Download 1 Why are you here today? - University of Cincinnati Graduate School

Why are you here today?
Credit and Budgeting for
Graduate Students
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Professor Margaret Reed, Ph.D., CPA
Lindner College of Business
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How do people get into
financial difficulties?
Personal Money Management:
Keys to Success
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By spending more than you have
By signing contracts you don’t
understand
 By being overly optimistic
 Once you get behind, the system
works against you.
You are interested in preventing or
avoiding financial problems in the future
You have entered a period of some
financial stress and are looking for some
suggestions to help things from getting
worse
You know you have major debt and cash
flow problems that are looming and are
looking for a simple solution
Know your current financial situation
Think about where you want to end
up
 Figure out how to get there
 Don’t fall into various financial traps
along the way
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Agenda for Graduate Students
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Goals and Budgets
Setting goals
– Creating a budget
– Monitoring your spending
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Borrowing
Credit cards
Student loans and loan consolidation
– Credit record and credit score
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Creating a budget
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Goal setting is an important part of
good money management
 Organize goals by short, intermediate
and long-term
 Make the goals as specific as
possible
 Change the goals whenever
necessary
Ongoing monitoring required
Gather your financial records for the past
quarter, six months or one year
Accumulate the data so that you know
what your income and expenses were
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Use an Excel spreadsheet or start to use
Quicken or Microsoft Money
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Setting Financial Goals
Project your income and expenses for the
next period, decide where you can cut
back
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Once you have a budget, then you have to
keep track of your spending to see where
you were able to stay within budget and
where you were not
Your goal is to make a realistic budget,
because then you can plan where the
money will come from rather than
haphazardly spend using your credit cards
Be sure to include some budget slack
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Credit Cards
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Understanding how credit cards work
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Revolving loan, grace period and minimum
payments
Credit Limit
Annual Percentage Rate
Interest Computation
Cash advances
Annual fees and other charges
Credit Card Agreements
Credit Card Limit
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This is the maximum amount you can
borrow on the card
 The credit limit can be increased
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Once you have a good payment record,
the credit card company will offer to
increase your limit
You can request to increase your limit,
which is often a better choice than
getting additional cards
What is a revolving loan?
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A revolving loan is one that does not
have to paid off each month
 There is a grace period, usually 14-20
days at then end of the cycle, when no
interest is charged at all if the balance
is paid in full
 A minimum payment equal to about
4% of the balance on the card, but not
less than the interest charged, must
be paid each month
Annual Percentage Rate (APR)
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The APR in the interest rate plus the annual
fee (the nominal annual rate does not include
the annual fee)
 If you won’t carry a balance, choose a card
with no annual fee but a higher nominal rate
 If you will or might carry a balance, choose a
card with an annual fee but a lower APR
 The APR can be changed with 15 days written
notification from the credit card company
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Interest Computation (approx.)
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Take the nominal annual rate and divide
by 12 to get the monthly interest rate
Multiply the monthly interest rate by the
average daily account balance
The average daily account balance is
calculated in one of several possible ways
– Average daily balance without a grace period
or the average daily balance with a grace
period are two of the most common methods to
calculate account balance
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Cash Advances
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Using your credit card to get cash is
very expensive
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There is no grace period for interest
charges on cash advances
Cash advances can cause your
purchase transactions to be subject to
finance charges
Exact Interest Calculation
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Assume average unpaid balance of
$350 for the month and an interest
rate of 16%
 Approximate calculation would result
in interest of $4.67 for the month
 Daily compounding calculation would
result in interest of $4.78 for the
month
Annual fees and other charges
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Many cards charge an annual fee,
payable up front when you get the
card and due each year after
 Late payment charges for making
your minimum payment late
 Overlimit charges for going over your
credit limit
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Credit card agreements
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Difficult to read but important to understand
Changes to the interest rate can occur with
15 days written notice
Changes occur after any event that affects
your credit record
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You buy a house and take out a mortgage
You are late with a payment on another credit
card or utility bill
How long to pay it off?
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Assume you have a $675 balance
outstanding on your credit card
(interest rate of 17%) and you have
$32 per month to pay it off. How
many months will it take you to pay it
off?
 Two years and one month
What if you get overextended?
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Stop using your credit cards and start
paying off the credit card with the highest
rate first
Consolidate your credit card balances with
balance transfers to a zero-rate card, and
then pay as much as you can during the
zero rate period
Seek lower cost financing to pay off your
credit cards, but only if you stop using the
cards
Credit Score Basics
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What is a credit score and why is it
important?
 FICO score ranges from 330 to 830
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Average score in Ohio was 685 in 2008
What affects your score?
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Amount of debt available and used
Timely payments on debt and other bills
Bounced checks
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Credit Score Access
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Your credit score must be provided to
you for free once each year, upon
request, by each of the three credit
reporting agencies
 Request online or in writing
 Checking your score will not affect it
 Having creditors check your score
will lower your score
Scholarships and grants
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Scholarships from a variety of
sources
 Federal grants, like Pell Grants,
FSEOGs, Academic Competitiveness
Grants, SMART Grants
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Awarded based on low expected family
contribution
Sources of funds for Education
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Scholarships and grants
 Parent/guardian or spouse support
 Work-study employment
 Subsidized student loans
 Unsubsidized student loans
 General loans or credit cards
Subsidized Student Loans
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Subsidized Stafford Loans
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Based on financial need, interest currently at
6.0%, repayment begins 6 months after leaving
school, no interest accrual during school
Unsubsidized Stafford Loans
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Not based on financial need, interest currently
at 6.8%, repayment begins 6 months after
leaving school, interest accrued during college
is added to the loan principal balance
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Lifetime limits
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Know the lifetime limits to make sure
you don’t run out of money before
you finish college
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Repayment of Student Loans
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Graduate and professional students $65,000
subsidized, $138,500 total(may be higher for
certain health professions)
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Loan Consolidation
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Student loan consolidation after you
graduate can be a good idea or not, it
depends on the interest rates and terms of
the loans
Calculate the payments under each of the
loans and add them up, then compare to the
payments on the consolidated loan
– Many consolidators extend the term of the
loan, decreasing the monthly payment but
dramatically increasing the amount of interest
you will pay over the repayment period
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Keep an inventory of your loans
Payments on most loans begin six months after
you drop below half-time status
Repayment options: standard (10 years),
graduated (rising pymts), income sensitive
(fluctuating pymts), extended (over 25 years, if
balance greater than $30,000)
Deferment: up to 3 years max while in grad
school or if you can’t find a job
Forbearance for volunteer work like Americorps
(no interest accrual for one year)
Minimizing Student Loans
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Estimate how much you will borrow over your
college years and calculate the payments that will
be due starting 6 months after you graduate
(these should not exceed 15% of your projected
monthly take-home pay)
 Try to cut expenses to reduce your student loans
(live at home, don’t get a car, etc.)
 Try to find scholarship money to reduce your
student loans (check with the university, your
department, your high school guidance counselor)
 Increase your income to reduce your student
loans (find a work-study position, become a tutor,
get a part-time job)
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Student Loans
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They stick with you until you pay
them off
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Student loans cannot be discharged in
bankruptcy
They impact your credit score
They reduce the amount of credit you
can qualify for
They increase the interest rate you will
pay on other debt
Good luck with your financial future
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