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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 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely What do you think? Nearly ___of teens owe money to either a person or company, with an average debt of _____.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.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.

3 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-A What do you think? Answers Nearly 33% of teens owe money to either a person or company, with an average debt of $230.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.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.30% of teens say they understand how credit card interest and fees work. 36% of teens say they know how to establish good credit.36% of teens say they know how to establish good credit.

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

5 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 6.What will be the extra cost of using credit 7.What will I have to give up to pay for it? 8.Can I afford to pay the monthly payments? 9.What will happen if I don’t make the payments on time? 10.All things considered, is using credit worth it for this purchase?

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

7 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Principle - money amount you borrow Interest - amount you pay to use someone else’s money APR (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 The Language of Credit

8 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 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. The Language of Credit

9 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Debt is the entire amount of money you owe to lenders. Credit limit – maximum amount of credit a lender will extend to a customer 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 The Language of Credit

10 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Fees Annual fee – usually charged by credit card companies for the privilege of using credit Origination fee – charge for setting up the loan ex. Home loan Finance charge – represents the actual dollar cost of using credit to maintain a balance Over-the-limit fee- fee for spending more than your credit limit Late fee – penalty for making a payment after the due date

11 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-D Types of Credit Installment Credit Fixed paymentsFixed payments Set period of time to repaySet period of time to repay Set or varying interest ratesSet or varying interest rates Car loans and home loans are typical examples.Car loans and home loans are typical examples. Revolving Credit No stated payoff timeNo stated payoff time Limit to creditLimit to credit Minimum monthly paymentsMinimum monthly payments Interest rates vary or notInterest rates vary or not Finance chargesFinance charges Credit cards most typical exampleCredit cards most typical example

12 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-E Sources 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?

13 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Credit: The Good and the Bad Rewards Credit Offers Convenience Protection Emergencies Opportunity to build credit Quicker gratification Special offers bonuses Potential Risks Interest Overspending Debt Identity theft

14 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

15 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 you’ve made the last payment, will what you purchased still be around??? And it will take nearly 11 YEARS to pay off! 1

16 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 Finance Charge $ Your CD player REALLY cost $1, After you’ve made the last payment, will your CD player still be around??? And it will take over 7 years to pay off! 1

17 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,

18 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

19 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

20 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

21 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Are you worthy? Information you need to apply for credit: Social Security number Driver’s license number Date of birth Address and phone number Name of employer Monthly income amount Total monthly payment on other debts Amount of monthly rent or mortgage payment

22 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-L The Four “ C s” of Credit Collateral Capital Capacity Character

23 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Collateral Asset of value that lenders can take from you if you don’t repay the loan as promised

24 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Capital In the event you don’t pay your bills, lenders want to know if you have items they can sell to repay the loan

25 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Capacity Whether you are able to repay a loan Creditworthiness and employment history

26 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Character Are you trustworthy? Measured by your credit score, a history of paying bills on time shows that you are responsible

27 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 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. The Language of Credit

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

29 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

30 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

31 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.

32 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Credit Score Ranking

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

34 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 4-O Protect Yourself Against Inaccurate Credit Reports Get a copy of your free credit reports from all credit rating agencies.Get a copy of your free credit reports from all credit rating agencies. Examine it thoroughly.Examine it thoroughly. If you find something that is incorrect, ask the agency to investigate the information.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.If that doesn’t resolve the issue, you can attach a short statement to your credit report.

35 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely 70% Living Expenses 10% Pay Off Debt 20% Save or Invest Rule of Thumb

36 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely How to avoid pitfalls Always read fine print of credit card or loan application before signing Avoid higher interest rates of credit cards Be choosy about your credit and don’t apply for more than you need Pay as much as you can every month Pay a bill at least a week before it’s due Arrange automatic payments for monthly bills Get into a saving mode so you rarely need credit or loans for your purchases

37 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Bankruptcy Legal process to get out of debt when you can no longer make all required payments Chapter 7 – effectively allows you to erase most of your debt Chapter 13 – allows you to repay many of your debts over a period of time around 5 years Bankruptcy does not erase – student loans, child support or alimony

38 NEFE High School Financial Planning Program Unit 4 – Good Debt, Bad Debt: Using Credit Wisely Exercise 4G Exercise 4H


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