1. Unit 4 Good Debt… Bad Debt… Using Credit Wisely

2. What do we know about credit???
What is credit?
What is a credit limit?
What can happen if you make a payment late or go over your credit limit?
When can you apply for a credit card?
How does a credit card work?
Who has a credit card?
What is a credit score?

3. What’s the catch??? Credit – Buy now… Pay later!
amount of money loaned to you with the expectation that it will be paid back later

4. Interest Amount you pay to use someone else’s money
Buy now, then pay for it over a period of time with interest
Higher interest rate = Higher total amount
When you use credit to buy something you end up paying more

5. Interest can sneak up on you…
If you pay your full balance off every month there will be no interest added
If you just make the minimum payment every month…
Takes longer to pay off balance
You will end up paying a lot more money
Example: Interest

6. Not a smart way to use credit!!!
Why people use credit?
To buy something you couldn’t afford if you had to pay for it all at once
Examples: - car
- college tuition
- vacation
Convenience
- They have the money but don’t want to carry cash
Shopping online
Immediate Satisfaction
Regardless if they can afford it or not
Not a smart way to use credit!!!

7. Common Types of Credit Credit Card Installment Loan Student Loan
Mortgage

8. 1. Credit Card Institution:
- banks, credit unions, stores, and gas stations
Features:
- Some can be used just about anywhere, others only at a specific place
- No payoff deadline
- Monthly minimum payments may vary… based on the balance
- Usually have highest interest rate out of these 4 types of credit

9. Examples:

12. 2. Installment Loan Institution:
- banks, credit unions, auto dealers, and other financial institutions
Features:
- Used for large purchases
*cars and appliances
- Loan term can vary from a few months to many years
- Monthly payments usually set for life of loan
- Usually lower interest rates than credit cards

13. 3. Student Loan Institution:
- banks, credit unions, and the federal government
Features:
- Used for college tuition and other expenses
- Some loans let you wait to make payments until after graduation
- Loan term usually up to 10 years
- Monthly payment amounts are usually set annually
- Usually lower interest rate than installment loans
*May provide an income tax break on the interest paid

14. The truth about student loans
Student Loan Activity in Moodle!!!

15. 4.Mortgage Institution: - banks and credit unions Features:
- Used specifically for a loan to purchase a home
- Usually repaid over years
- Monthly payments may be set for the life of the loan
- Usually lower interest rate than installment loans
*May provide an income tax break on the interest paid

16. Cost of Using Credit Using credit comes with a price…
Biggest part of the price is the interest rate
Advertisers: “Buy it now for only $19 a month!”
Doesn’t tell you what you really are paying?!?!
Read the fine print of credit card or loan application!

17. Annual Percentage Rate-APR
The cost of the loan per year as a percentage of the amount borrowed
Best credit feature to compare
Law requires exact same APR calculations
Beware of “teaser rates”

19. REVIEW!
What is a Mortgage? Installment loan? What is the biggest part of the cost of using credit? What is the best credit feature to compare? What other factors should you look at when choosing to use credit?

20. Other factors connected to cost of using credit…
What you need to look for…
Annual fee
Credit limit
Finance charge
Origination fee
Loan term
Grace period

21. Annual Fee Yearly charge you pay to use credit
Usually charged by credit card companies

22. Credit Limit Maximum amount of credit a lender will give to customer
$500
$1,000
$10,000
$25,000
Can increase over time

23. Finance Charge Actual dollar cost of using credit
Extra price you pay for the privilege of borrowing money

24. Origination Fee Charge for setting up a loan
Usually associated with home loans

25. Loan Term Length of time you have to pay off loan
Applied to installment, student, and mortgage loans
Longer loan term = Lower monthly payment
Cost increases because of interest

26. Grace Period Length of time before interest kicks in
If you pay off your balance each month, you will not pay any interest
Look for credit card with a grace period of 25 days or more

27. Everyone Makes Mistakes…
Payment after due date
Spend more than credit limit
What are the consequences????

28. May NOT be the only penalty for a late payment!
Consequences
Over-The-Limit Fee
Spending more than your credit limit
Late Fee
Making payment after the due date
Know how much late fee is and when it will be charged
May NOT be the only penalty for a late payment!

29. Universal Default Clause
Hike up your interest rate for one late payment
Even if it’s to a different creditor
Could be for a very low and minor payment

30. REVIEW What is a grace period?
What type of loan usually has a origination fee?
What is the Universal Default Clause?

