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

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

2. You have saved $400 from your part-time job. You want to go on a school-sponsored trip out of town next week, but the trip costs $700. You ask a classmate if you can borrow the $300 you need for the trip.Questions: 1) What will make you repay the money?2) What could happen if you are unable to repay the money?3) Is it fair for your classmate to charge you interest for borrowing their money? WHY?

3. Tell me about an actual event when you either borrowed money or someone borrowed money from you. Did being a lender/borrow affect the relationship.

4. Nearly 33% of teens owe money to either a person or company, with an average debt of $230. About 26% of teens ages 16-18 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. Credit Facts 4-A

5. 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? Top 10 Questions to AskBefore 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? 4-B-2 4-B-3 4-B-1 1 2

6. http://buyingvalue.com/2009/09/buy-afford/ Don’t Buy Things You Can’t Afford

7. 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 4-C-1 of 1 4

8. Debt is the entire amount of money you owe to lenders. APR (Annual Percentage Rate) is the total cost to use credit in a year. 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 4-C-2 of 2 4

9. 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 4-C-3 of 3 4

10. 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 4-C-4 of 4 4

11. Type of CreditInstitution Credit Card Banks, Credit Unions, Stores, Gas Stations Installment Loan Banks, Credit Unions, Auto Dealers, and Financial Institutions Student LoanBanks, Credit Unions, and Federal Government Mortgage Banks and Credit Unions Common Types of Credit

12. Banks Credit Unions Department Stores Automobile Dealers Oil Companies (for gas stations) Federal Government (for student loans) Others? Sources of Credit 4-E

13. Rewards Convenience Protection Emergencies Opportunity to Build Credit Quicker Gratification Special Offers Bonuses Potential Risks Interest Overspending Debt Identity Theft Credit: Good and Bad Complete TRY IT! Page 46

14. Question of the Day List four things you can do with money. • Spend it on needs or wants • Save it • Invest it • Give it away

15. CHALLENGE FRUIT TUNA

16. channelone.com Go to the computer with your sheet of paper and complete the following.

17. Search Engine - Credit Card Simulator Write which card you choose At PAYMENT HISTORY Write the amount you Spent Write the amount of Interest you are Charged Write the Total Cost Number of Months channelone.com

18. Take the Credit 101 Quiz Take the Will You Be Rich Quiz Take the Money Master Quiz Write Down the Results for Each Quiz

19. Define a secured credit card and give an example. Who can file for Chapter 7 bankruptcy? What are often the arrangements set up for someone who files for Chapter 13 bankruptcy? Find average American’s (or household) credit card debt for 2010 – list the web address. Define debt consolidation company and give 3 examples including name and web address. Find a web site that gives realistic financial advice to those who are in “money” trouble. Give the web address and two points of creditable information you viewed.

20. What’s the interest rate for purchases? How long is the loan for? What’s my minimum monthly payment? What’s the grace period? What extra fees and penalties may be charged? Which is the best deal for me? 6 Questions to Ask When You Compare Credit

21. Social Security Number Driver’s License Number Date of Birth Address and phone number Name of your employer Average Monthly Income Total monthly payments on other debts Amount of monthly rent or mortgage payment Things to have on hand when seeking a credit card or loan.

22. The Four “Cs” of Credit(Lenders use in deciding how much to loan you) Collateral Capital Capacity Character 4-L

23. Collateral – an asset value that lenders take from you if you don’t repay the loan as promised. In home and car loans, it may be referred to as a “secured” loan. Capital – the personal items of value you have. These are items that if the loan is not repaid, can be sold to repay the loan; examples investment accounts and your home. The Four “Cs” of Credit

24. Capacity – can you feasibly repay the loan (look at your credit worthiness, your income, and your employment history) Character – are you trustworthy (look at you credit record for paying bills on time)? The Four “Cs” of Credit Complete TRY IT! Exercise 4E Page 48

25. 2 Types of Credit Installment Credit Fixed payments Set period of time to repay Set or varying interest rates Car loans and home loans are typical examples. Revolving Credit No stated payoff time Limit to credit Minimum monthly payments Interest rates vary Other charges Credit cards most typical example 4-D

26. WHEN YOU BUY “STUFF” 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

27. How Long Will It Take??? You owe $3,000 for a motorcycle. 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

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

29. 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

30. 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

31. CompletePaymentCalculator Worksheet

32. That about 40% of credit card holders carry individual balances of less than $1,000, while about 15% individually carry total credit card balances of more than $10,000. That 48% of consumers individually carry less than $5,000 of debt (not including mortgage loans). That the typical consumer has about $19,000 total credit available on credit cards. More than ½ of all people with credit cards are using less than 30% of the total credit limit. Source: “Average Credit Statistics,” at www.myFICO.com Did you know…

33. Report Card tracks your success inschool. Credit Report tracks your success in managing money responsibly. Credit Scores

34. http://www.channelone.com/life/credit/ Video: Credit Reports 101

35. Credit History - arecord of your personal financial transactions. Credit Report - a history of personal transactions for the past7to 10 years. Credit Score - anumberthat reflects your credit worthiness, based on the4 C’s. Important Credit Report Definitions

36. Also known as credit bureaus Sell your credit report information to businesses that are interested in finding out your credit worthiness. Run your credit anytime you apply for a credit card, a loan, and sometimes when you apply for a job. Credit Reporting Agencies

37. Three main agencies in the US: Equifax Experian TransUnion Every consumer in the US are entitled to a free copy of their credit report from one of the above companies once every 12 months. FICO score - most popular credit score (ranges from 300 to 850). Website: annualcreditreport.com NOT freecreditreport.com Credit Reporting Agencies

39. http://www.creditreporting.com/free-credit-report-video.html

40. 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

41. 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

42. 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

43. 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

44. 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

45. Ask a parent or another trusted adult to co-sign a credit card application or car loan for you. Remember the co-signer is on the hook, legally and financially. Ask the place where you have your savings or checking account for a credit card application. Apply for a credit card from a store, which is often easier to get than the major bankcards. How you get started building your credit when ready

46. Apply for a secured credit card. When you rent a place with some of your friends, put at least one of the utility bills in your name and pay it on time. How should you get started building your credit when ready

47. Rule of Thumb 70-20-10 Rule 4-P

48. Defined as the entire amount of money you owe to lenders. Excessive debt affects your life (health) and relationships Debt can overwhelm even responsible people when experiencing: illness, divorce, business losses, job losses, and life events that are beyond their control. DEBT

49. Take additional money you may have available and use it to pay off the debt with the smallest balance first – debt snowball. Concentrate first on repaying the debt with the highest interest rate. Be patient and persistent when paying off your debt! 2 Popular Methods Used to Tackle Debt

50. Complete TRY IT! Exercise 4G Page 56 What Are the Priorities?