Learning how to achieve your financial goals is one of life’s most important lessons. But it’s a lesson most people have to learn on their own, usually by trial and error.
We don’t think trial and error is good enough. Our financial lives today are increasingly complex, and the choices we make are more important than ever before. We believe the key to financial success is financial education. But as important as financial education is, too few students arrive on campus with the kind of training needed to manage their personal finances. That’s why we prepared this brochure – to help you find the best ways to manage your finances and give you the skills you need to achieve your financial goals.
We understand the financial challenges facing college students. The rising cost of tuition, combined with an increasingly broad range of available financing options, requires that today’s college student be an expert on the ins-and-outs of balancing spending and saving, as well as understanding how to use – and not abuse – available credit. We’re committed to providing you with the information you need to successfully manage your finances – and improve the quality of your life, both now and in the future.
FINDING FINANCIAL FREEDOM
Do you have a dream?
Most of us do. We see graduation from college as the beginning of that dream. Maybe it’s living in a certain city, working for a great company. Maybe it’s a house, or a car, or travel. Maybe it’s more education for an advanced degree. Maybe it’s starting a business, raising a family, becoming a Broadway star or winning the Nobel Prize. Or maybe you have several dreams – some people just want to explore the world while they’re young, and decide on a career later.
But the truth about a dream is that it not only takes hard work, it usually requires money in order to be realized. Whether you’ve chosen a field that offers high income potential, or one with other-than-financial rewards, the challenge is the same: how to manage the money you have in order to get what you want out of life.
You might not spend much time in your college life making financial plans. Most don’t. There’s enough to do as it is, with class work and jobs and friends. But you need to start thinking about your future from a financial point of view, because your financial situation will be a major factor in determining the choices that you’ll be able to make.
How will you pay for what you want? How much will your dream cost? How much flexibility will you need? Where will the money come from? It’s time for you to start answering some of these important questions. Firm financial planning will give you the ability to make life decisions based on personal choice, not financial necessity.
So how do you start? Here are six simple steps to get you on the right track:
1. Set Your Financial Goals
2. Pay Yourself First
3. Take Control with a Budget
4. Get to Know Your Bank
5. Establish Good Credit
6. Expand Your Financial Education
7. Start Now!
Now, let’s see how these steps can work for you.
STEP 1: Set Your Financial Goals
When you think about setting your financial goals, the place to start is with your life goals.
Start by taking a sheet of paper, and then list things you want to have, things you want to do, places you want to go, and things you want to accomplish over the next few years. Don’t worry about making it a final, perfect list – you’re just doing a rough sketch for now. No one is going to see this but you, so don’t limit yourself. Put everything down.
Then, try to put a timetable and dollar figure by each item. For example, maybe you want to visit Europe for several weeks. The timetable might be within three years, the cost $3,000. Maybe you want to move to a big city and get a job. This timetable might be one year and the cost for moving, living until you get the job, setting up house, etc., could be $5,000.
It won’t always be easy to figure out costs, but give it your best guess. If you really don’t have even a rough idea of what things cost, buy a local newspaper and look at the various ads to get some ideas. Use the yellow pages to make a few phone calls. Ask people. But find out.
Now, add up the dollar figures to get a total. Then check the timetables to see when your expenses are heaviest. Are all your plans scheduled for “right now” or do you have both short- and long-term goals?
What you’ve sketched out here are the elements of your dream. You’ve actually estimated the cost of that dream. But the vision is the easy part. Now let’s look at reality.
Paying for Your Dream
How much money do you expect to make after graduation? Write down a rough yearly salary for the first five years after you leave college. Again, if you don’t know what people in your field make, find out. Read ads, ask your career placement office, and ask friends or teachers. You can’t afford to take a wait-and-see approach on something this important.
Do you have loans to pay off? Write down the payments you’ll be making per month during the first five years. If you don’t know what they will be, ask for assistance in your financial aid office.
You’ll have to live, too, so figure an amount for rent, food, utilities, entertainment, transportation, medical insurance, clothing and miscellaneous expenses each month.
Now compare your estimated income with your estimated expenses. How does it look? If you’re like most students, you just saw most of your income disappear into the cost of daily living and paying off your education. So what happens to your dream?
That’s the point of financial planning. You’ll need to view your money from two perspectives: the money you need for your daily living, and the money that will pay for your goals. Figuring out how to do both takes a good budget – we’ll get to that later. But you need to have a budget category that most people don’t have – and that category is you.
STEP 2: Pay Yourself First
The most important category in your budget has your name at the top. Whenever you receive a paycheck, or some money from home, first put aside a small amount toward your personal financial goals, even before you pay your other bills.
Set up a savings account, or open a mutual fund account with an initial investment, and start making regular contributions. If you have direct deposit for example, you can arrange to have a small amount deposited in your account automatically from each paycheck.
If you tend it carefully, your “Pay Yourself First” fund will put you on the road to financial freedom. You’ll build it over time with regular contributions, knowing that it will yield financial benefits in the future. You’ll put in a few extra dollars this week, a few more dollars next week. You can start small, but you must start. Even small amounts saved regularly will quickly add up to a useful fund. A chart at the back of this brochure shows how, over time, your money can grow. It also shows the missed financial opportunity of waiting, instead of starting now.