31. Credit: The Good and Bad
Before you decide whether credit is the best choice for you
Extremely important to know all the rewards and risks

32. Benefits Convenience Protection Emergencies
Opportunity to Build Credit
Quicker Gratification
Special Offers
Bonuses

33. Convenience Safer than carrying around large amounts of cash
Easier for travel expenses
Used to buy items on internet

34. Protection Credit Card: Easier to get a refund
Some cards offer buyer protection
Type of insurance for:
Damaged items
Mistaken charges on account

35. Emergencies Always have a way to pay for sudden expenses Examples:
Car breaks down
Injuries

36. Opportunity to Build Credit
Best way to build credit history
Must be responsible with credit card
Makes it easier to get more credit in the future

37. Quicker Gratification
Allows you to buy expensive items
Car
House
*Only way some people can afford these items

38. Special Offers Decrease short-term costs of credit cards Examples:
Reduced interest rate
No payments until next year
*Be careful when these deals expire!!!

39. BONUSES Rewards Offer bonus points: Frequent-flyer miles
Cash rebates for every dollar you spend
*These perks may come with higher interest rates
Rewards

40. Potential Risks
Interest
Overspending
Debt
Identity Theft

41. INTEREST
Amount you pay for using credit
Makes item more expensive

42. OVERSPENDING Use credit to live beyond their means
Buying items they can’t afford
Time goes on, amount grows, harder to pay off balance

43. DEBT Entire amount of money you owe to your lenders
Lenders have legal claims against your future income
Too much debt… can destroy financial plan and future

44. Identity Theft Personal info is used without your permission
Frauds/Crimes
Be careful giving out information

45. Moodle Activity Identity Theft
Answer questions in the discussion topic in Moodle!

46. Review… 4 potential risk we looked at What is overspending
Identity theft

47. Are you worthy????
When you apply for a credit card or a loan you will usually need:
Social security number
Driver’s license number
Date of birth
Address and phone number
Name of employer
Monthly income
Other debts
Monthly rent or mortgage

48. What Lenders Look For…
Once you apply, lender decides if your creditworthy
They decide if and how much to lend you
What all lenders look for is referred to as THE 4 C’s

49. THE 4 C’s OF CREDIT
Collateral
Capital
Capacity
Character

50. 1. Collateral
An asset of value lenders can take from you if you don’t repay the loan
Typically for home mortgage or car loan
“Secured Loan”

51. Borrows money for house…
Loans money for house.
= Collateral

52. 2. Capital Personal items of value
Can be taken away and sold to repay loan
Examples:
House
Investments

53. 3. Capacity
Lender’s main concern is whether you are able to repay a loan
Key factors:
Income
Employment history
*Rising income and steady employment gives lenders confidence
*Lots of debt, lenders will question your ability to make payments

54. 4. Character Are you trustworthy?!?!
Measure this by looking at your credit record
History of paying bills on time shows you are responsible!

55. Review… What do you usually need to apply for a loan or credit card?
What are the 4 C’s of Credit?
What are the two key factors of capacity that lenders look at?

56. Exercise 4E: Apply for a Loan Page 48
Applying for a Loan
Exercise 4E: Apply for a Loan Page 48

57. Credit Report Record of your personal financial transactions
“Credit History”
Tells lenders…
Any credit you have
Loan amounts you received
Credit card balances
Paid bills on time?
Your credit report card for the past 7 to 10 years

58. Credit Score Number that reflects your creditworthiness based on 4 C’s
Score changes over time
FICO Scores

59. FICO
Public company that provides data and decision making services including Credit Scoring
Helps financial companies make decisions
One of the most popular scoring systems
90% of the larger banks use FICO
Scores: 300 – 850

60. Review… What does FICO stand for?
What are some things on a application for a loan?
What is a good credit score?
How far back does your credit score go?

