Unit 4 - Good Debt, Bad Debt: Using Credit Wisely

NEFE High School Financial Planning ProgramNEFE High School Financial Planning ProgramUnit 4 – Good Debt, Bad Debt: Using Credit Wisely

Unit 4 - Good Debt, Bad Debt:Unit 4 - Good Debt, Bad Debt:Using Credit WiselyUsing Credit Wisely

You have saved $400 from your part-time job. You want to go on a school-sponsored trip out of town next week, but the trip costs $700. You ask a classmate if you can borrow the $300 you need for the trip.Questions:1) What will make you repay the money?2) What could happen if you are unable to repay the money?3) Is it fair for your classmate to charge you interest for borrowing their money? WHY?


Tell me about an actual event when you either

borrowed money or someone borrowed money

from you. Did being a lender/borrow affect the

relationship.


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Credit FactsCredit Facts• Nearly Nearly 33%33% of teens owe money to either of teens owe money to either

a person or company, with an average a person or company, with an average debt of debt of $230$230..

• About About 26%26% of teens ages 16-18 already of teens ages 16-18 already have more than $1,000 in debt.have more than $1,000 in debt.

• 30%30% of teens say they understand how of teens say they understand how credit card interest and fees work.credit card interest and fees work.

• 36%36% of teens say they know how to of teens say they know how to establish good credit.establish good credit.


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Top 10 Questions to AskTop 10 Questions to AskBefore Signing on the Dotted LineBefore Signing on the Dotted Line

1.1. Do I really need this item right now, or Do I really need this item right now, or can I wait?can I wait?

2.2. Can I qualify for credit?Can I qualify for credit?

3.3. What is the interest rate (APR) on this What is the interest rate (APR) on this card?card?

4.4. Are there additional fees?Are there additional fees?

5.5. How much is the monthly payment, and How much is the monthly payment, and when is it due?when is it due?21

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6.6. Can I afford to pay the monthly Can I afford to pay the monthly payments?payments?

7.7. What will happen if I don’t make the What will happen if I don’t make the payments on time?payments on time?

8.8. What will be the extra cost of using What will be the extra cost of using credit?credit?

9.9. What will I have to give up to pay for it?What will I have to give up to pay for it?

10.10.All things considered, is using All things considered, is using credit worth it for this purchase?credit worth it for this purchase?


http://buyingvalue.com/2009/09/buy-afford/


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• Credit is the amount of money or something of value that is loaned on trust with the expectation it will be repaid later to lenders.

• Types of Credit– Borrow up to a predetermined limit (i.e., credit

card)– Borrow cash to be repaid by a specific date– Borrow money for a major purchase to be

repaid in regular payments over time, typically monthly (i.e., car loan, home mortgage)

The Language of CreditThe Language of Credit

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• Debt is the entire amount of money you owe to lenders.

• APR (Annual Percentage Rate) is the total cost to use credit in a year.

• Term is how long you have to repay a loan, often expressed in months.

• Fees are charged to use credit. Examples: Annual Credit Card Fee, Loan Origination Fee, Over-the-Limit Fee


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• Credit History is a record of your behavior related to borrowing and repaying loans.

• Credit Report is a detailed record of your personal credit and financial transactions.

• Credit Score is a rating used by credit reporting companies to help lenders decide whether and/or how much credit can be extended to a borrower.


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• Universal Default allows a credit card company to increase your interest rate if you make just one late payment.

• Bankruptcy is a legal process to get out of debt when you can no longer make all your required payments.


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Common Types of Credit

Type of Credit InstitutionCredit Card Banks, Credit Unions, Stores, Gas Stations

Installment Loan Banks, Credit Unions, Auto Dealers, and Financial Institutions

Student Loan Banks, Credit Unions, and Federal Government

Mortgage Banks and Credit Unions


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Sources of CreditSources of Credit• BanksBanks

• Credit UnionsCredit Unions

• Department StoresDepartment Stores

• Automobile DealersAutomobile Dealers

• Oil Companies (for gas stations)Oil Companies (for gas stations)

• Federal Government (for student loans)Federal Government (for student loans)

• Others?Others?


Credit: Good and BadRewards• Convenience• Protection• Emergencies• Opportunity to Build

Credit• Quicker Gratification• Special Offers • Bonuses

Potential Risks• Interest• Overspending• Debt• Identity Theft

Complete

TRY IT!

Page 46


Question of the Day

List four things you

can do with

money.

