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NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Unit 4 - Good Debt, Bad Debt: Using Credit Wisely.

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Presentation on theme: "NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Unit 4 - Good Debt, Bad Debt: Using Credit Wisely."— Presentation transcript:

1 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 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 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-A Credit Facts Nearly of teens owe money to either a person or company, with an average debt ofNearly of teens owe money to either a person or company, with an average debt of About of teens ages already have more than $1,000 in debt.About 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 understand how credit card interest and fees work. of teens say they know how to establish good credit. of teens say they know how to establish good credit. 33% $230 26% 30% 36%

4 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-B-1 Top 10 Questions to Ask Before Signing on the Dotted Line 1.Do I really need this item right now, or can I wait? 2.Can I qualify for credit? 3.What is the interest rate (APR) on this card? 4.Are there additional fees? 5.How much is the monthly payment, and when is it due? 21 4-B-24-B-3 6.Can I afford to pay the monthly payments? 7.What will happen if I dont make the payments on time? 8.What will be the extra cost of using credit? 9.What will I have to give up to pay for it? 10.All things considered, is using credit worth it for this purchase?

5 Credit: The Good and the Bad Rewards, Credit Offers: Convenience Protection Emergencies Opportunity to build Credit Quicker Gratification Special offers Bonuses/Points Potential Risks: Interest Overspending Debt Identity Theft

6 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-C-1 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 with interest. Types of Credit –Borrow up to a predetermined limit –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. The Language of Credit 41 of

7 Types of Credit Type of CreditInstitutionFeatures Credit CardBanks, Credit Unions, Stores, and Gas Stations Most can be used about anywhere, some are specific No payoff deadline Monthly min. varies Highest rates Installment Loan Banks, Credit Unions, Auto Dealers, Other Financial Institutions Used for large purchases like a car or appliances Loan term varies (months to years) Monthly payments are set for life of loan Lower rate than credit cards Student LoanBanks, Credit Unions, and Federal Government Tuition and other college expenses Loan term up to 10 years Tax break on interest is possible MortgageBanks and Credit Unions For buying a home Repaid over 15 to 30 years Fixed, Variable or ARM rates

8 4-C-2 Finance Charge –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. Term –How long you have to repay a loan, often expressed in months. The Language of Credit 42 of

9 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-C-3 Fees –Charges to use credit. Examples: Annual Credit Card Fee - Yearly charge to use credit Loan Origination Fee – Charge for setting up loan (home loans) Over-the-Limit Fee - Charge for spending more than limit Late Fee – Penalty for making payment after due date Credit Limit –Maximum amount of credit a lender will extend to a customer Universal Default –Allows a credit card company to increase your interest rate if you make just one late payment. The Language of Credit 43 of

10 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-F WHEN YOU BUY STUFF In fact, you bought $500 worth of STUFF with your credit card. You bought 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 interest Final cost of your purchases = $ And it will take SEVEN YEARS and NINE MONTHS 1

11 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-G How Long Will It Take??? APR = 18% Payment: 4% of current balance You owe $3,000. Finance Charge $ Total cost of original $3,000 loan = $ After youve made the last payment, will what you purchased still be around??? And it will take nearly 11 YEARS to pay off! 1

12 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-H The Cost of Using Credit APR = 24% Payment: 4% of current balance $700 for a Game System and Accessories Finance Charge $ Your game system REALLY cost $1, After youve made the last payment, will your game system still be around??? And it will take over 7 years to pay off! 1

13 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-I The Cost of Using Credit Interest Rate = 24% Payment = 4% of Current Balance BALANCE TIME TO PAY OFF INTEREST CHARGED TOTAL COST $2, YEARS 6 MONTHS $1,850$3,850 $6, YEARS 1 MONTH $5,850$11,850 $10, YEARS 2 MONTHS $9,850$19,

14 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-J The Cost of Using Credit APR = 21% Payment: 4% of current balance $3,000 Charged to Credit Account Finance Charges $2, You Owed $3,000 but You Paid $6,065+ Includies annual fees Annual Credit Card Fee: $65 Paying the minimum, it will take you 11 YEARS and 11 MONTHS to pay off your debt. 1

15 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-K-2 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! Financial Consequences of Debt 2 of 2 22 of

16 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-K-1 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. Financial Consequences of Debt 1 of 2 21 of

17 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-L The Four C s of Credit Capital – What are your assets and Net worth? –Want to know you have enough capital to pay back the loan –What 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)

18 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely The Four C s of Credit Character – Will you repay the loan –Want to know what kind of person they are lending money to –Have 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 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Credit Score Credit Report –A record of your personal financial transactions –Three major credit reporting companies: Equifax, Experian, TransUnion Credit Score –A number that reflects your credit worthiness based on the 4 Cs –FICO score ranges from 300 to 850

20 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-M-1 How Credit Scores Are Determined Your payment historyYour payment history –Information about how you make your payments on credit cards, store accounts, car loans, finance companies, mortgages –Accounts in collection or past due, and how long past due –Information in public records, such as bankruptcy, judgments, liens, wage attachments or child support 321

21 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely How Credit Scores Are Determined Your overall debtYour overall debt –How much you owe on all your accounts –How much credit you have available to use Your credit account historyYour credit account history –When you opened and used each of your accounts –How recently you applied for new credit –Recent good credit history following past payment problems 4-M-2 321

22 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely How Credit Scores Are Determined Types of CreditTypes of Credit –The different types of credit accounts you have –The total number of accounts you have 4-M-3 321

23 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-N Get and Keep a Good Score Make sure your credit report is accurate.Make sure your credit report is accurate. Pay all your bills on time.Pay all your bills on time. Apply for credit only when you need it.Apply for credit only when you need it. Lower the balances on all your credit accounts.Lower the balances on all your credit accounts. Pay off debt rather than moving it around.Pay off debt rather than moving it around.

24 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 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 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Debt Snowball CardBalance Monthly Minimum Credit Card A 500$26 Credit Card B 5000$200 Credit Card C 250$25 Credit Card D 2500$150 The person has an additional $100/month which can be devoted to repayment of debt CardPayment Credit Card C Credit Card A Credit Card D Credit Card B $125 ($ ) $151 ($26 + $125) $301 ($150 + $151) $501 ($200 + $301)

26 Getting Out of Debt Bankruptcy –A legal process to get out of debt when you can no longer make your required payments –Chapter 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 Payments –Unemployment compensation –Net 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 time Debtor normally keeps all or most of his/her property Make payments to Chapter 13 trustee (appointed by court) who then distributes the money to the creditors.


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