1. THE BASICS OF CREDIT

2. WHAT IS CREDIT? The dictionary defines credit as “confidence in a purchaser’s ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment.” But what does that really mean? Simply put, credit is a measure of how likely you are to pay something back. When you buy a car without paying for all of it at once, your credit tells the bank if you can be trusted with a loan. Good Credit = Easy to Trust Bad Credit = Hard to Trust

3. WHAT IS CREDIT? Just about every purchase you will make as an adult will involve your credit in some way. You need credit to buy a car, rent a house, get a loan, apply for a credit card, and do anything along those lines. The sooner you start building your credit, the better off you will be.

4. WHY CREDIT IS IMPORTANT FICO or credit score: Credit Card Issuers & Lenders  Determine APR (Annual Percentage Rate) Auto Insurers  Determine Premium Employers  Are you a worthy hire? Landlords  Are you a reliable tenant?

5. HOW IS CREDIT MEASURED? Once you start building it, your credit will be assigned a number, known as your credit (FICO) score. Credit scores range from 350 to 850, with 850 being the best score you can get. Here is a look at how credit scores are ranked: Your credit score will not start out at 350. Chances are it will start in the 500’s or 600’s, depending on what you do to build it. Most people fall into the “fair” or “good” credit ranges. The national average credit score is 691.

6. IT’S LIKE SCHOOL. Think of a credit score like a grade you get in class. A 95 is better than an 87, and an 87 is better than a 65. The harder you work, the higher your score is probably going to be. Getting bad grades on multiple assignments will lead to a bad grade for the semester. That’s what happens with your credit score. Every time you make a payment for a loan, credit card, or a bill (in some cases), you get a positive mark on your credit. This mark won’t have a specific value like a grade in class would, but it will work with all the other marks to determine how high your score will go. Long, steady payment histories improve credit, and missed payments make it worse. You have to keep track of your score to make sure it stays high.

7. HOW CAN I BUILD GOOD CREDIT? Building good credit is an important part of being an adult. Even if you never need to get a loan, you can use a good credit score to get discounts on phones, clothing, electronics, and more. There are several ways to build good credit, and one is no better than the others. You could… – Make payments on a credit card. – Make payments on a small loan. – Make payments on a piece of furniture. – Make payments on a house (not in rent). You get the idea. Everything revolves around paying someone for something. In order to build credit, you have to find people that will trust you with a small amount of money. If you pay that back on time, you will get a good mark and a higher score.

8. IT’S STILL LIKE SCHOOL. Let’s go back to the idea of getting grades in class. If you turn in your assignments on time with the right information, you will get a good grade. Late or incomplete homework will not have as high of a grade. It works the same with credit. If you don’t make a payment on time or you make less of a payment than you need to, your credit score will not be as high. It’s as simple as that.

9. WHY DO SOME PEOPLE HAVE BAD CREDIT? Bad credit comes from not making payments on time. It has nothing to do with how much money you owe in loans and credit cards. You can be in a lot of debt and still have a good credit score if you are making all of your payments on time. Factors that lead to bad credit include: – Missed payments – Payments that are too low – Outstanding debts (Those that you have not paid for a long time) – Excessive credit inquiries (Too many people looking at your credit) – Car repossessions (You lost your car because you couldn’t pay for it) – Home foreclosures (You lost your house because you couldn’t pay for it)

10. WHAT DO CREDIT CARDS DO FOR CREDIT SCORES? When used correctly, credit cards can do wonders for credit scores. Every positive payment you make on your credit card will be a good mark on your credit history. Make these payments consistently, and future lenders will see that you can be trusted with a line of credit or a loan. However, failure to make your credit card payments could lead to disasters on your credit score. Most credit card companies are more likely to report bad credit than they are to report good credit. In other words, it only takes one mistake to make your credit score drop significantly, even if you have a great history before that.

11. THIS ISN’T LIKE SCHOOL. IT’S LIKE LIFE AT HOME. Think about how life works at home. If you do your chores for months at a time, your parents will eventually assume that you’re going to do your chores. The first time you break curfew, you’re grounded for two weeks. It doesn’t matter how many times you cleaned your room, put up the dishes, washed the dog, or gave Grandpa Sam his meds. You’re going to be in trouble for breaking the rules. Credit card companies do the same thing. They don’t pat you on the back and thank you for making your payments. They put horrible marks on your credit when you don’t make your payments. That’s why it’s so important to make your credit card payments on time.

12. THE BASICS OF BUILDING CREDIT car repossession: An event where a car is taken away because a person did not make payments on a loan for it. cosigner: A person who puts his or her name on a loan with a person, offering to make payments if that person cannot do so in the future. credit: A measure of how likely a person is to pay back a loan or manage a credit card. credit card: A plastic card that represents an account. credit score: A number that represents how good or bad a person’s credit is. home foreclosure: An event where a home is taken away because a person did not make payments on a loan for it.

13. ADVANTAGES AND DISADVANTAGES OF CREDIT advantages : Able to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment On-line purchases Kick-backs i.e. cash, airline miles, etc. Can rent a car disadvantages: Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses track of how much has been spent each month Increased impulse buying may occur teens – lesson 7 - slide 7-A

14. THE THREE CS OF CREDIT WORTHINESS Character—will you repay the debt? From your credit history, does it look like you possess the honesty and reliability to pay credit debts? Have you used credit before? Do you pay your bills on time? Do you have a good credit report? Can you provide character references? How long have you lived at your present address? How long have you been at your present job? Capital—what if you don’t repay the debt? Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable? What property do you own that can secure the loan? Do you have a savings account? Do you have investments to use as collateral? Capacity—can you repay the debt? Have you been working regularly in an occupation that is likely to provide enough income to support your credit use? Do you have a steady job? What is your salary? How many other loan payments do you have? What are your current living expenses? What are your current debts? How many dependents do you have?