• Spend it on needs or wants

• Save it

• Invest it

• Give it away


CHALLENGE

FRUIT TUNA


channelone.com

Go to the computer with your sheet of paper and complete

the following.


channelone.com1. Search Engine - Credit Card Simulator

A. Write which card you chooseAt PAYMENT HISTORY

B. Write the amount you SpentC. Write the amount of Interest you are

ChargedD. Write the Total Cost E. Number of Months


2. Take the Credit 101 Quiz

3. Take the Will You Be Rich Quiz

4. Take the Money Master Quiz

Write Down the Results for

Each Quiz


5. Define a secured credit card and give an example.

6. Who can file for Chapter 7 bankruptcy?7. What are often the arrangements set up for

someone who files for Chapter 13 bankruptcy?8. Find average American’s (or household) credit

card debt for 2010 – list the web address.9. Define debt consolidation company and give 3

examples including name and web address.10. Find a web site that gives realistic financial

advice to those who are in “money” trouble. Give the web address and two points of creditable information you viewed.


6 Questions to Ask When You Compare Credit

1. What’s the interest rate for purchases?

2. How long is the loan for?

3. What’s my minimum monthly payment?

4. What’s the grace period?

5. What extra fees and penalties may be charged?

6. Which is the best deal for me?


Things to have on hand when seeking a credit card or loan.

• Social Security Number• Driver’s License Number• Date of Birth• Address and phone number• Name of your employer• Average Monthly Income• Total monthly payments on other debts• Amount of monthly rent or mortgage

payment


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The Four “The Four “CCs” of s” of CreditCredit((LendersLenders use in deciding how much to use in deciding how much to loanloan you) you)

CollateralCollateral

CapitalCapital

CapacityCapacity

CharacterCharacter


The Four “The Four “CCs” of s” of CreditCredit

• Collateral – an asset value that lenders take from you if you don’t repay the loan as promised. In home and car loans, it may be referred to as a “secured” loan.

• Capital – the personal items of value you have. These are items that if the loan is not repaid, can be sold to repay the loan; examples investment accounts and your home.


The Four “The Four “CCs” of s” of CreditCredit

• Capacity – can you feasibly repay the loan (look at your credit worthiness, your income, and your employment history)

• Character – are you trustworthy (look at you credit record for paying bills on time)?

Complete

TRY IT! Exercise 4E

Page 48


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2 Types of Credit2 Types of CreditInstallmentInstallment Credit Credit• FixedFixed payments payments• Set Set periodperiod of time to of time to

repayrepay• Set or varying Set or varying interestinterest

ratesrates• Car Car loansloans and home and home

loans are typical loans are typical examples.examples.

Revolving CreditRevolving Credit• No stated No stated payoffpayoff time time• Limit to Limit to creditcredit• Minimum Minimum monthlymonthly

paymentspayments• Interest rates Interest rates varyvary• OtherOther charges charges• CreditCredit cards most cards most

typical exampletypical example


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WHEN YOU BUY “STUFF”WHEN YOU BUY “STUFF”

In fact, you bought $500 worth of “STUFF” with your credit card.In fact, you bought $500 worth of “STUFF” with your credit card.

You bought “STUFF” with your credit card.You bought “STUFF” with your credit card.

Your APR is 18%.Your APR is 18%.

You plan to pay $10 a month to pay it off.You plan to pay $10 a month to pay it off.

You will pay $431 in interestYou will pay $431 in interest

Final cost of your purchases = $931.40Final cost of your purchases = $931.40

And it will take SEVEN YEARS and NINE MONTHSAnd it will take SEVEN YEARS and NINE MONTHS

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How Long Will It Take???

APR = 18%APR = 18%

Payment: 4% of current balancePayment: 4% of current balance

You owe $3,000 for a motorcycle.You owe $3,000 for a motorcycle.

Finance Charge $1715.69Finance Charge $1715.69

Total cost of original Total cost of original $3,000 loan = $4715.69$3,000 loan = $4715.69

After you’ve made the last payment, will what you purchased still be around???

And it will And it will take take

nearly nearly 11 YEARS 11 YEARS to pay off!to pay off!

1


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The Cost of Using Credit

APR = 24%APR = 24%


$700 for a Game System$700 for a Game System

Finance Charge $550.04Finance Charge $550.04

Your GS player REALLY Your GS player REALLY cost $1,250.04cost $1,250.04

After you’ve made the last payment, will your Game System still be around???

And it will And it will take overtake over7 years 7 years

to pay off!to pay off!

1


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The Cost of Using Credit

APR = 21%APR = 21%


$3,000 Charged to Credit Account$3,000 Charged to Credit Account

Finance Charges $2,220.57Finance Charges $2,220.57

You Owed You Owed $3,000$3,000

butbutYou PaidYou Paid$6,065+$6,065+

Includies annual feesIncludies annual fees

Annual Credit Card Fee: $65Annual Credit Card Fee: $65

Paying the minimum, it will Paying the minimum, it will take you 11 YEARS and 11 take you 11 YEARS and 11 MONTHS to pay off your debt.MONTHS to pay off your debt.

