make it much easier to reach your savings goals. Solvency is the road to financial freedom

How to pay down your debt - Create a budget to identify nonessential expenses that you can cut back on. - Make more than the minimum payment on your balance. - Start with the card or loan that charges the highest interest rate. - Try negotiating with credit card companies for a lower interest rate. - Consider paying off your debt with a home equity loan. -

#3 Create an emergency fund to prepare for the unexpected

To keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency fund to cover at least six to eight months of essential living expenses like rent, mortgage, utilities, food and transportation.

Keep emergency money in an account that is easy to access

- Savings or Checking Account- Money Market Account- Home Equity Line of Credit

#5 Start saving early for a child’s education If you have children in the family, one of your goals is probably to set aside funds for their education.

529 College Savings Plan Money can be withdrawn tax-free to pay for college expenses like tuition, books, supplies and in some cases room, board and computers.

Coverdell Education Savings Account- May be used for qualified elementary, secondary and college education expenses. 

- You can put away $2,000 each year per child (if eligible). 

- Potential earnings grow tax-free, and distributions for qualified expenses are free of federal income taxes. - Income limits apply.

#6 Saving for a house

Choices to consider for down payment savings

Short-term CDs Choose a CD that matures when you plan to buy your house. CDs are FDIC insured.

Money Market Funds Choose these funds when you start shopping for a house and want quick access to your money. Not FDIC insured.

Short-term bonds Choose bonds that come due when you’rready to buy or funds containing high-quality bonds (“A” or better credit rating).

Treasury Bills Choose a maturity that matches your plans. Values fluctuate prior to maturity. Backed by the US Treasury.

#7 Pay down tax-deductible, high-interest rate debt

Reducing high-interest-rate debt—even if it’s a tax-deductible mortgage, home equity line of credit or student loan—can enhance your ability to save. Refinancing considerations

- If interest rates have fallen since you took out your mortgage,refinancing could lower monthly payments in the near term and saveyou money over time.

- Be sure to factor in any transaction and closing costs that may be included in refinancing.

The Cost of Consumer Credit

Credit Score & Personal Finance

• Understand & Improve Your FICO & Credit Score Reports• What Affects Your FICO Score?

• Credit types

• Homeownership

• Length of credit history

• How do you use credit

• Negative credit events

Consumer Credit Costs

Type Term 2006 2007 2008 2009 2010 Feb-’11

New car Interest Rates

48 mnths

7.72 7.77 7.02 6.20 6.21 5.86

Personal Credit Cards

24 mnths

12.41 12.38 11.37 11.1 10.87 11.01

Loan-to-Value

(%)

94 95 91 90 86 80

Amount Financed

($)

26,220 28,287 28,178 28,272 27,759 26,673

Source: Federal Reserve

Federal Reserve

• The size of the total consumer debt grew nearly five times in size from 1980 ($355 billion) to 2001 ($1.7 trillion). Consumer debt in 2010 now stands at $2.4 trillion.

• The average household in 2010 carried nearly $6,500 in credit card debt.

• As of the twelve months ending June 2006, there were 1.5 million consumer bankruptcy filings, including 1.1 million Chapter 7 filings, 0.1 million filings for Chapter 11 and 0.3 million Chapter 13 bankruptcies.

Consumer Loan Rates

• New Car financing rates declined by almost 200 bps between ‘06 & Feb

’11

• During the same period personal credit card rates declined by 140 bps.

Source: Federal Reserve

• Amounts Financed decrease over 7% between 2007 and 2008.

• Beginning in 2008 during the Credit/Liquidity Crisis the amounts financed approximately 6%.

• More telling is from 2006 to current the loan-to-values adjusted down to 80% from a high of 94%. “Skin-in-the-Game”

Source: Federal Reserve

Credit & the Undergraduate Students

• In each school year between 2000–2001 and 2006–2007, an estimated 60% of bachelor’s degree recipients borrowed to fund their education. Average debt per borrower rose 18%, from $19,300 to $22,700 over this time period. Average debt per bachelor’s degree recipient increased from $10,600 to $12,400. (Source: The College Board, Trends in Student Aid, 2008)

•In 2008, 84% of undergraduates had at least one credit card, up from 76% in 2004. The average number of cards has grown to 4.6 per student, and half of college students had four or more cards.(Source: Sallie Mae, How Undergraduate Students Use Credit Cards, 2009)

• Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004's $946 to $1,645. 21% of undergraduates had balances of between $3,000 and $7,000, also up from the last study.(Source: Sallie Mae, How Undergraduate Students Use Credit Cards, 2009)

Epidemic Debt

Roughly 2.0 to 2.5 million Americans seek the help of a credit counselor each year, mostly to avoid bankruptcy.

From 1990 to 2000, the number of Americans seeking the help of a credit counselor doubled.

In two thirds of the counseling cases, the individual is referred to a household budget counselor, financial advisor or a social worker.

Many individuals experiencing financial difficulties have experienced a job loss, an interruption to their income due to illness, or a divorce / separation.

Nearly 75% of those seeking help from a credit counselor held a credit card.

The average client seeking the help of a counselor had $43,000 in debt, of which $20,000 was consumer debt and $8,500 was revolving debt.

QUESTIONS

or

COMMENTS?

John M. Beckem II, PhDRalph A. Armenta, MBA, MS Finance

SUNY/ESC CDL ConferenceApril 30, 2011