Saturday Session 6 Presentation 10:45-11:30am Beckem/Armenta PDF version only

1. Personal Finance
&
The Cost of Consumer Credit
John M. Beckem II, PhD
Ralph A. Armenta, MBA, MS Finance
SUNY/ESC CDL Conference
April 30, 2011

2. Where should your money go
first?
Company Savings Plans
Pay off non-deductible debt
6-8 months emergency savings
Education Savings
Pay down home mortgage

3. #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

4. •
#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.
-

5. #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

6. #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Money can be withdrawn tax-free to pay for college expenses like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.

7. #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.

8. #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 save
you money over time.
- Be sure to factor in any transaction and closing costs that may be
included in refinancing.

9. The Cost of Consumer Credit

10. 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

11. Consumer Credit Costs
Type Term 2006 2007 2008 2009 2010 Feb- 11
New car 48 7.72 7.77 7.02 6.20 6.21 5.86
Interest mnths
Rates
Personal 24 12.41 12.38 11.37 11.1 10.87 11.01
Credit mnths
Cards
Loan-to- 94 95 91 90 86 80
Value
(%)
Amount 26,220 28,287 28,178 28,272 27,759 26,673
Financed
($)
Source: Federal Reserve

12. 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.

13. Consumer Loan Rates
• New Car financing rates Consumer Loan Trends
declined by almost 200 14
bps between 06 & Feb 12
’11 10
8
interest Rates
6
• During the same period 4
personal credit card rates 2
declined by 140 bps. 0
2011
2006 2007 2008 2009 2010
-Feb
New Car
7.72 7.77 7.02 6.2 6.21 5.86
Interest Rates
Personal
12.41 12.38 11.37 11.1 10.87 11.01
Credit cartds
Source: Federal Reserve

14. • Amounts Financed Consumer Loan Trends
decrease over 7%
28,500 100
between 2007 and
2008.
95
28,000
• Beginning in 2008
90
during the Credit/
Amounts Financed
Loan-to-Value
27,500
Liquidity Crisis the
amounts financed 85
approximately 6%. 27,000
80
• More telling is from 26,500
2006 to current the 75
loan-to-values
adjusted down to 80% 26,000 70
1 2 3 4 5 6
from a high of 94%. Amount Financed
26,220 28,287 26,178 28,272 27,959 26,673
“Skin-in-the-Game” (Dollars)
Loan-to-Value Ratios 94 95 91 90 86 80
Source: Federal Reserve

15. 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)

16. 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.

17. QUESTIONS
or
COMMENTS?
John M. Beckem II, PhD
Ralph A. Armenta, MBA, MS Finance
SUNY/ESC CDL Conference
April 30, 2011