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Creator of www.carefulcents.com for SpringCoin‟s blog Contributor (www.springcoin.com/blog) Blogger for Huffington Post
Understanding & improving your credit score Using credit cards responsibly Debt Relief Options
What is a credit score? • Ranges from 300-850 • Most common type of score: FICO • (3) Major Credit Reporting Agencies: Equifax Transunion Experian
5 Factors that Determine Your Credit Score Payment History (35%) Amounts Owed (30%) Length of Credit History (15%) New Credit (10%) Credit Mix (10%)
What‟s your track record? • Do you have a proven track record of paying your bills on time? What factors into your payment history? • Public Records/Collections • Bankruptcy • Liens • Judgments Missed Payments • How late were they? (30, 60, 90+ days late) • A 30 day late payment that just happened a month ago will have more weight than a 90 day late payment that happened two years ago.
Ruleof thumb is to utilize <30% of your available credit • Example: A credit card with a $10,000 credit limit shouldn‟t exceed a balance of more then $3,000 Carrying a balance doesn‟t mean you‟re a high risk borrower
Credit history = number of months or years your account(s) have been active The longer the credit history you have, the greater your score Never close accounts with a long credit history Are you utilizing your accounts that have a long credit history?
Are you accumulating more debt? Opening new accounts could be a sign of financial hardships Opening several credit accounts in a short period of time represents greater credit risk Applying for credit will show up as an inquiry on your credit report Lower credit score
What‟sin your credit score, do you have a healthy mix? • Credit cards, installments, mortgage, auto loans Do not apply for accounts just because you don‟t have it included, credit mix is not a key factor Credit mix is more important if you lack sufficient information to base a score
There is no quick fix to improve your credit score Do not contact a credit repair agency Get a copy of your credit report to check for inaccuracies. • AnnualCreditReport.com One free credit report for each bureau once a year Clean up past due accounts Set up payment reminders, timely payments are the biggest factor in determining your score
Apply for a secured credit card • Easy approval • Cash as collateral in case of default • Make sure bank is reporting to all three major credit bureaus • Utilize this account while paying off balance every month, do not exceed more than 30% of your credit limit • Will not get a rejection on your credit report (this will hurt your credit) • Rejections are easily spotted if there is an inquiry and no corresponding accounts opened • If possible, try to open 2-3 secured credit cards
Payment History = Single most important factor, establish trust with creditors Don‟t utilize more than 30% of your available credit limit Never close accounts with a long credit history Get a free copy of your credit report at www.annualcreditreport.com Avoid credit repair agencies Secured credit cards are the best way to improve your credit score
Creditcards are necessary in today‟s society • Rental Cars Security Deposit • Hotels Incidentals • Fraud Protection Better protection over debit cards
Typically carry a high interest rate • Monthly payments get credited towards general purchases first Look over monthly statements • Subscription Services • Transaction Errors, interest rates
Don‟t carry a balance over 30% of your credit limit If you can‟t pay off the balance in full, always try to pay more than the minimum payment Don‟t mistaken your available credit as “free money” Limit the number of credit cards you have
DO‟S DON‟TS Analyze needs vs wants before Don‟t use credit card for making a purchase everyday purchases Notify creditors if you are going Don‟t use credit card to buy to be late, they may possibly things you can‟t afford waive late fees Always pay on time, late fees Don‟t view available credit as can be in excessive of $35+ „free cash‟, buy now pay later Stay within 30% of your credit Don‟t take out cash advances limit Don‟t make only minimum Do try and pay off your entire payments balance every month Don‟t sign up for department Do check your balance store credit cards just because frequently to make sure you you get a 1-time discount are not overextended
Watch out for introductory/teaser rates Monitor monthly statements Always pay off balance in full or more than minimum payment Don‟t carry a balance over 30% of available credit Avoid cash advances Separate needs vs wants