Found Money
Believe it or not, one overlooked source of extra income for college students is your tax return. That’s right – the Internal Revenue Service, or IRS, may indeed owe you money if you paid your taxes last year. If you usually work during the summer to save money for school, or if you’ve held a part-job during the school year, you probably paid taxes to the government out of each paycheck you took home. Even if you did not earn enough to make filing a tax return mandatory, you should because you could be due a tax refund – perhaps as much as a few hundred dollars.
If you are going to receive a refund, consider it found money. That’s money you probably didn’t count on when you figured your budget, so it may be money that you may not need. So save it. Put your tax refund in your savings or mutual fund account.
STEP 3: Take Control with a Budget
One of the first skills in managing your money is knowing what you’ve got and where it’s going. A budget is a simple tool that will help you know just that, but the sad truth is that most people just don’t want to make a budget. They say “I just kind of know what I’ve got left” or “It just kind of works out by itself” or “I have so little money, I don’t need a budget.” But most people never achieve financial freedom, and that’s not good enough for you.
The main thing you need to consider in your budget is keeping it dynamic. Make it a part of your life – don’t just leave it in a drawer somewhere. Your budget will change over time as your situation changes, and you need to keep it flexible.
At the back of this booklet you will find a budget sheet to help you get started on the road to managing your money. Fill in the amount you want to budget monthly for each expense, and then the amount you actually spent. The variance is the difference between the two. When you see a variance, on an expense, you may wish to either adjust your budget or your spending.
Budget Tips
· Learn to differentiate between “needs” and “wants.”
· You need food, but you want to go out for an expensive dinner with your friends.
· Keep your long-term goals in mind: don’t let short-term desires interfere with attaining long-term objectives. The money you spend now won’t be there for the down payment on the car you want to buy in five years. “Paying yourself first” should be a top priority.
· Set a definite dollar limit for your miscellaneous expenses, including entertainment, gifts and travel – those non-necessities you can’t live without. Stick to your limit.
· Don’t regard any expenditure as unchangeable. If the cost of your rent is holding you back in another budget category, then find a roommate (or another roommate) or move. If your cost of transportation is high, you can walk, or bike or car pool. You can usually find some way to cut almost any category if you’re determined.
· Whenever possible, save up for large purchases. Don’t take on any debts lightly.
· Always comparison shop. Money you save is money you have.
· Set aside something for emergencies. You need enough money in your emergency fund to cover your essential living expenses for at least three months – six is better.
· Evaluate your expenditures every few months to see where your money is being spent, where you can cut back, and where you need to reallocate.
· Automatic Teller Machines are great for convenience, but if you’re not careful, they can make a mess of your record-keeping. Be sure to get a receipt for each ATM transaction and note it in your checkbook.
· Be honest and be realistic. Your budget is no place for fantasy.
Systems Make it Easier
While you’re making your budget, set up a general filing system for all your financial activities. Try one of the popular software programs designed to help you manage your personal finances – this is a great way to watch what you spend month-by-month. Having a special box or portable file is also a good, simple way to keep track of your spending and saving. Keep all your receipts from major purchases, bills, loan agreements and tax records - as well as your budget - together where you can find them. Keep your insurance, banking and investment records here, too, if you have them.
Your file can be highly organized, or not, as you wish, but at least everything should be in one place. It’s also a good idea to set aside a time each week or month to pay your bills, update your budget and balance your checkbook. Just make it a habit, and it’s easier to stay on track.
STEP 4: Get To Know Your Bank
Establishing a good relationship with your bank is one of the best moves you can make.
Open a checking account if you don’t have one, and a savings account.
Don’t wait until you need something from the bank to start building the relationship – ask for brochures on their services, on investing, on loan policies. Do as much business with the bank as you can.
Once you’ve established yourself with a bank, you may have an easier time getting a loan when you need it.
STEP 5: Establish Good Credit - and Build a Strong Financial Resume
Credit is a way of life in America today. Most Americans rely on the convenience of credit cards and the flexibility of spreading out payments for major purchases to help them improve their quality of life. For unexpected expenses, like an illness or family emergency, credit can keep you afloat until the crisis has passed.
But credit can be a problem too, if you get over-extended. It can be all too easy to lose sight of the real cost of the things you’re buying when you just say, “Charge it.”
You need to establish credit, but you need to use it wisely. Credit is not an extension of income.
Applying for Credit
When you apply for a credit card or loan at a bank, the creditor will check your credit history. That credit history is one of the most important elements in your financial life – but most Americans have never even seen their own credit report!
For most creditors, the information in your credit report is all they will ever know about you. If it’s blemished or if there’s a mistake in it, the consequences could be serious for you. A bad credit rating can affect your ability to get a job, buy a car or rent an apartment.
Your credit report is a compilation of information from your creditors about how you pay your bills and how much credit you’re using. It’s compiled and maintained by one of the three major credit bureaus throughout the country, which provide their information about your credit history to banks, stores and other credit-granting organizations. The report is very detailed: it shows who has asked for credit reports on you, and when. Every time you use credit, and every time you make a payment, the report is updated. It shows the most credit you’ve had, and the credit limits you’ve been granted. If you pay your bills late, it will be in your credit report. If you have large outstanding balances, then it, too, will be reflected in your credit report.