15. YOUR RESPONSIBILITIES  Borrow only what you can repay.  Read and understand the credit contract.  Pay debts promptly.  Notify creditor if you cannot meet payments.  Report lost or stolen credit cards promptly.  Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity. teens – lesson 7 - slide 7-C

16. HOW MUCH CAN YOU AFFORD? (THE 20-10 RULE) never borrow more than 20% of your yearly net income If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800 Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960 So, you should never have more than $960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards. monthly payments shouldn’t exceed 10% of your monthly net income If your take-home pay is $400 a month: $400 x 10% = $40 Your total monthly debt payments shouldn’t total more than $40 per month. Note: Housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards. teens – lesson 7 - slide 7-I

17. WHAT NOT TO USE CREDIT FOR: Pay Day Loans

18. PAYDAY LOANS / CHECK CASHING Stay Away! What is it?  Cash Loan  Extremely High Interest  Short-term (14 – 45 days)

19. HOW DO THEY WORK? You postdate a check They give you a loan Loan last for 2 weeks They charge you a fee for borrowing the money—equivalent APR can be over 300%.

20. RISKS OF PAYDAY LOANS Not a long-term cash solution Borrowers get trapped in a payday loan cycle of debt  Take out loan after loan

21. WHAT’S NEXT? LIFE AFTER HIGH SCHOOL

22. LEARNING BOOSTS EARNING EducationAverage Annual Income Professional$71,258 Doctorate$60,729 Master's$48,772 Bachelor's$40,387 Associate$26,536 Some college, no degree$20,998 High school graduate only$18,571 Not a high school graduate$10,839

23. SAVING FOR THE FUTURE Save 10% of every monthly check Use savings for:  Emergencies  Big purchases  Trip with friends  Car  Down payment on a home  Retirement You should use credit to buy:  House  Car  Education (student loan)

24. SHOPPING FOR A CREDIT CARD

25. Comparison shop credit cards Don’t take the first offer that comes to you:  Pre-approval  Means nothing  No special rates

26. CARD HOLDER AGREEMENT Written statement that gives the terms and conditions of a credit card account.  Look here for all info before signing up  Required by Federal Reserve  Card issuers can change terms at any time with 15 days notice

27. BILLING STATEMENT The monthly bill sent by a credit card issuer to the customer. It gives a summary of activity on an account. Important changes to a credit card account are included in small-print fliers that are sent with the statement.  Schumer box: Important to look here once you’ve selected a card.

28. ANNUAL PERCENTAGE RATE (APR) Annual Percentage Rate (APR) Interest F (Fixed) rate V (variable) rate Introductory rate  How long?  What will the rate “go to” afterwards?

29. GRACE PERIOD Interest-free time between:  Transaction date  Billing date Usually 20 – 30 days No grace period if:  Carry a balance  No stated grace period

30. CREDIT LIMIT The maximum amount you can charge on a credit account. You're approved up to $25,000!  “Up to” is the key phrase  Enticement offer  Actual credit limit based on credit score Recommended limit  20% of net income

31. OVER-THE-CREDIT-LIMIT FEE You can exceed your credit limit but it will cost you  Fee  Higher interest rate

32. ANNUAL FEES ON REWARD CARDS Paying for the privilege of using a credit card Many cards offer rewards without an annual fee Weigh cost of annual fee to value of reward  Mileage Avoid annual fees

33. LATE-PAYMENT FEE Charge imposed for not paying on time Know your payment due date & time  9 a.m.  12 noon  5 p.m.  11:59 p.m.? Pay via U.S. mail, phone, online, automatic bill pay, etc.

34. BALANCE-TRANSFER FEE Balance Transfer  The process of moving an unpaid credit card debt from one issuer to another Cards charge to transfer balance to or from one card to another.

35. RETURNED-CHECK FEE Your check “bounces” at the bank because:  Not enough money in your account  You don’t have a cash-advance line at the bank to cover the check

36. MINIMUM FINANCE CHARGE Also called “No Balance Fee” Fee charged for using the credit card even when you pay off the balance in full every month. Don’t select this card  $1.50 * 12 = $18  Similar to an annual fee

37. CASH-ADVANCE FEE & INTEREST Don’t take cash advances Fee  Flat amount  Percentage of withdrawal Cash advance interest rate is always higher and has no grace period Payments are applied to lower-interest balance first

38. BILLING METHODS: AVERAGE DAILY BALANCE Determined by:  Adding each day’s balance  Dividing by total number of days in the billing cycle.  Multiplying by monthly periodic rate (APR/12) Example  Day 1: Charge $100  Day 2: Charge $200  Avg. Daily Bal $150  30 days in billing cycle =  $5 average daily balance  Card with 15% APR has a 1.25% monthly periodic rate (15% / 12 months)  $5 daily balance = $6.25 finance charge

39. BILLING METHODS: TWO-CYCLE BILLING If you don’t pay your balance off it:  Charges you interest based off of the current and previous month  Interest starts the day you make the purchase.

40. DEFAULT AND UNIVERSAL DEFAULT Default  A designation that indicates a person has not paid a debt that was owed. Universal default  If you are more than 30 days late on a payment to anyone, your credit card company can raise your interest rate.

41. WHAT YOU DON’T NEED IN A CREDIT CARD OFFER

42. NO ON CREDIT CARD INSURANCE Life and disability insurance policies will cover credit cards. Any type of credit card insurance is not as flexible as traditional policies. You will have to take a policy out on each credit card.

43. NO TO THEFT INSURANCE If your card is stolen  Federal law limits your liability to $50 Don’t need theft insurance because you’re already protected Report missing cards within 24 hours or ASAP