Presentation on theme: "Unit 4 - Good Debt, Bad Debt:"— Presentation transcript:
1 Unit 4 - Good Debt, Bad Debt: Using Credit Wisely
2 What is Consumer Credit? Answer the following discussion questions:What is the difference between a credit and debit card?Do you have a credit card?If yes, what do you use it for?If no, would you like to have one? Explain why.At what age are you allowed to sign up for a credit card on your own?Why do you think there is an age restriction for signing up for a credit card?In a paragraph, discuss whether or not high school students should be permitted to have credit cards.Give details to support your answer.
3 Credit Facts33%Nearly of teens owe money to either a person or company, with an average debt ofAbout of teens ages already have more than $1,000 in debt.of teens say they understand how credit card interest and fees work.of teens say they know how to establish good credit.$23026%30%ASK STUDENTSHas anyone used a credit card recently?Was it in your name?If so, how did you get your card?How long have you had it?How, and why, do they use it?IF NOBODY HAS A CREDIT CARD, ASKWould you like to have a credit card?How would you use it?36%4-A
4 Top 10 Questions to Ask Before Signing on the Dotted Line Can I afford to pay the monthly payments?What will happen if I don’t make the payments on time?What will be the extra cost of using credit?What will I have to give up to pay for it?All things considered, is using credit worth it for this purchase?Do I really need this item right now, or can I wait?Can I qualify for credit?What is the interest rate (APR) on this card?Are there additional fees?How much is the monthly payment, and when is it due?4-B-34-B-14-B-212
5 Credit: The Good and the Bad Rewards, Credit Offers:Potential Risks:InterestOverspendingDebtIdentity TheftConvenienceProtectionEmergenciesOpportunity to build CreditQuicker GratificationSpecial offersBonuses/Points
6 The Language of CreditCredit is the amount of money or something of value that is loaned on trust with the expectation it will be repaid later to lenders with interest.Types of CreditBorrow up to a predetermined limitBorrow cash to be repaid by a specific dateBorrow money for a major purchase to be repaid in regular payments over time, typically monthly.4-C-1of14
7 Types of Credit Type of Credit Institution Features Credit Card Banks, Credit Unions, Stores, and Gas StationsMost can be used about anywhere, some are specificNo payoff deadlineMonthly min. variesHighest ratesInstallment LoanBanks, Credit Unions, Auto Dealers, Other Financial InstitutionsUsed for large purchases like a car or appliancesLoan term varies (months to years)Monthly payments are set for life of loanLower rate than credit cardsStudent LoanBanks, Credit Unions, and Federal GovernmentTuition and other college expensesLoan term up to 10 yearsTax break on interest is possibleMortgageBanks and Credit UnionsFor buying a homeRepaid over 15 to 30 yearsFixed, Variable or ARM rates
8 The Language of Credit Finance Charge APR (Annual Percentage Rate) the total dollar amount you pay to use credit.APR (Annual Percentage Rate)is the total cost to use credit in a year expressed in a %.Ex. 18% APR means you pay $18 per year for each $100 you owe.TermHow long you have to repay a loan, often expressed in months.4-C-2of24
9 The Language of Credit Credit Limit Universal Default Fees Charges to use credit. Examples:Annual Credit Card Fee - Yearly charge to use creditLoan Origination Fee – Charge for setting up loan (home loans)Over-the-Limit Fee - Charge for spending more than limitLate Fee – Penalty for making payment after due dateCredit LimitMaximum amount of credit a lender will extend to a customerUniversal DefaultAllows a credit card company to increase your interest rate if you make just one late payment.4-C-3of34
10 WHEN YOU BUY “STUFF” Your APR is 18%. You bought “STUFF” with your credit card.In fact, you bought $500 worth of “STUFF” with your credit card.Your APR is 18%.You plan to pay $10 a month to pay it off.You will pay $431 in interestFinal cost of your purchases = $931.40And it will take SEVEN YEARS and NINE MONTHS4-F1
11 How Long Will It Take??? And it will take nearly 11 YEARS to pay off! You owe $3,000.And it will take nearly11 YEARS to pay off!APR = 18%Payment: 4% of current balanceFinance Charge $Total cost of original $3,000 loan = $After you’ve made the last payment, will what you purchased still be around???4-G1
12 The Cost of Using Credit $700 for a Game System andAccessoriesAnd it will take over7 yearsto pay off!APR = 24%Payment: 4% of current balanceFinance Charge $550.04Your game system REALLY cost $1,250.04After you’ve made the last payment, will your game system still be around???4-H1