Because a credit report is so important for consumers, Congress passed the Fair Credit Reporting Act, which assures that you can get a copy of your credit report and correct any mistakes you find. If you find mistakes, the credit bureaus must change them. If you’ve been turned down for credit because of information in your credit report, you can get a copy free in 30 days. Otherwise, you’ll have to pay a small fee. You’ll find credit bureaus listed in the back of this booklet, or you can ask your creditors to which bureaus they report.
The best way to have a good credit report is to have only the amount of credit you can carry comfortably and to pay your bills on time.
Try thinking of your credit report as your financial resume. It reflects your experience as a consumer, and a good credit report underscores the fact that you have good money management skills, and you’re serious about your financial responsibilities.
First-Time Credit Applications
Don’t be afraid to apply for credit – even if you don’t have a credit history.
Most creditors only require that you be at least 18 years of age, and they consider a variety of other criteria, some of which include stability, income potential, total expenses, and your debt record. Having a checking and savings account will help, and dealing with the bank where you have the accounts is a good idea. Some credit card companies make a special effort to attract college students because they want to develop an early relationship with individuals they know will be good customers – both now and in the future.
Paying off a student loan is a good way to build a strong credit history. Or, if you can make a large down payment for a purchase, you may have an easier time getting a loan for the balance. Then, pay off the loan on time. Your credit history will benefit
If you can’t get credit by yourself, you may need to get a co-signer, perhaps a parent or relative who meets the creditor’s requirements. From there, start to build your own credit history so you can qualify on your own in the future.
Tips On Using Credit
Your credit card account is actually a type of contract; in this case, it’s a contract with your credit card issuer. In exchange for the right to use your credit card, you agree to repay the amount you charge – or borrow – with the card. In many cases, you may also be required to pay interest on the amount you charge, particularly if you revolve, or carry over a balance on your account from month to month.
Having the freedom to use your credit card carries a significant amount of responsibility; you’re required to pay back the amount of money you charge. To avoid charging more than you afford to pay back, think carefully about how you’ll use your credit card. The following tips should help:
· Keep track of your credit use. You can set up a register just like the one for your checkbook and record all your credit purchases. You need to know how much you owe at any one time.
· Limit the number of credit cards you have. Don’t get them just to have them. Creditors may consider the credit you have been granted, but haven’t yet used, as an existing loan.
· Set a personal credit limit for yourself. For example, just because your credit card issuer has given you a $1,000 limit doesn’t mean you need to charge $1,000 in purchases. Maybe you’re only comfortable charging up to $500, because that’s the most you can afford to repay within a relatively short amount of time. That’s your personal credit limit.
· Mentally subtract your credit purchase from your budget so you don’t over spend: once it’s charged, the money is owed!
· Be as serious about credit card debt as you would be about getting a bank loan for the same amount.
· Plan your credit use ahead. Figure out what expenses you’re going to have and see if your income will meet them. If not, decide which type of credit is most appropriate for you.
Types Of Credit
· Credit cards come in two varieties: single-payment and revolving. With a single-payment card, commonly referred to as a “charge card,” you must pay the bill in full each month. There’s usually no finance charge as long as you pay on time, but there’s often an annual fee. Some travel and entertainment charge cards are single-payment.
· With a revolving credit card account you can charge purchases up to a certain limit or get cash advances. You don’t have to pay the bill in full each month, but you must make a minimum monthly payment. You pay a finance charge on the balance you don’t pay each month. Revolving credit cards are typically issued by financial institutions, or retail stores.
· Installment credit usually comes from a lending institution, and requires you to pay the loan back over a set period, in regularly scheduled payments. You have to apply for the loan and explain its specific purpose, and you may need to make a down payment. Interest rates are often lower than for revolving credit accounts. Installment credit is the usual way to pay for a car or make other major purchases.
· Unsecured lines of credit from banks and other financial institutions are revolving credit lines that you apply for and get once, and then use over and over again as needed. Interest rates are usually lower than for installment loans or credit cards, and you don’t have to pledge collateral. Usually you get special checks or a credit card to use when you want to draw on the credit line. You can use the credit line up to a specified limit, and the credit becomes available to you again as you pay off the balance.
Student Loans
Graduating from college with student loan debt is common today. Your student loans are serious commitments, and you need to be sure you pay them off on schedule. But if your loan has an attractive interest rate, don’t be in a hurry to pay it off early – you might be better off making the regular payments and using the additional money to build your personal savings.
Credit Problems
Be careful not to get into trouble with credit. You can tell if you’re getting in over your head with credit if:
· You’re regularly using your credit cards for daily expenses.
· You’re using cash advances from credit cards to pay other creditors.
· You’re paying the minimum amount – or less – due on your bills each month.
· You’re always late with bill payments.
· You don’t know how much you owe.
If you find you have debts you can’t pay back within 12-24 months, not including your student loans or mortgage, then you may have a credit problem. If you think you have this kind of problem, get help from a non-profit consumer credit counseling service. The National Foundation for Consumer Credit (tel. 1-800-388-2227) can direct you to the nearest Consumer Credit Counseling Service (CCCS) office in your area. Remember – your good credit history is too valuable for you to take any chances with it.
