Unit 4 - Good Debt, Bad Debt:

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Unit 4 - Good Debt, Bad Debt Using Credit Wisely
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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?
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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.
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Credit Facts

• 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.

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Top 10 Questions to AskBefore Signing on the
Dotted Line

1. Can I afford to pay the monthly payments?
2. What will happen if I dont make the payments on
   time?
3. What will be the extra cost of using credit?
4. What will I have to give up to pay for it?

1. All things considered, is using credit worth it
   for this purchase?

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?

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Dont Buy Things You Cant Afford

• http//buyingvalue.com/2009/09/buy-afford/

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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.
• 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)

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The Language of Credit

• 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

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The Language of Credit

• 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.

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The Language of Credit

• 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.

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Common Types of Credit

• Type of Credit Institution
• Credit Card Banks, Credit Unions, Stores, Gas
  Stations
• Installment Loan Banks, Credit Unions, Auto
  Dealers, and Financial Institutions
• Student Loan Banks, Credit Unions, and Federal
  Government
• Mortgage Banks and Credit Unions

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Sources of Credit

• Banks
• Credit Unions
• Department Stores
• Automobile Dealers
• Oil Companies (for gas stations)
• Federal Government (for student loans)
• Others?

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Credit Good and Bad

• Rewards
• Convenience
• Protection
• Emergencies
• Opportunity to Build Credit
• Quicker Gratification
• Special Offers
• Bonuses

• Potential Risks
• Interest
• Overspending
• Debt
• Identity Theft

Complete TRY IT! Page 46
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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

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CHALLENGE

• FRUIT

• TUNA

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

• 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

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1. Take the Credit 101 Quiz
2. Take the Will You Be Rich Quiz
3. Take the Money Master Quiz

Write Down the Results for Each Quiz
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1. Define a secured credit card and give an example.
2. Who can file for Chapter 7 bankruptcy?
3. What are often the arrangements set up for
   someone who files for Chapter 13 bankruptcy?
4. Find average Americans (or household) credit
   card debt for 2010 list the web address.
5. Define debt consolidation company and give 3
   examples including name and web address.
6. 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.

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6 Questions to Ask When You Compare Credit

1. Whats the interest rate for purchases?
2. How long is the loan for?
3. Whats my minimum monthly payment?
4. Whats the grace period?
5. What extra fees and penalties may be charged?
6. Which is the best deal for me?

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Things to have on hand when seeking a credit
card or loan.

• Social Security Number
• Drivers 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

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The Four Cs of Credit(Lenders use in deciding
how much to loan you)

• Collateral
• Capital
• Capacity
• Character

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The Four Cs of Credit

• Collateral an asset value that lenders take
  from you if you dont 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.

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The Four Cs of Credit

• 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)?

Complete TRY IT! Exercise 4E Page 48
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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

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Capital

• Make a list of items and their selling price.
• Example
• Play Station Cost
• 25 Games Cost
• Jewelry Cost
• 4-Wheeler Cost

Add the COST to calculate your individual CAPITAL
or NET WORTH
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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
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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 youve made the last payment, will what you
purchased still be around???
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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 youve made the last payment, will your
Game System still be around???
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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.
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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
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Complete Payment Calculator Worksheet
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Did you know

• 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

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Credit Scores

• Report Card
• tracks your success in school.
• Credit Report
• tracks your success in managing money responsibly.

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Video Credit Reports 101

• http//www.channelone.com/life/credit/

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Important Credit Report Definitions

• Credit History - a record of your personal
  financial transactions.
• Credit Report - a history of personal
  transactions for the past 7 to 10 years.
• Credit Score - a number that reflects your credit
  worthiness, based on the 4 Cs.

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Credit Reporting Agencies

• 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.

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Credit Reporting Agencies

• 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

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(No Transcript)
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http//www.creditreporting.com/free-credit-report-
video.html
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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

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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

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How Credit Scores Are Determined

• Types of Credit
• The different types of credit accounts you have
• The total number of accounts you have

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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.

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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 doesnt resolve the issue, you can attach
  a short statement to your credit report.