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The Cost of Using CreditThe Cost of Using CreditInterest Rate = 24%Interest Rate = 24%

Payment = 4% of Current BalancePayment = 4% of Current Balance

BALANCEBALANCE TIME TO TIME TO PAY OFFPAY OFF

INTEREST INTEREST CHARGEDCHARGED

TOTAL TOTAL COSTCOST

$2,000$2,000 11 YEARS11 YEARS6 MONTHS6 MONTHS $1,850$1,850 $3,850$3,850

$6,000$6,000 16 YEARS16 YEARS1 MONTH1 MONTH $5,850$5,850 $11,850$11,850

$10,000$10,000 18 YEARS18 YEARS2 MONTHS2 MONTHS $9,850$9,850 $19,850$19,850

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Complete

Payment Calculator

Worksheet


Did you know…

• That about 40% of credit card holders carry individual balances of less than $1,000, while about 15% individually carry total credit card balances of more than $10,000.

• That 48% of consumers individually carry less than $5,000 of debt (not including mortgage loans).

• That the typical consumer has about $19,000 total credit available on credit cards. More than ½ of all people with credit cards are using less than 30% of the total credit limit.

Source: “Average Credit Statistics,” at www.myFICO.com


Credit Scores

Report Card

tracks your success in school.

Credit Report

tracks your success in managing money responsibly.


Video: Credit Reports 101 http://www.channelone.com/life/credit/


Important Credit Report Definitions

• Credit History - a record of your personal financial transactions.

• Credit Report - a history of personal transactions for the past 7 to 10 years.

• Credit Score - a number that reflects your credit worthiness, based on the 4 C’s.


Credit Reporting Agencies

• Also known as credit bureaus

• Sell your credit report information to businesses that are interested in finding out your credit worthiness.

• Run your credit anytime you apply for a credit card, a loan, and sometimes when you apply for a job.


Credit Reporting Agencies • Three main agencies in the US:

– Equifax– Experian– TransUnion

• Every consumer in the US are entitled to a free copy of their credit report from one of the above companies once every 12 months.

• FICO score - most popular credit score (ranges from 300 to 850).

• Website: annualcreditreport.com NOT freecreditreport.com


National Credit Scores

2%5%

8%

12%15%

18%

27%

13%

0%

5%

10%

15%

20%

25%

30%

up to499

500-549

550-599

600-649

650-699

700-749

750-799

800+


http://www.creditreporting

.com/free-credit-report-video.html


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How Credit Scores Are DeterminedHow Credit Scores Are Determined• Your payment Your payment historyhistory

– Information about how you make your Information about how you make your payments on credit cards, payments on credit cards, storestore accounts, accounts, carcar loans, finance companies, mortgagesloans, finance companies, mortgages

– Accounts in Accounts in collectioncollection or past due, and how or past due, and how long past duelong past due

– Information in public records, such as Information in public records, such as bankruptcybankruptcy, judgments, liens, wage , judgments, liens, wage attachments or attachments or child supportchild support

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How Credit Scores Are DeterminedHow Credit Scores Are Determined• Your overall debtYour overall debt

– How much you How much you oweowe on all your accounts on all your accounts– How much How much creditcredit you have available to use you have available to use

• Your credit account historyYour credit account history– When you When you openedopened and used each of your and used each of your

accountsaccounts– How How recentlyrecently you applied for new credit you applied for new credit– Recent good credit history following Recent good credit history following pastpast

payment problemspayment problems

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How Credit Scores Are DeterminedHow Credit Scores Are Determined• Types of CreditTypes of Credit

– The different The different typestypes of credit accounts you of credit accounts you havehave

– The total The total numbernumber of accounts you have of accounts you have

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Get and Keep a Good ScoreGet and Keep a Good Score• Make sure your credit report is Make sure your credit report is accurateaccurate..

• Pay all your Pay all your billsbills on on timetime..

• Apply for Apply for creditcredit only when you need it. only when you need it.

• Lower the Lower the balancesbalances on all your credit on all your credit accounts.accounts.

• Pay offPay off debt rather than moving it around. debt rather than moving it around.


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Protect Yourself Against Protect Yourself Against Inaccurate Credit ReportsInaccurate Credit Reports

• Get a Get a copycopy of your of your freefree credit reports from credit reports from all credit rating agencies.all credit rating agencies.

• Examine it thoroughly.Examine it thoroughly.

• If you find something that is If you find something that is incorrectincorrect, ask , ask the agency to the agency to investigateinvestigate the information. the information.

• If that doesn’t If that doesn’t resolveresolve the issue, you can the issue, you can attach a attach a shortshort statement to your credit statement to your credit

report.report.