STEP 6: Expand Your Financial Education
There’s a lot you’ll need to know to manage your financial life in the future and you need to take responsibility for your own financial education. One of the best ways to become knowledgeable is to start reading. Books, magazines and a growing number of Web sites dedicated to money management and investing are readily accessible. Make a habit of spending some time each week on your financial education. Some topics to investigate:
· Evaluating salaries and benefit packages from employers
· Cost of living differences in different parts of the country
· Insurance – health, car, home and disability
· Planning cash flow
· Building equity
· Tax planning
· Investing – CDs, mutual funds, money market funds, stocks and bonds
· Retirement planning – IRAs, 401K plans
You don’t need to be an expert, but you need to know the kind of questions to ask an expert. Reading will help.
STEP 7: Start Now!
If you’re thinking that financial planning is something you can do later, maybe in a few years when you’ve got some money saved up, you should think again. You need to start now.
CONCLUSION
Your college years are a great time to organize your financial life. You’ve got more time and resources now than you’re likely to have later in your life, and it’s a great opportunity to clarify your goals and make your plan. You probably haven’t made any financial mistakes yet. If you can get this part of your life in shape now, you’ll be years ahead of someone who waits “until I make more money” or “until I get a little saved up.”
And remember, you may think you don’t have enough money for it to matter, but you’re wrong. Just start saving a dollar a day and you’ll make a big leap toward financial freedom, thanks to the power of time and compounding. You can add more later, but start now with something. Your investment will grow quickly, if you are resolute in building it. Slow and steady can actually win the financial race.
Time = Money
When it comes to saving or investing, it really does pay to start early. This chart illustrates how $1,200 put aside annually can grow over time, and how much less you’ll have accumulated by age 65 if you wait 5 years, 10 years, 15 years or longer before starting to save or invest. It assumes an annual return of 8%.
|
Begin At Age: |
Amount You’ll Have Accumulated by Age: | |||||||
|
|
30 |
35 |
40 |
45 |
50 |
55 |
60 |
65 |
|
20 |
17,384 |
32,582 |
54,914 |
87,726 |
135,938 |
206,777 |
310,862 |
463,796 |
|
25 |
7,040 |
17,384 |
32,582 |
54,914 |
87,726 |
135,938 |
206,777 |
310,862 |
|
30 |
1,200 |
7,040 |
17,384 |
32,582 |
54,914 |
87,726 |
135,938 |
206,777 |
|
35 |
|
1,200 |
7,040 |
17,384 |
32,582 |
54,914 |
87,726 |
135,938 |
|
40 |
|
|
1,200 |
7,040 |
17,384 |
32,582 |
54,914 |
87,726 |
|
45 |
|
|
|
1,200 |
7,040 |
17,384 |
32,582 |
54,914 |
|
50 |
|
|
|
|
1,200 |
7,040 |
17,384 |
32,582 |
|
55 |
|
|
|
|
|
1,200 |
7,040 |
17,384 |
|
60 |
|
|
|
|
|
|
1,200 |
7,040 |
|
65 |
|
|
|
|
|
|
|
1,200 |
MONTHLY BUDGET | |||
EXPENSE |
BUDGET |
ACTUAL |
VARIANCE |
Housing |
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Rent/Mortgage |
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Food |
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Groceries |
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Eating Out |
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Utilities |
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Phone |
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Gas/Oil |
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Electric |
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Cable |
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Transportation |
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Auto (Gas, Tolls, etc.) |
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Train/Bus/Subway Fare |
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Clothing |
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Laundry/Dry Cleaning |
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New Purchases |
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Loan Payments |
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Student Loans |
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Car Payments |
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Credit Card Payments |
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Insurance |
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Homeowner’s/Renter’s |
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Car |
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Health/Life |
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Entertainment |
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Movies, Concerts, Theater |
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Books, CDs, Magazines |
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Miscellaneous |
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School Supplies |
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Household Supplies/Toiletries |
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Medical/Dental |
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Short-Term Savings |
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Furniture/Appliances |
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Vacation/Holiday Travel |
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Down payment for Car |
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Gifts |
|
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Long-Term Savings |
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House/Property |
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Retirement |
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Other |
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TOTAL EXPENSE |
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TOTAL INCOME |
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DIFFERENCE |
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HOW TO GET YOUR CREDIT REPORT
Credit reports are available through the companies listed below. If you have been denied credit, the creditor, under the Fair Credit Reporting Act, must tell you why you were denied credit and give you the name of the credit reporting company used in determining your creditworthiness. If you have been denied credit in the last 60 days, you can receive a free copy of your credit report from that company. Otherwise, you may be charged a nominal fee, which varies among companies.
Not all retailers, credit card companies or financial institutions report to the same credit reporting companies, so it is a good idea to order reports from all the companies listed below to ensure that your personal financial information is accurate.