61. FREE Credit Reports Free Credit Report Commercials NOT free!
Website to get a credit report that truly is free!
The Real Free Credit Report Website

62. 3 Reporting Agencies
1. Equifax 2. Experian 3. TransUnion

63. Building Good Credit History
Takes discipline…
Always pay bills on time
Best way to show creditors you are responsible with your money
Make regular deposits into savings account
Lenders like to see a consistent savings pattern
Be choosy about credit cards and loans
Only ones you really need and keep them for a long time
Better to have low credit card balance and pay it off rather than no balance

64. Hurting Credit History and Score
Making late payments
Writing checks when you don’t have enough money to cover
A lot of credit cards and loans
High balances on credit cards and loans
Changing credit cards frequently

65. Monitoring Your Credit Report
Law requires credit bureaus to provide information that is:
Correct
Complete
Confidential
You have the right to see everything
Very important to regularly review your credit report
Look for any errors or fraudulent charges
Entitled for free credit report once a year
NO EXCUSES!

66. Wrong Credit Report By Law:
If you find any mistakes or inaccurate information on your report…
1. Don’t Panic!
2. Contact credit reporting agency
3. Ask representative to investigate
By Law:
Agency must investigate the questionable item
Correct or delete anything that is wrong

67. Other Options… If that doesn’t work…
Attach a short statement to your report
Describe the situation
Facts that support your claim
Credit bureaus must delete unfavorable information after 7 years
Must remove any bankruptcy after 10 years
Will not be on your report permanently!

68. How You Can Get Credit Tough to get credit while your in school
Some options you may take:
Ask parent or trusted adult to co-sign
Equally responsible for the debt
Legally and financially
Ask the place where you have a checking or savings account
Already have a track record
May be more likely to get approved

69. Apply for a store credit card Apply for a “secured credit card”
Easier than the major credit cards
Apply for a “secured credit card”
Deposit money into account
Make charges against that amount
Renting a place with friends… get one utility bill in your name
Pay bill on time

70. 70-20-10 Rule A great way to keep up with your debt!
How it is broken down:
Spend 70% of income on living expenses
Rent, food, gasoline
Save or invest 20% of your income
Financial goals
Emergency expenses
Spend 10% on debt payments
Credit cards
Car loans
Students loans

71. Review…
What should 70% of your income be used for in the Rule?
20% of your income?
10% of your income?
What are some ways you can try to get credit when you are a student?

72. The Dangers of Debt Debt can take a toll on you Dangers:
Harder to achieve financial goals
Stress about your bills can affect your health
Not having money for medical expenses
Can affect relationships negatively
People try to hide financial problems

73. Reducing Amount of Debt
Stop using the plastic
Live entirely on cash
Make commitment to pay your debt
Find out how bad it is and how much you really owe
Come up with a repayment plan
Stick with plan!

74. Strategies to Stop Using Credit

75. Bankruptcy Last resort when someone gets too far in debt
Bankruptcy- legal process to get out of debt when you can’t make payments
2 Types:
-Chapter 7
-Chapter 13

76. 2 Types of Bankruptcy Chapter 7 Chapter 13
Allows you to erase most of your debt
Must undergo financial counseling
To apply:
Must be unemployed
Very low income
Chapter 13
Allows you to repay your debts over a period of time
Usually no more than 5 years
Court oversees repayment plan

77. Bankruptcy Facts… NOT all debts will be erased
Common types that are not erased
Student loans
Child support
Alimony
Fines for crimes
Now much harder to declare for Chapter 7
Very serious action
Can stay on credit record up to 10 years

78. Makes it much harder and more expensive to buy a house or get a credit card
Very costly to everyone
Lenders raise rates to make up their loss
Why people file…
Result of irresponsible borrowing
“Clean Slate” for people who had an unavoidable and unexpected event take place
Chance to rebuild life

79. Bankruptcy

80. Law and Order of Debt - Fair Debt Collection Practices Act
Lenders may take legal action against you
Lenders must respect the rights you have
Must be told specific reason if you get turned down for loan or credit card
LAWS:
- Truth in Lending Act
- Fair Debt Collection Practices Act

81. Truth in Lending Act Lenders must:
Tell you true interest rate and total finance charge before you sign credit application
Be truthful
Not mislead you with advertisements

82. Fair Debt Collection Practices Act
Protects you from the harassment of creditors
Debt collector is NOT allowed to:
Use abusive language
Call at unreasonable hours /excessive number
Threaten to notify employer or friends
Try to collect more than you owe
Send you misleading letters
*Can sue if collectors act in this way

83. Test questions… REVIEW!!!!! 4 Multiple Choice 4 Fill in the Blank
2 Short Answer/Essay

84. REVIEW GAME!
JEOPARDY