Unit 4 - Good Debt, Bad Debt: Using Credit Wisely

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.

Credit Facts 33% Nearly of teens owe money to either a person or company, with an average debt of About of teens ages 16-18 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. $230 26% 30% ASK STUDENTS Has 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, ASK Would you like to have a credit card? How would you use it? 36% 4-A

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-3 4-B-1 4-B-2 1 2

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

The Language of Credit 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. 4-C-1 of 1 4

Types of Credit Type of Credit Institution Features Credit Card Banks, 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 Loan Banks, Credit Unions, and Federal Government Tuition and other college expenses Loan term up to 10 years Tax break on interest is possible Mortgage Banks and Credit Unions For buying a home Repaid over 15 to 30 years Fixed, Variable or ARM rates

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. Term How long you have to repay a loan, often expressed in months. 4-C-2 of 2 4

The Language of Credit Credit Limit Universal Default 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. 4-C-3 of 3 4

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 interest Final cost of your purchases = $931.40 And it will take SEVEN YEARS and NINE MONTHS 4-F 1

How Long Will It Take??? And it will take nearly 11 YEARS to pay off! You owe $3,000. And it will take nearly 11 YEARS to pay off! APR = 18% Payment: 4% of current balance Finance Charge $1715.69 Total cost of original $3,000 loan = $4715.69 After you’ve made the last payment, will what you purchased still be around??? 4-G 1

The Cost of Using Credit $700 for a Game System and Accessories And it will take over 7 years to pay off! APR = 24% Payment: 4% of current balance Finance Charge $550.04 Your game system REALLY cost $1,250.04 After you’ve made the last payment, will your game system still be around??? 4-H 1

The Cost of Using Credit Interest Rate = 24% Payment = 4% of Current Balance BALANCE TIME TO PAY OFF INTEREST CHARGED TOTAL COST $2,000 11 YEARS 6 MONTHS $1,850 $3,850 $6,000 16 YEARS 1 MONTH $5,850 $11,850 $10,000 18 YEARS 2 MONTHS $9,850 $19,850 4-I 1 2 3

The Cost of Using Credit $3,000 Charged to Credit Account You Owed $3,000 but You Paid $6,065+ Includies annual fees APR = 21% Payment: 4% of current balance Finance Charges $2,220.57 Annual Credit Card Fee: $65 Paying the minimum, it will take you 11 YEARS and 11 MONTHS to pay off your debt. 4-J 1

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-2 of 2 2

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-1 of 1 2

The Four “Cs” 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) 4-L

The Four “Cs” 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?

Credit Score Credit Report Credit Score 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 C’s FICO score ranges from 300 to 850

How Credit Scores Are Determined Your 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 4-M-1 1 2 3

How Credit Scores Are Determined Your overall debt How much you owe on all your accounts How much credit you have available to use Your 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 1 2 3

How Credit Scores Are Determined Types of Credit The different types of credit accounts you have The total number of accounts you have 4-M-3 1 2 3

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

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

Debt Snowball Card Balance 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 Card Payment Credit Card C Credit Card A Credit Card D Credit Card B $125 ($25 +100) $151 ($26 + $125) $301 ($150 + $151) $501 ($200 + $301)

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 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

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.