·Equifax
P.O. Box 105873
Atlanta, GA 30348
1-800-685-1111 or 1-800-997-2493
http://www.equifax.com
·Experian
P.O. Box 2104
Allen, TX 75013-2104
1-800-682-7654 or 1-888-397-3742
http://www.experian.com
·Trans Union Corporation
P.O. Box 390
Springfield, PA 19064-0390
1-800-888-4213
http://www.transunion.com
GLOSSARY
Affinity Credit Card
A card that is offered jointly by two organizations. One is a credit card issuer and the other is a professional association, special interest group or other non-bank company. For example, Citibank and American Airlines sponsor the Citibank AAdvantage card.
Annual Fee
The yearly cost to use a credit card. Not all credit cards have an annual fee.
Annual Percentage Rate (APR)
The cost of carrying a balance on a loan expressed as an annual percentage. To calculate the amount owed in interest each month divide the APR by 12. For example, if the APR is 18% the monthly rate is 1.5%.
Asset (Financial)
Anything owned by an individual that has a cash value. This includes property, goods, savings or investments.
Available Credit
The unused portion of a credit line. Available credit is the credit limit minus the current balance.
Average Daily Balance
The average daily balance is a method used to calculate finance charges. It is calculated by adding the outstanding balance on each day in the billing period, and dividing that total by the number of days in the billing period. The calculation includes new purchases and payments.
Bad Credit
A term used to describe a poor credit rating. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. "Bad Credit" can result in being denied credit.
Balance/Amount I Owe
The total amount of money owed. It includes any unpaid balance from the previous months, new purchases, cash advances, and any charges such as an annual fee, late fee or interest. The "Amount I Owe" should not be confused with the monthly payment (the minimum payment allowed each month).
Balance Transfer
Moving outstanding balances from one credit card to another.
Bankruptcy
Bankruptcy is a legal declaration of the inability to repay debts. Bankruptcy should be viewed as a last resort. It will have a severe impact on a credit rating and will remain on a credit report for ten years. Furthermore, bankruptcy is not a solution in all cases. Federal student loans, Federal tax debt and child support are all exempt from bankruptcy protection. Bankruptcy agreements vary but there are two types of agreements that most people choose: Chapter 7 and Chapter 13.
Chapter 7
In a Chapter 7 agreement, the court resolves most debts by selling assets and property so that the filer is given a fresh financial start. The court takes all assets including cars, homes, furnishings, jewelry or anything else of value. The assets are sold to pay off the debt.
There are some debts that a person may wish to repay on their own instead of having the court resolve it. This is called reaffirmation. Reaffirmation is a special payment plan with the court. For example, if a car loan is reaffirmed, the person keeps the car and makes payments under new terms.
Chapter 7 bankruptcy will not eliminate debts due to taxes, child support, alimony, student loans, court fines or personal injury caused by driving drunk or under the influence of drugs.
A Chapter 7 filing will remain on a credit report for 10 years.
Chapter 13
In a Chapter 13 agreement, the court creates a debt repayment plan that allows the filer to keep their property. In order to file Chapter 13, a person must have a source of income and promise to pay part of their income to creditors. The court allows the filer to keep any assets that have debts against them if they pay them off under terms determined by the court.
A Chapter 13 filing will remain on a credit report for 10 years. With Chapter 13, there is a better chance of obtaining future loans and credit.
Bank Deposits
Bank Deposits include money invested in FDIC insured bank accounts such as Checking Accounts, Savings Accounts, Bank Money Market Accounts, and Certificates of Deposit.
Bank Money Market Accounts
Bank Money Market Accounts are FDIC insured interest bearing bank accounts that pay money market interest rates. They usually allow up to six preauthorized withdrawals (transfers) per month (with no more than 3 by check). All telephone and computer transfers are included in this limit.
Billing Cycle
The number of days between the last statement date and the current statement date.
Billing Statement
The monthly bill from a credit card issuer that describes and summarizes the activity on an account. A billing statement includes the outstanding balance, purchases, payments, credits, finance charges and other transactions for the month.
Bond Funds
Bond Funds are Mutual Funds that invest primarily in Bonds. Bond Funds provide Diversification by investing in a variety of Bonds according to guidelines set in the funds' Prospectuses. Bond Funds are usually categorized by the types of Bonds they invest in, for example: government Bond Funds, corporate Bond Funds, international Bond Funds, and municipal Bond Funds. As with individual Bonds, the value of Bond Funds typically falls when Interest Rates rise, and rises when Interest Rates fall. Also a Bond Fund's dividends will vary. Bond Funds are not FDIC insured, and involve risk to Principal
Borrower
The person who signs and agrees to the terms of a promissory note and is responsible for repaying a loan.
Budget
A report of estimated income and expenses.
Cardholder Agreement
The issuer's written statement of terms and conditions relating to a credit card account. The cardholder agreement is required by Federal Reserve regulations. The agreement states the annual percentage rate, the monthly minimum payment formula, annual fee, if applicable, and the cardholder's rights in billing disputes.
Cash Advance
An instant loan from a credit card account. The card company will charge interest from the day the advance is taken until the day it is paid off. A transaction fee may also be charged based on the amount of the withdrawal.
Cash Advance Fee
A one-time fee for cash advances in addition to normal interest charges. This fee is usually a percentage of the advance amount.