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How you get started building your credit when
ready

• 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.

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How should you get started building your credit
when ready

• 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.

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Rule of Thumb 70-20-10 Rule
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DEBT

• 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.

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2 Popular Methods Used to Tackle Debt

• 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!

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

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Seeking Help with Debt

• Creditors want to be repaid, so try to work with
  them to pay off your debt.
• The Association of Independent Consumer Credit
  Counseling Agencies (AICCCA)-helps you find
  registered nonprofit credit counseling agencies
  in your area (www.aiccca.org)
• Last resort- file bankruptcy.

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http//www.channelone.com/generationmoney/

• Are student loans worth it?

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Bankruptcy

• The legal process to get out of debt when you can
  no longer make all your required payments.
• Used as a last resort after exhausting all other
  means to pay off excessive debt.
• Can stay on your credit record for up to 10
  years.
• It wont erase all debt, such as student loans,
  child support, alimony, and penalties and fines
  for crimes a person committed.

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Chapter 7 Bankruptcy

• Allows a person to erase most of their debt.
• Qualifications
• Unemployed
• Very Low Income
• Requires financial counseling
• The government has made it much harder for
  individuals to file this type of bankruptcy.

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Chapter 13 Bankruptcy

• Allows a person to repay many of their debts over
  a period of time, usually no more than five
  years.
• The courts typically oversee the repayment plan
  to make sure it is being repaid.

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Financial Consequences of Debt
1 of 2

• It is your responsibility to repay your debts.
• If you fail to repay debts, lenders may take
  legal action against you to recover what they
  can.

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The Truth in Lending Act

• Requires that lenders tell you in writing the
  true interest rate and total finance charge
  before you sign a credit application.
• Gives you the right, with certain types of
  credit, to cancel an agreement with a lender
  within three days.
• If turned down for credit card or loan, the
  lender must tell you the specific reason for the
  denial and the reporting agency they used.

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Fair Debt Collection Practices Act (FDCPA)

• Protects a person from harassment by creditors.
• Provides that a debt collector cannot
• Use abusive language with you
• Call at unreasonable hours (only between 8 am and
  9 pm) or an excessive number of times
• Threaten to notify your employer or friends that
  you havent paid your bills

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Fair Debt Collection Practices Act (FDCPA)

• Attempt to collect more than you owe
• Send you misleading letters that appear to be
  from a governmental agency or a court of law.
• Report problems to the State Attorney Generals
  Office and the Federal Trade Commission (FTC)!

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Reduce Your Debt by

• Put away the plastic, and stop adding to your
  debt. Start living on more of a cash basis.
• Make a personal commitment to repay all your
  debts. Remember they are your debts.
• Find out exactly how bad it is- how much do you
  really owe?
• Create a repayment plan that you can stick with.

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Financial Consequences of Debt
1 of 2

• 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.

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Financial Consequences of Debt
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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!
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Financial Consequences of Debt
1 of 2

• 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.

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Financial Consequences of Debt
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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!
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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

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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

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How Credit Scores Are Determined

• Types of Credit
• The different types of credit accounts you have
• The total number of accounts you have

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Previous Balance X1 Interest Charge
Previous Balance Interest Charge Balance Plus
Interest
Balance Plus Interest Your Payment Remaining
Balance
Date PREVIOUS BALANCE INTEREST CHARGE BALANCE PLUS INTEREST YOUR PAYMENT REMAINING BALANCE
1-Jan 495.00 4.95 499.95 55.00 444.95
1-Feb 444.95 4.45 449.40 55.00 394.40
1-Mar 394.40 3.94 398.34 55.00 343.34
1-Apr 343.34 55.00
1-May 55.00
1-Jun 55.00
1-Jul 55.00
1-Aug 55.00
1-Sep 55.00
1-Oct will not be 55 0.00
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Remaining Balance

• Jan 1 444.95
• Feb 1 - 394.40
• Mar 1 - 343.34
• April 1 - 291.77
• May 1 - 239.69
• Oct 1 - 0.00 Oct your payment will be what
  you actually owe not 55.00