CREDIT & DEBT 1

Key Points Credit Debt Interest Opportunity Cost 3 C’s of Credit Credit History Credit Report Credit Score

Credit and Debt Credit The assessment of an individual’s ability to fulfill financial obligations The time extended for the payment of a liability The granting of money or something else of value in exchange for a promise of a future payment. Buying or borrowing on the promise to repay at a later date Debt That which one owes Liability SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Cost of Credit Interest The price of using someone else’s money Expense to the borrower; income to the lender Interest rate The price paid for using someone else’s money, expressed as a percentage Other Fees Processing fees Account maintenance Late payment SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Total Cost of Credit Principal Plus Interest Total Amount of Loan Interest Rate Length of Loan SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit and Debt Decisions Borrowing can help meet long-term goals Key Points and Questions to Consider: Do I need this right now or can it wait? Is this an impulse purchase? Short-term versus long-term purchases How will the credit payment affect monthly budget? For how long? What is the true cost of borrowing for the purchase? SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

3 C’s of Credit Capacity Can the borrower repay the debt? Borrower's ability to service a loan from his or her disposable income or cashflow Character Will the borrower repay the debt? Collateral Is the creditor fully protected if the borrower fails to repay? Is there a financial asset or a piece of property that a creditor can take if the borrower fails to repay the loan? SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Opportunity Cost of Credit and Debt When buying on credit, consumers pay interest and fees The goods and services that could have been purchased with the money used for interest and fees is the opportunity cost When buying on credit, consumers are committing future income (purchasing power) to a purchase made in the past SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Types of Credit Revolving Credit Installment/Term Credit Non-Installment or Service Credit SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Types of Credit Revolving Credit “Open-end” and “unsecured” credit Borrow at any time up to a limit set by creditor Flexible payments with a minimum payment required Minimum payment is usually a percentage of the balance due Periodic finance charges are computed on unpaid balance Examples: Credit card, Line of credit SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Types of Credit Installment/Term/Fixed Credit “Closed-end” and “secured” credit Borrow a specific amount for a specific purpose for a specific amount of time at a given interest rate Loan term, loan amount, number and dollar value of payments, and total finance charges agreed upon at start of loan Typically has fixed number of payments of predetermined amount Examples: House mortgage, Car loan, Student loan SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Types of Credit Non-installment or Service Credit Paying for a service that has already been used Payment in full is required by a specified date Interest is not charged Failure to pay within specified time may result in service fees and/or discontinuation of service Examples: Cell phone plan, Utilities SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Loan Basics Interest rate Price borrowers pay for the use of money they borrow from a lender Principal The original amount of money borrowed or still owed on which interest is charged When the borrower repays some of the principal, the amount of money subject to interest is reduced, and thus the amount of interest charged is also reduced SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Loan Basics Annual Percentage Rate (APR) The interest rate for the whole year (rather than monthly fee/rate) as applied on loan, credit, mortgage, etc. Total cost of credit to the consumer Finance charge expressed as an annual rate SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Loan Basics Annual Percentage Rate (APR), continued Nominal APR Simple interest rate for a year Rate for a payment period X # of payment periods in a year Effective APR The fee(s) + compound interest rate calculated over a year SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Loan Repayment Obligations Terms and Conditions Timely Payments Early payment Fees, Charges Consequences Garnishment of wages Repossession of property Negative entries on credit report SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit Cards Credit Card High Interest, Short Term Loan Unsecured Loan Transaction Types Purchases- items that are purchased Balance Transfer- moving debt from one card to another Cash Advance- cash loan from the ATM SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit Cards Incentives are perceived benefits that encourage certain behaviors Promotional low interest rates Special store discounts Reward programs that allow users to accumulate and redeem points for merchandise and travel Cash rewards SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Consumer’s Guide to Credit Cards from the Federal Reserve Board of Governors Consumer’s Guide to Credit Cards – Federal Reserve Board of Governors

Credit History Record of payment behavior over time Vital part of credit review process Important to monitor credit history Ensure that information reported is accurate Avoid identity theft Monitor their credit history by obtaining and reviewing copies of credit reports SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit Report Summary of loan and bill payments kept by a credit bureau Activity remains for 7 years (bankruptcy 10 years) Credit Bureau An organization that compiles credit information on individuals Makes information available to businesses for a fee Equifax, Experian, TransUnion SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit Report Used by financial institutions and other potential creditors To determine likelihood that future debt will be repaid Lenders, insurers, and employers use information along with credit score Set loan and insurance rates Review job applications SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit Report Negative Information Reduces credit opportunities Increases cost of borrowing Positive Information Increases credit opportunities Decreases cost of borrowing Improving and enhancing credit report Meeting repayment schedules Exceeding repayment schedules SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Credit Score “Financial GPA” Measure of how handle financial obligations A snapshot of your level of risk to a lender at a specific point in time A credit score is NOT on the credit report SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

National Credit Scores

Credit Score Components Source: myfico.com Which component matches each percentage? Types of Credit Used Amounts Owed New Credit Payment History Length of Credit History

Credit Score Components Source: myfico.com

Establishing and Maintaining Good Credit Building and Keeping Good Credit is Key to Financial Stability Making timely payments Consider the amount of credit you need (Qualify v. use) Maintain accurate financial records (checking account, credit cards) Protect identity on financial tools and statements SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Establishing Good Credit History Helping Students Establish Credit History Open bank account Purchase cell phone contract Make car and car insurance payments on time Pay all bills on time Don’t open too many credit card accounts Monitor credit usage SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Debt Management Established Need? Options Loan consolidation Renegotiation of terms and repayment schedules Bankruptcy Consequences Credit Counseling Services Fees, reputation, plans Rebuilding Credit Timely Payments Monitor Credit Report SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Review What is credit? What is interest? What are the types of credit? What are the 3 C’s of credit? What is APR? What is the opportunity cost of credit and debt? What is credit history? Why is it important to maintain and establish good credit history? What is a credit report? What is a credit reporting bureau? Who are they? What is a credit score? SS.7.E.1.2, SS.7.E.2.2 SS.912.E.1.6, SS.912.E1.14

Fraud and Identity Theft Fraud Deliberate misrepresentation which causes another person to suffer damages Identity Theft Unauthorized use of your personal information to commit financial fraud Personal information: name, Social Security number, bank or credit account, etc.

Activity: Fraud and Identity Theft What are ways you can protect yourself against fraud and identity theft? Instructions: Divide room into 3 groups Each group will be assigned one of the following categories: Record keeping Internet Other Each group will develop a list of ways to protect against fraud and identity theft for their category Each group will share their responses

Protect Yourself from Fraud and Identity Theft If it sounds too good to be true, it probably is Education—know your rights and responsibilities Don’t share any personal or financial information via phone or Destroy sensitive documents prior to discarding them Limit identification information and carry only those cards you will need Keep items with personal information in a secure place Protect your account access with passwords Check your credit report on an annual basis

What If Your Identity Has Been Compromised? 1.Place a fraud alert on your credit file by calling any one of the three national credit bureaus. 2.Review credit reports from each of the three national credit bureaus for inaccuracies and possible fraudulent accounts, inquiries, and transactions. 3.Contact the fraud department of your primary lender as well as those at banks, credit card companies, utilities, telephone companies, and Internet service providers with which you do business. 4.File a report with your local police or the police in the community where the identity theft took place. 5.File a complaint with the Federal Trade Commission (FTC).

QUESTIONS? 36