CCCS - Consumer Credit Counseling Service
A non-profit organization that provides free or low cost counseling and guidance to people experiencing financial difficulty. CCCS can be reached by calling 1-800-388-CCCS.
Certificates of Deposit (CDs)
Certificates of Deposit are FDIC insured bank accounts that lock in funds for a specific period of time, usually at a specific rate of interest, with a penalty for early withdrawal.
Charge Card
A card that requires full payment of the balance by the due date. It is not a line of credit and interest is not charged. The American Express card and Diners Club card are examples of charge cards.
Checking Accounts
Checking Accounts are FDIC insured Bank Deposits, which usually allow unlimited withdrawals by check, ATM, or transfer. Some Checking Accounts pay interest, but the rate is often lower than that paid on Savings Accounts or Bank Money Market Accounts.
Collateral
An asset pledged to a lender to guarantee repayment of a loan. Collateral can include savings, bonds, insurance policies, jewelry, property or other items of value. If payments are not made according to the contract, the lender is authorized to take the collateral as payment.
Consolidation Loan
A loan used to refinance existing debt. It usually results in a lower monthly payment at a lower interest rate.
Corporate Bonds
Corporate Bonds are debt securities issued by a corporation. Like all Bonds, their value typically falls when Interest Rates rise, and rises when Interest Rates fall. They are not FDIC insured, and involve risk to Principal.
Co-signer
A person who signs a loan or credit card agreement with the primary applicant. The co-signer is responsible for repaying the balance of the loan or debt in the event that the applicant does not.
Credit Analysis (also known as Debt Burden)
The percentage of income that goes to paying debt every month. It usually gives a clear picture of overall financial well-being. A low ratio is under 20%, which means that the person is in good financial health and is doing a good job of managing finances. A moderate ratio is between 21% and 40%. This may mean that the person should look carefully at their monthly payments and expenses and start decreasing their overall level of debt, including credit cards. A high ratio is over 40%. This may mean that the person should immediately stop accumulating debt and start looking for ways to decrease total debt level.
Credit Card Debt
The total unpaid balances on all credit cards (not to be confused with the minimum amount due each month).
Credit History
Credit history is a record of the way people manage their debts. This information is collected and sold by credit reporting agencies. It includes personal information such as Social Security number, current and prior addresses, and employment information. It also includes the names of credit issuers, current account balances, and the timeliness of payments. Information such as missed or late payments will remain in a credit history for seven years. Bankruptcy will remain for 10 years.
The information in a person's credit history can either qualify or disqualify them from obtaining credit cards, mortgages, loans, car or apartment leases, and possibly employment.
Credit Limit
The maximum amount that a person may owe on a credit card, including purchases, cash advances, finance charges and fees.
Credit Line
A revolving amount of credit. Any amount up to the limit on the credit line may be borrowed to make purchases or cash advances. The cost of the purchase, plus interest, is then paid off over a period of time. As the outstanding balance is paid off, credit becomes available again to use for another purchase or cash advance.
Credit Management
The way a person handles the money they borrow from banks or credit issuers. Paying more than the minimum due and not exceeding the credit limit are examples of good credit management.
Credit Reporting Agency (credit bureau)
A credit-reporting agency is a company that collects and sells information about how people manage their debts. There are three major reporting agencies.
Debit Card
A card that allows purchases to be paid for with funds that are immediately deducted from the purchaser's financial account (e.g., checking account).
Debt
The amount of money a person owes to banks and credit issuers.
Default
Failure to repay a loan according to the agreed terms. If a person defaults on a loan, the issuer can sue to ask the court to force the person to pay the balance of the debt.
Deferred Payment
Payments put off to a future date or extended over a period of time. Interest will usually accumulate during deferment.
Delinquent Account
An account on which payments have not been made according to the terms and conditions of the cardholder agreement.
Diversification
Diversification is the investment strategy of putting your money into a number of different investments in order to reduce overall Investment Risk. The goal is that losses in one or more investments may be offset by gains in others.
Dividend
A Dividend is a payment distributed to shareholders at times and in amounts voted on by a company's (or a Mutual Fund's) board of directors. The Dividend may be in cash, in more shares of the company's Stock, or in shares of another company it owns.
Due Date
The day a payment is due to a creditor. After that date, a late fee may be charged, a late payment may be reported to the credit reporting agencies, and the account may be considered delinquent.
Equities
The term "Equities" is generally used interchangeably with the term "Stocks".
Finance Charges
The total dollar amount paid to use credit. Finance charges include interest, service and transaction fees, premiums paid for credit life insurance, and so forth.
Finance Company
A business that makes consumer loans, often to consumers who cannot qualify for credit at a credit union or bank. Typically the interest rates charged by a finance company are higher than those charged by other creditors.
Fixed Expenses
Expenses that must be paid every month. These are expenses that really can't be changed, like a mortgage, rent, car payment or student loan payments.
Fixed Interest Rate
An interest rate that changes only if the issuer notifies cardholders through an amended cardholder agreement. Federal law stipulates a minimum of 15 day's advance notice is required.
Forbearance
A method of postponing payments due to economic hardship. A lender will set the terms of forbearance. Typically, interest accrues and is added to the loan balance at the end of the forbearance period.
