debt know how

Debt Know HowA Debt Education Program

created by

MasterCard in partnership with the

University of Minnesota Extension Service

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Welcome to Debt Know How

• Resource to help consumers get out of debt

Includes:

• Website – www.debtknowhow.com

• Debt education workshops

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Workshop Goal

Participants will:

• Increase knowledge about debt issues

• Assess personal debt

• Develop action plan to pay off debt and improve credit score

Debt Overview

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Debt in America

• Consumer spending accounts for more than two-thirds of total economic activity (FDIC)

• Approximately 45% of Americans carry no outstanding balance on their credit cards (Staff Working Paper, Federal Reserve 2004)

• 1 in 20 American households are in high debt (MSN Money)

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Debt in America

• Consumer credit comes from mortgage debt, home equity loans and credit cards

• Consumer debt was $9.8 trillion in 2004

• Almost 80% from residential mortgages

• About 8% comprised of credit card debt

Source: The Nilson Report

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Common Reasons for Getting into Debt

• Loss of job

• Divorce

• Medical crisis

• Overspending

• Unexpected home or car expenses

• Bad money advice or fraud

Debt Warning Signs Quiz

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How Did You Score?

Total Points from Debt Warning Signs Quiz

• 0 - Congratulations

• 1 - 4 Pay attention to early warning signs

• 5 - 10 Already deep in debt

Assess Your Finances

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How Much Money Do You Earn?

Calculate Total Monthly Income

• Salary & wages

• Tips

• Commissions

• Bonuses

• Interest/dividends

• Veteran’s benefits

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Where Does Your Money Go?

Calculate Total Monthly Expenses• Housing • Savings & set–aside funds• Food• Health care & insurances• Transportation• Personal• Debt payments & fees• Recreation & entertainment• Past due bills & debts

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Where Does Your Money Go?

Subtract Total Expenses from Total Income

to get Total Monthly Cash Flow

Total Monthly Income + _____

Total Monthly Expenses - _____

Monthly Cash Flow = _____

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Assess Your Finances

Tips

• Positive cash flow means it’s working

• Negative cash flow means spend less

• Use your budget to make changes

• Track spending

• Find money

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Measure Your Debt

Calculate Total Monthly Non-Mortgage Debt:

• Credit cards

• Home equity loan

• Store cards

• Vehicle loan

• Family loan

• Past due debt

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Measure Your Debt

www.debtknowhow.com: Budget calculator will help individuals tailor information to best suit their needs

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Measure Your Debt

Calculate Debt Payments-to-Income Ratio:

• 20 % or higher – take action to pay down debt

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Measure Your Debt

Example:

$1,105

$5,275 = 21% Debt-to-Income Ratio

Debt Payments-to-Income Ratio =Monthly Debt PaymentsMonthly Take-Home Pay

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Measure Your Debt

www.debtknowhow.com: Understanding your debt-to-income ratio is crucial to determining the correct path out of debt

Improve Your Credit Score

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Credit History

• Positive credit history leads to opportunities

• Problems with credit leads people to action

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Credit History and Score

• Credit reporting bureaus maintain files on borrowers

• Experian, Equifax, and Trans Union

– major credit reporting bureaus

• Lenders use the information when making credit decisions

• Order your credit report each year

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Request Your Credit Report

To order your credit report:

on-line

www.annualcreditreport.com

or call

1-877-322-8228

or write

Annual Credit Report Request Service

P. O. Box 105281

Atlanta, GA 30348-5281

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Access to Your Credit Report

You are entitled to free credit reports at any time if:

• Denied credit or employment

• Victim of fraud

• Receiving welfare benefits

• Unemployed and looking for work

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What’s in Your Report?

Personal Identifying InformationYour Name Social Security #: 123-45-6789

123 Current Address Date of Birth: February 1, 1960

City, State 00000

Previous Address(es)

456 Former Rd., Somewhere, ST 11111

P.O. Box xxxx, Anywhere, ST 22222

Last Reported Employment: Account Manager, Any Co.

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Public Record Information & Collections

Lien Filed 03/03; Good CTY; Case or ID #4321; Amount $26000; Class – State; Released 07/03; Verified 07/03

Bankruptcy Filed 12/02; Northern District Ct; Case or ID #55HC44; Liabilities - $16000; Personal; Individual; Discharged; Assets- $800

Collection Reported 05/96; Assigned 09/94 to Oldcoll (800)xxx-xxxx Client – ABC Hospital; Amount-$1010; Unpaid; Balance $1010; Date of Last Activity 09/94; Individual Account; Account #2345

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Credit Account InformationCompany Name Account

NumberWhose

AccountDate

OpenedMonths

ReviewedDate of

Last Activity

High Credit

Terms Items as of date reported Date Reported

Balance Past Due

Status

DepartmentStore

32514 J 10/86 36 9/97 $950 $0 R1 10/97

Bank 1004735 A 11/86 24 5/97 $750 $0 I1 4/97

Oil Company 541125 A 6/86 12 3/97 $500 $0 O1 4/97

Auto Finance 529778 I 5/85 48 12/96 $1100 $50 $300 $200 I5 7/97

Previous Payment History: 3 times 30 days late; 4 times 60 days late; 2 times 90+ days latePrevious Status: 01/97 – I2; 02/97 – I3; 03/97 – I4

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Inquiries Home Mortgage 10/10/01 Real estate loan $214,000

10 Oak Lane for state bank with 30 yr. term.

Any, MN 22222 scheduled until 10/2003

07/29/98 XYZ BankCard

04/12/97 GHG Department Store

02/24/00 Department Store

05/02/00 Mortgage

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Dispute Errors

1. Make a copy of your credit report and mark items you suspect are incorrect.

2. Write a letter to the reporting agency and explain the disputed items.

3. Request an investigation and send copies of supporting documents.

4. Tell the creditor in writing that you dispute an item.

5. Keep copies of all correspondence.

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Credit Scoring

• Credit score is an evaluation of a person’s credit worthiness

• Credit scores change overtime

• Scores range from about 350 to more than 800

• Lenders use scores plus other information

• Most well known score is FICO (Fair Isaac Corporation.)