13 The Cost of Using Credit Interest Rate = 24%Payment = 4% of Current BalanceBALANCETIME TO PAY OFFINTEREST CHARGEDTOTAL COST$2,00011 YEARS6 MONTHS$1,850$3,850$6,00016 YEARS1 MONTH$5,850$11,850$10,00018 YEARS2 MONTHS$9,850$19,8504-I123
14 The Cost of Using Credit $3,000 Charged to Credit AccountYou Owed $3,000butYou Paid$6,065+Includies annual feesAPR = 21%Payment: 4% of current balanceFinance Charges $2,220.57Annual Credit Card Fee: $65Paying the minimum, it will take you 11 YEARS and 11 MONTHS to pay off your debt.4-J1
15 Financial Consequences of Debt What if you took the $120 monthly payment in the last example and INVESTED $120 a month for the 12 years it took to pay off the $3,000 debt, and your investment got an 8% rate of return?Instead of $6,000 paid out for $3,000 worth of “stuff”, your $120 monthly investments would amount to $28,799 in your pocket!4-K-2of22
16 Financial Consequences of Debt Could put you in a state of overspending and perpetual debt, where you get used to carrying a balance and paying extremely high interest rates.Could adversely affect your credit rating, making it harder to get loans when you really need them.4-K-1of12
17 The Four “Cs” of Credit Capital – What are your assets and Net worth? Want to know you have enough capital to pay back the loanWhat are your assets?What are your liabilities?Collateral – What if you do not repay the loan?What assets do you have to secure the loan? (vehicle, home, furniture)Do you have any other assets? (bonds or savings)4-L
18 The Four “Cs” of Credit Character – Will you repay the loan Want to know what kind of person they are lending money toHave you used credit before?How long have you lived at your present address?How long have you held your current job?Capacity – Can you repay the loan?What is you job, and how much is your salary?Do you have other sources of income?What are your current debts?
19 Credit Score Credit Report Credit Score A record of your personal financial transactionsThree major credit reporting companies: Equifax, Experian, TransUnionCredit ScoreA number that reflects your credit worthiness based on the 4 C’sFICO score ranges from 300 to 850
20 How Credit Scores Are Determined Your payment historyInformation about how you make your payments on credit cards, store accounts, car loans, finance companies, mortgagesAccounts in collection or past due, and how long past dueInformation in public records, such as bankruptcy, judgments, liens, wage attachments or child support4-M-1123
21 How Credit Scores Are Determined Your overall debtHow much you owe on all your accountsHow much credit you have available to useYour credit account historyWhen you opened and used each of your accountsHow recently you applied for new creditRecent good credit history following past payment problems4-M-2123
22 How Credit Scores Are Determined Types of CreditThe different types of credit accounts you haveThe total number of accounts you have4-M-3123
23 Get and Keep a Good Score Make sure your credit report is accurate.Pay all your bills on time.Apply for credit only when you need it.Lower the balances on all your credit accounts.Pay off debt rather than moving it around.4-N
24 Getting Out of Debt Reduce Your Debt Put away the plastic Create a repayment plan (Debt Snowball)Order your debts from lowest balance to highest balance.Designate a certain amount of money to pay toward debts each month.Pay the minimum payment on all debts except the one with the lowest balance.Throw every other penny at the debt with the lowest balance.When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance
25 Debt Snowball Card Balance Monthly Minimum Credit Card A 500 $26 Credit Card B5000$200Credit Card C250$25Credit Card D2500$150The person has an additional $100/month which can be devoted to repayment of debtCardPaymentCredit Card CCredit Card ACredit Card DCredit Card B$125 ($ )$151 ($26 + $125)$301 ($150 + $151)$501 ($200 + $301)
26 Getting Out of Debt Bankruptcy Chapter 7 (a straight bankruptcy) A legal process to get out of debt when you can no longer make your required paymentsChapter 7 (a straight bankruptcy)An individual is required to draw up a petition listing his or her assets and liabilities.Many but not all debts are forgiven. Most of the debtors assets are sold to pay off creditors.Some Assets are protected:Social Security PaymentsUnemployment compensationNet value of your home, vehicle, household goods and appliances, tools for work and books
27 Getting Out of Debt Bankruptcy Chapter 13 (A wage earner plan bankruptcy)A debtor, with a regular income, proposes a plan to use future earnings or assets to eliminate debts over a specific period of timeDebtor normally keeps all or most of his/her propertyMake payments to Chapter 13 trustee (appointed by court) who then distributes the money to the creditors.
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