Grace Period
If individuals do NOT have an outstanding balance on their credit card, a grace period is the interest-free time period between the date of purchase and when that purchase appears on their statement. For example, if they pay off the balance in full on June 1st and then buy an item on June 2nd, they will not be charged interest for the time period between June 2nd and their next statement date. If they carry a balance on their credit card from month to month, they do not have a grace period. A grace period is not the amount of time after the due date during which a person may make a payment without being charged a late fee. Payments must be received on or before the due date on the statement.
Household Income
The total income of all members of a household. It includes wages, commissions, bonuses, alimony, child support, Social Security/retirement benefits, unemployment compensation or disability, dividends and interest.
Individual Credit
Individual credit is credit based on your assets, income and credit history. You alone are responsible for paying an individual account, even if you're married.
Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) can be established by working people and their spouses. IRA contributions are subject to an annual contribution limit of $2,000 or earned income, whichever is lower. A non-working spouse can establish a Spousal IRA, bringing combined maximum allowed contributions for both spouses to the lesser of $4,000 starting in tax year 1998 ($2,250 for tax year 1996) or 100% of earned income. IRA earnings are tax deferred until withdrawn. Certain rules affect the deductibility of IRA contributions, but many individuals can still take a deduction. IRA withdrawals are subject to regular income taxes, and may be subject to a 10% IRS penalty prior to age 59 1/2.
Inflation Rate
The Inflation Rate is the rate of increase in the price of goods and services over a given period of time. The most generally used measure of inflation is the Consumer Price Index, which is calculated monthly by the Bureau of Labor Statistics. Other Indices are available which help measure price increases for specific goods or services. In determining what inflation rate assumption to use when planning for a future goal it is always a good idea to look at historical inflation rates over a long period, preferably a 20 or 30 year period.
Installment Loan
A loan that a person promises to pay back in fixed, scheduled payments over a specific period of time. In addition to the original amount borrowed, interest is paid - a fee for the use of the lender's money. Student loans, home equity loans and auto loans are usually installment loans.
Interest Rate
The Interest Rate is the percentage of a deposit that a bank pays annually to the depositor in return for use of the depositor's money, the percentage of a loan that a borrower pays annually to the lender in return for use of the lender's money, or the percentage of a Bond's face value that the issuer pays annually to the holder in return for the holder's money.
Investment Risk
Investment Risk is the potential for fluctuation in the value of an investment, which could result in loss of Principal. Some causes of Investment Risk are: general market fluctuations, industry-specific market fluctuations, trends in Interest Rates and foreign exchange rates, company specific factors, and others. Higher Risk is usually associated with the potential for higher long-term rates of return.
Joint Credit
Joint credit is credit based on the assets, income and credit history of both people who apply. Your combined resources may help you get a higher line of credit. But it also means that you both are responsible for paying off the debt. If one person fails to pay a joint account, the creditor can require payment from the other even if you are separated or divorced.
Late Payment
A payment that is received after the due date.
Late Payment Fee
A fee charged when a payment is received after the due date.
Legal Judgment
A court decision that may require a person to do something, such as pay a debt.
Liability
Anything that is owed and must be repaid at some point in the future. A liability may be due immediately (such as an electric bill) or may be more long term and be paid off over several months or years (such as a mortgage or student loan). The opposite of a liability is an Asset.
Minimum Monthly Payment/Amount Due
The smallest amount that can be paid by the due date and still meet the terms of the cardholder agreement. See also Balance/Amount I Owe.
Municipal Bonds
Municipal Bonds are debt obligations issued by a state or local government, created to support a government's general financing needs or for special projects. Municipal Bond interest is generally free of federal tax, although it may be subject to the federal Alternative Minimum Tax. Municipal Bond Interest may also be free of state and local tax if issued in the investor's state of residence. Like all Bonds, their value typically falls when Interest Rates rise, and rises when Interest Rates fall. Municipal Bonds are not FDIC insured, and involve risk to Principal.
NFCC - National Foundation for Consumer Credit
A non-profit organization dedicated to educating consumers in the wise use of credit. The NFCC is the parent group for Consumer Credit Counseling Service.
Outstanding Balance
The total amount owed on a credit card or other loan.
Over-the-Credit-Limit
When the amount owed is greater than the limit on a credit line. Any combination of purchases, cash advances, fees or finance charges may cause an individual to exceed their credit limit.
Over-the-Limit Fee
A fee charged for exceeding the assigned credit limit on a credit card.
Past Due
The status of an account when the minimum payment has not been received by the due date.
Periodic Rate
The interest rate described in relation to a specific amount of time. For example, the monthly periodic rate is the cost of credit per month; the daily periodic rate is the cost of credit per day.
Posting Date
The date that a purchase, cash advance, fee, service charge or payment is recorded on an account.
Prepayment
When a portion or the entire amount of the principal of a loan is paid before it is due. This will usually reduce the total amount of interest that must be paid.
Previous Balance
The total balance due at the end of the last billing cycle.
Prime Rate
The base interest rate on corporate loans posted by at least 75% of the nations' 30 largest banks. The Prime Rate is monitored by the Federal Reserve.