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Base for Credit Scores

• Payment history - 35%

• Amounts owed - 30%

• Length of credit history - 15%

• Taking on more debt - 10%

• Types of credit used - 10%

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Tips to Improve Your Score

• Pay bills on time

• Missed a payment? Get current and stay current

• Keep balances low on credit cards and other revolving credit

• Pay off debt rather than move it around

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Tips to Improve Your Score

• Don’t close unused credit cards as a short term strategy

• Don’t open unnecessary lines of credit

• Shop for rates within a focused time (ex. auto loan, home equity loan)

• It’s okay to request and check your own score

Action Plan

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Pay Off Your DebtTake Action Now

• Assess the problem

• Set a goal

• Generate new income

• Create your plan

• Track spending

• Save on interest and late fees

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• Choose a method to pay off debt

• Contact creditors

• Consider a loan consolidation

• Seek help if overwhelmed

• Bankruptcy

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• Assess the problem

– Determine why you are in debt

– Curb spending

– Determine amount of debt accumulated

• Set a goal

– Set smaller goals

– Keep motivated

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Debt Reduction GoalAction Plan

Overall Goal:

Reduce my debt by $__________ in __________months

Monthly Goals:

Reduce my debt by $_________ every month

Increase my income by $________ each month

Reduce my expenses by $________ each month

Additional action steps I will take to reach my goal:

1.

2.

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• Generate new income

– Take a second job

– Sell assets

– Use money in low-interest bank accounts

• Create your plan

– Spending decisions

– Stick to a budget

– No new debt

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• Track spending

– Find daily savings

• Save on interest and late fees

– Ask each credit card lender for a lower interest rate

– Prioritize your debts by interest rates

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• Choose a method to pay off debt

– Highest interest rate first

– Smallest debt first

– Pay more than the minimum

• Contact creditors

– Explain the problem

– Try to work out a modified plan

– Make the agreed upon payments

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• Consider a loan consolidation– Multiple loans consolidated into one loan

– Lower interest rate

– Easier to focus on one loan than several

– Don’t add new debt

• Seek help if overwhelmed– See a reputable credit counselor

– Renegotiates loan terms

– Ask about fees

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• Bankruptcy

Bankruptcy Reform Act

– Based on income and ability to pay

– Chapter 7 or Chapter 13

– Means test is required

– Will vary according to state average income

– Must receive credit counseling before bankruptcy

– Must complete debt education before being discharged

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Resources

• Government Sites

Federal Reserve Board – www.federalreserve.gov

Federal Trade Commission – www.ftc.gov

U.S. Department of Justice – www.usdoj.gov

Cooperative Extension – www.csrees.usda.gov

U.S. Bankruptcy Courts – www.uscourts.gov

Financial Literacy & Education – www.mymoney.gov

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Resources

• Debt & Credit Management

Freddie Mac – www.freddiemac.com

MasterCard Worldwide – www.mastercard.com

MasterCard – www.debtknowhow.com

Your Credit Card Companies – www.yourcreditcardcompanies.com

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Resources

• Accessing Your Credit Report

Annual Credit Report – www.annualcreditreport.com

Equifax – www.equifax.com

Experian – www.experian.com

Trans Union – www.transunion.com

MyFico, a division of Fair Isaac Corporation www.myfico.com

Evaluation

Help us for future trainings!

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For information about MasterCard’s Debt Know How program

Patrick DwyerMasterCard Worldwide2000 Purchase StreetPurchase, NY 10577Tel: (914) 249-6637Fax: (914) [email protected]

Cindy M. PetersenUniversity of MinnesotaRegional Extension EducatorFamily Resource Management980 - 2nd Avenue SEHutchinson, MN 55350Tel: (320) 234-0440 or 1-888-241-3207Fax: (320) [email protected]

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Bibliography

Materials have been adapted from the following sources:

Anthes, William L., Ph.D. Twelve Ways to Get Out of Serious Debt, National Endowment for Financial Education, February 3, 2003

U.S. Department of Justice and Cooperative Extension Service conference call, July 21, 2005

Bankruptcy Reform, BankruptcyAction.com

MyFICO What’s in Your Credit Report, myfico.com

Lifelong Money Management, Home Ownership Center, St. Paul, MN

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MasterCard Worldwide in partnership with the University of Minnesota Extension Service

Cindy M. Petersen, M.Ed., A.F.CUniversity of Minnesota Extension Service Regional Extension EducatorFamily Resource ManagementIn consultation with:

Jean W. Bauer, Ph.D.Family EconomistUniversity of Minnesota Extension Service

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