Presentation on theme: "Unit 4 - Good Debt, Bad Debt:"— Presentation transcript:
1 Unit 4 - Good Debt, Bad Debt: Using Credit Wisely
2 What do you think?Nearly ___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._____of teens say they understand how credit card interest and fees work._____of teens say they know how to establish good credit.
3 What do you think? Answers Nearly 33% of teens owe money to either a person or company, with an average debt of $230.About 26% of teens ages already have more than $1,000 in debt.30% of teens say they understand how credit card interest and fees work.36% of teens say they know how to establish good credit.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?4-A
4 Top 10 Questions to Ask Before Signing on the Dotted Line 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?
5 What will be the extra cost of using credit What will I have to give up to pay for it?Can I afford to pay the monthly payments?What will happen if I don’t make the payments on time?All things considered, is using credit worth it for this purchase?
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.Types of CreditBorrow up to a predetermined limit (i.e., credit card)Borrow cash to be repaid by a specific dateBorrow money for a major purchase to be repaid in regular payments over time, typically monthly (i.e., car loan, home mortgage)
7 The Language of Credit Principle - money amount you borrow Interest - amount you pay to use someone else’s moneyAPR (Annual Percentage Rate) is the total cost to use credit in a year.Grace period – length of time you have before you start accumulating interest
8 The Language of CreditUniversal 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.
9 The Language of CreditDebt is the entire amount of money you owe to lenders.Credit limit – maximum amount of credit a lender will extend to a customerTerm 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
10 FeesAnnual fee – usually charged by credit card companies for the privilege of using creditOrigination fee – charge for setting up the loan ex. Home loanFinance charge – represents the actual dollar cost of using credit to maintain a balanceOver-the-limit fee- fee for spending more than your credit limitLate fee – penalty for making a payment after the due date
11 Types of Credit Installment Credit Revolving Credit Fixed payments Set period of time to repaySet or varying interest ratesCar loans and home loans are typical examples.Revolving CreditNo stated payoff timeLimit to creditMinimum monthly paymentsInterest rates vary or notFinance chargesCredit cards most typical example4-D
12 Sources of Credit Banks Credit Unions Department Stores Automobile DealersOil Companies (for gas stations)Federal Government (for student loans)Others?4-E
13 Credit: The Good and the Bad Rewards Credit OffersPotential RisksConvenienceProtectionEmergenciesOpportunity to build creditQuicker gratificationSpecial offersbonusesInterestOverspendingDebtIdentity theft
14 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
15 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
16 The Cost of Using Credit $700 for a Game SystemAnd it will take over7 yearsto pay off!APR = 24%Payment: 4% of current balanceFinance Charge $550.04Your CD player REALLY cost $1,250.04After you’ve made the last payment, will your CD player still be around???4-H1
17 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
18 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
19 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
20 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
21 Are you worthy? Information you need to apply for credit: Social Security numberDriver’s license numberDate of birthAddress and phone numberName of employerMonthly income amountTotal monthly payment on other debtsAmount of monthly rent or mortgage payment
22 The Four “Cs” of CreditCollateralCapitalCapacityCharacter4-L
23 CollateralAsset of value that lenders can take from you if you don’t repay the loan as promised
24 CapitalIn the event you don’t pay your bills, lenders want to know if you have items they can sell to repay the loan
25 Capacity Whether you are able to repay a loan Creditworthiness and employment history
26 Character Are you trustworthy? Measured by your credit score, a history of paying bills on time shows that you are responsible
27 The Language of CreditCredit 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.
28 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 support
29 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 problems
30 How Credit Scores Are Determined Types of CreditThe different types of credit accounts you haveThe total number of accounts you have
31 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
34 Protect Yourself Against Inaccurate Credit Reports Get a copy of your free credit reports from all credit rating agencies.Examine it thoroughly.If you find something that is incorrect, ask the agency to investigate the information.If that doesn’t resolve the issue, you can attach a short statement to your credit report.4-O
35 Rule of Thumb70%Living Expenses10%Pay Off Debt20%Save or Invest
36 How to avoid pitfallsAlways read fine print of credit card or loan application before signingAvoid higher interest rates of credit cardsBe choosy about your credit and don’t apply for more than you needPay as much as you can every monthPay a bill at least a week before it’s dueArrange automatic payments for monthly billsGet into a saving mode so you rarely need credit or loans for your purchases
37 BankruptcyLegal process to get out of debt when you can no longer make all required paymentsChapter 7 – effectively allows you to erase most of your debtChapter 13 – allows you to repay many of your debts over a period of time around 5 yearsBankruptcy does not erase – student loans, child support or alimony