Principal
Principal is the portion of a loan that represents the actual amount of money borrowed. Principal is separate from interest. In terms of credit cards, principal represents the price of purchased items or the amount of a cash advance.
Promissory Note
The binding legal document that a person signs to obtain a loan. It lists rights and responsibilities under the loan agreement, including how and when the loan must be repaid.
Purchasing Power Risk
Purchasing Power Risk, or Inflation Risk, is the risk that the return on an asset will not exceed the rate of Inflation.
Quarterly
Every three months.
Rate of Return
The Rate of Return is the gain or loss generated from an investment over a specified period of time. It is also referred to as total return, and it includes the change in the value of a security plus all Interest, Dividends and capital gains distributions generated by holding that security.
Rebate Card
A credit card that supplies benefits based upon the card's usage. Benefits are usually in the form of services, such as airline tickets, discounts on future purchases or cash refunds. The credits accumulated toward these benefits are often a percentage of each purchase.
Revolving Credit
A credit agreement that allows consumers to pay all or part of the outstanding balance on a loan or credit card. As the balance is paid off, credit becomes available again to use for another purchase or cash advance.
Risk Tolerance
Risk Tolerance is an investor's comfort level with fluctuations in the value of investments, and the potential for loss.
Savings Accounts
Savings Accounts are FDIC insured Bank Deposits, which usually allow withdrawals at any time and in any amount. These accounts are very liquid. However, preauthorized withdrawals (transfers) from Savings Accounts, including those made by telephone and computer, are limited to six per month.
Secured Card
A credit card which is guaranteed by a cash deposit held in a special savings account or certificate of deposit. The credit line on the card is usually equal to the amount of the deposit. If the cardholder defaults on payments, the issuer will apply the deposit toward the outstanding balance. The deposit must remain in the account until the credit line is closed or the issuer determines security is no longer necessary.
Secured Debt
Debt for which repayment is guaranteed through collateral - property of equal or greater value than the amount of the loan. If the loan is not repaid, the issuer may take possession of the collateral. Collateral may be an asset such as a car or a home or, in the case of a secured credit card, a cash deposit held by the issuer. For example, a mortgage is a secured debt in which the home is collateral. If the person fails to repay the loan, the bank may take the home as payment.
Semi-Annually
Twice a year.
Social Security Benefits
The Social Security system provides working individuals and their families with certain retirement, disability, survivorship, and medical benefits. You can obtain a summary of your expected benefits by completing a history of earnings request form and mailing it to the Social Security Administration. You can obtain this form by calling 1-800-772-1213 or by visiting your local Social Security office. Social Security retirement benefits can begin as early as age 62, but at a reduced rate. The current full benefit retirement age is 65, but it will start increasing gradually beginning in the year 2000 until it reaches age 67 for those retiring in the year 2027 or later.
Stock
The term "Stock" generally refers to shares of Common Stock. Each share of Common Stock represents a share of ownership in a company. The price of a Stock generally represents investor expectations about the future profitability or future value of the company, and may also be influenced by general economic and market conditions. Stock is not FDIC insured and involves risk to Principal.
Transaction Date
The date a purchase is made or cash is withdrawn. Some companies assess interest from the transaction date, others from the posting date.
Transaction Fee
A charge for various credit activities such as using an ATM or receiving a cash advance.
Unsecured Debt
Debt that is not guaranteed by collateral - no assets are committed in the event of default. If the issuer is unable to collect on the loan, its value is lost. Most credit cards are unsecured.
U.S. Treasury Bonds and Notes
U.S. Treasury Bonds and Notes are debt securities issued by the U.S. Government. U.S. Treasury Bonds are issued with maturities of over 10 years, and U.S. Treasury Notes are issued with maturities of 2 to 10 years. The U.S. Government guarantees the timely payment of Principal and interest on these securities, but it does not protect against market fluctuations. Like all Bonds, their value typically falls when Interest Rates rise, and rises when Interest Rates fall. Thus, loss of Principal is possible when these securities are sold prior to maturity. Because of their longer maturities U.S. Treasury Bonds are more sensitive to Interest Rate fluctuations than U.S. Treasury Notes. These securities are not FDIC insured, but Principal and interest payments are backed by the full faith and credit of the U.S. government.
Variable Expenses
Expenses that can change from month to month. Variable expenses include necessities that can be decreased (e.g., food, utilities) and non-essentials that can be eliminated (e.g., long distance charges, cable, magazine subscriptions, etc). Reducing these expenses is the simplest step in getting control of finances.
Variable Interest Rate
An interest rate that changes based on an economic index such as the prime rate. A variable rate credit card will often have an interest rate like "prime + 5.9%" meaning that the interest on the card is the prime rate plus an additional 5.9%. (See Fixed Interest Rate.)
Warning Signs
Situations or events that suggest financial difficulty. For example, a warning sign could be using a credit card to pay for daily expenses. Other warning signs include paying only the minimum due on credit cards, one credit card to pay the monthly minimum on another card and routinely exceeding the limit on credit cards.
Zero Balance
When the total outstanding balance is paid and there are no new charges or cash advances during a billing cycle.
Please note Definitions for the above terms could vary slightly from lender to lender.
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