How you get started building your credit when ready

• Ask a parent or another trusted adult to co-sign a credit card application or car loan for you. Remember the co-signer is on the hook, legally and financially.

• Ask the place where you have your savings or checking account for a credit card application.

• Apply for a credit card from a store, which is often easier to get than the major bankcards.


How should you get started building your credit when ready

• Apply for a secured credit card.

• When you rent a place with some of your friends, put at least one of the utility bills in your name and pay it on time.


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Rule of Thumb 70-20-10 RuleRule of Thumb 70-20-10 Rule

Pay Off Debt, 10%

Save or Invest, 20%

Living Expenses,

70%

Pay Off Debt

Save or Invest

Living Expenses


DEBT• Defined as the entire amount of money

you owe to lenders.

• Excessive debt affects your life (health) and relationships

• Debt can overwhelm even responsible people when experiencing: illness, divorce, business losses, job losses, and life events that are beyond their control.


2 Popular Methods Used to Tackle Debt

1. Take additional money you may have available and use it to pay off the debt with the smallest balance first – debt snowball.

2. Concentrate first on repaying the debt with the highest interest rate.

Be patient and persistent when

paying off your debt!


Complete

TRY IT! Exercise 4G

Page 56

What Are the Priorities?


Seeking Help with Debt

• Creditors want to be repaid, so try to work with them to pay off your debt.

• The Association of Independent Consumer Credit Counseling Agencies (AICCCA)-helps you find registered nonprofit credit counseling agencies in your area (www.aiccca.org)

• Last resort- file bankruptcy.


Are student loans worth it?

http://www.channelone.com/generationmoney/


Bankruptcy

• The legal process to get out of debt when you can no longer make all your required payments.

• Used as a last resort after exhausting all other means to pay off excessive debt.

• Can stay on your credit record for up to 10 years.

• It won’t erase all debt, such as: student loans, child support, alimony, and penalties and fines for crimes a person committed.


Chapter 7 Bankruptcy

• Allows a person to erase mostmost of their debt.

• Qualifications:– Unemployed– Very Low Income

• Requires financial counseling

• The government has made it much harder for individuals to file this type of bankruptcy.


Chapter 13 Bankruptcy

• Allows a person to repay many of their debts over a period of time, usually no more than five years.

• The courts typically oversee the repayment plan to make sure it is being repaid.


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• It is your responsibility to repay your debts.

• If you fail to repay debts, lenders may take legal action against you to recover what they can.

Financial Consequences of Debt

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The Truth in Lending Act

• Requires that lenders tell you in writing the true interest rate and total finance charge before you sign a credit application.

• Gives you the right, with certain types of credit, to cancel an agreement with a lender within three days.

• If turned down for credit card or loan, the lender must tell you the specific reason for the denial and the reporting agency they used.


Fair Debt Collection Practices Act (FDCPA)

• Protects a person from harassment by creditors.

• Provides that a debt collector cannot:– Use abusive language with you– Call at unreasonable hours (only between 8

am and 9 pm) or an excessive number of times

– Threaten to notify your employer or friends that you haven’t paid your bills


Fair Debt Collection Practices Act (FDCPA)

– Attempt to collect more than you owe– Send you misleading letters that appear to be

from a governmental agency or a court of law.

Report problems to the State Attorney General’s Office and the Federal Trade

Commission (FTC)!


Reduce Your Debt by:

• Put away the plastic, and stop adding to your debt. Start living on more of a cash basis.

• Make a personal commitment to repay all your debts. Remember they are your debts.

• Find out exactly how bad it is- how much do you really owe?

• Create a repayment plan that you can stick with.


DatePREVIOUS BALANCE

INTEREST CHARGE

BALANCE PLUS INTEREST

YOUR PAYMENTREMAINING BALANCE

1-Jan $ 495.00 $ 4.95 $ 499.95 $ 55.00 $ 444.95

1-Feb $ 444.95 $ 4.45 $ 449.40 $ 55.00 $ 394.40

1-Mar $ 394.40 $ 3.94 $ 398.34 $ 55.00 $ 343.34

1-Apr $ 343.34 $ 55.00

1-May $ 55.00

1-Jun $ 55.00

1-Jul $ 55.00

1-Aug $ 55.00

1-Sep $ 55.00

1-Oct will not be $55 $0.00

Previous Balance X1%= Interest Charge

Previous Balance + Interest Charge = Balance Plus Interest

Balance Plus Interest – Your Payment = Remaining Balance


Remaining Balance

• Jan 1 – $444.95

• Feb 1 - $394.40

• Mar 1 - $343.34

• April 1 - $291.77

• May 1 - $239.69

• Oct 1 - $0.00 – Oct “your payment” will be what you actually owe not $55.00

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Unit 4 - Good Debt, Bad Debt: Using Credit Wisely

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