DEBT SNOWBALL DEBT STACKING Paying off lowest balance Paying off highest interest credit card first rate credit card first Make minimum payments Make minimum payments on all accounts accept for on all accounts accept for the lowest balance credit the highest interest rate card credit card Once lowest balance Once highest interest rate account is paid off, “roll credit card is paid off, “roll over” your payments to the over” your payments to the next lowest balance account next highest interest rate account
This method is good for: • Consumers who can afford to pay more than the monthly minimum payments • Have a steady source of income and continue to pay more than minimum payments • Need to have discipline to roll over payments to next account
Creditor Balance Min Payment Interest Rate Chase $5,000 $180 18.99% Citi $3,000 $120 8.99% Wells Fargo $7,000 $240 24.99% Total $15,000 $540Creditor Total Interest Paid Creditor Total Interest PaidChase $1364.63 Chase $1581.75Citi $216.57 Citi $334.32Wells Fargo $3290.67 Wells Fargo $2649.34Total $4871.96 Total $4565.41
What is a Debt Management Plan (DMP) • A DMP is administered by a credit counselor • Credit counselors will take 1 monthly payment and disburse it to your creditors • Interest Rate Reductions & Waiver of late fees • Past due amounts put into back of loan • Plans can last up to 60 months
BENEFITS DRAWBACKS Interest Rate Reductions Accounts will be closed (varies by creditor, 0-15%) Notation on credit report Ease of one monthly stating you‟re enrolled in payments consumer credit counseling Out of debt <60 months (this does not affect your Waiver of late fees & credit score) penalties Credit score decrease Past due amounts put into (overall debt to income ratio arrears will increase)
Consumers who are carrying high interest rate credit cards Unable to afford more than the minimum payments Suffered financial hardship, fell behind on monthly payments About to fall behind due to financial hardship
What is debt settlement? • Debt settlement is the negotiation of your severely past due accounts to pay off your accounts for less than what is owed • Example: $10,000 in credit card debt, 6 months behind, negotiate a settlement for $4500, payment is considered as “settled in full” • Only unsecured debts are eligible (no mortgage/auto loans) • Only accounts that are severely past due will be considered for debt settlement, or accounts that are already in collections
BENEFITS DRAWBACKS Has the most amount of Increased collection calls savings Tax implications (any debt Some creditors can forgiven over $600 reported potentially settle as low as to IRS) 20% Creditors have the right to Ideal for accounts that are sue you (judgment) already in collection status Negative impact on credit score Reported on credit report as “settled in full”
Consumers whose accounts are already in collection status Judgment Proof (no assets, income is protected from wage garnishment) Have funds readily available for settlement Accounts that are severely past due (4-6+ months)
Different types of debt consolidation • Consolidation through mortgage refinance Often requires high credit score Need sufficient equity in home to qualify Balance Transfer • Consolidate multiple accounts into one credit card/loan • Requires high credit score • Watch for introductory teaser rates
No impact on credit score Easier to manage payments More transparency of your overall debt Potentially get out of debt faster
CHAPTER 7 CHAPTER 11 Often referred as liquidation Often referred as of debts restructuring of debts Commonly used if you have Used if you have significant little assets or no money left assets that you want to keep Commonly used to protect over after living expenses home against foreclosure Most unsecured debts can Consumer pays trustee be eliminated every month, lasts 3-5 years Process moves quick Trustee distributes your Must pass “means test” monthly payments to your creditors Ends collection calls
Debt Snowball vs Debt Stacking requires you to pay more than minimum payments • Debt Snowball = Pay off lowest balance • Debt Stacking = Pay off highest interest rate Debt Management Plans will help you lower interest rates and get on a payment plan that lasts no more than 60 months • Creditors will close accounts • Interest rates vary among creditors Debt settlement has most savings, but is not right for everyone • Credit score implication • Possible Tax liabilities • Creditors may sue for non payment
Debt Consolidation • Requires excellent credit score • No impact on credit score Bankruptcy • Will remain on credit report for 7-10 years • Chapter 7: liquidation of assets • Chapter 11: restructuring of debts, pay trustee