Credit and Debt.notebook August 28, 2014

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1 Credit and Debt What does it mean to have credit? Credit means someone is willing to loan you money in exchange for your promise to repay it, usually with interest. Interest the amount of money you pay to use someone else's money. Principal the amount of money you borrow Apr 5 7:17 AM Apr 5 7:20 AM Advantages of Using Credit 1. Lets you buy something you would not have been able to afford otherwise car, college tuition, medical bills. 2. Lets you pay for it over a period of time instead of all at once. The Cost of Using Credit Compound Interest Forgo current consumption to pay off past consumption Apr 5 7:32 AM Apr 5 7:55 AM Credit: The Good & the Bad Good Bad Types of Credit Convenience Installment Loans Revolving Credit Protection Emergency money Opportunity to build credit Quicker gratification Special offers Interest Overspending Debt Identity Theft Car Loans Mortgages Student Loans Credit Cards!! Bonuses Apr 5 9:11 AM Apr 12 9:04 AM

2 What to Look For 1. Annual fee A yearly fee you pay for the privilege of using the card. 2. Credit limit The maximum amount of credit a lender will give a customer. 3. Finance charge The dollar amount charged for maintaining a balance. (based on your APR) 4. Origination fee The charge for setting up the loan (usually on home loans). 5. Loan term The length of time you have to pay off the loan. 6. Grace period The length of time you have before you start accumulating interest or fees. More Fees... Over limit fee a charge for spending more than your credit limit. Late fee a charge for making your payment after the due date. Universal default a statement in most credit agreements stating that the creditor can increase your interest rate if you make even one late payment. Apr 5 9:07 AM Apr 5 8:48 AM How APR works... The law requires that all lenders calculate APR in the same way so this is best way to compare credit offers. Your APR is the percent of interest paid over the entire year. To find your monthly interest you divide the APR by 12. Example: 24% APR = 2% monthly interest because 24/12 = 2 Keeping Score With Your Credit A credit report is simply a record of your personal financial transactions, or credit history. Lenders look at your credit report to see if you have managed your credit well in the past. A credit report is like a report card of your financial health for the past 7 10 years. Apr 5 8:40 AM Apr 5 9:13 AM Keeping Score With Your Credit A credit score is also assigned to every person who has a financial history. Your credit report is based on the 4 C's. Your score tells lenders your creditworthiness. The 4 C's Collateral An item of value that a lender can take from you if you don't repay the loan (usually your car or home). Capital Money, or personal items of value that the lender can sell if you don't repay the loan. Capacity Your ability to repay the loan. Character Whether or not you have paid your bills on time in the past. The Titans of Credit There are 3 main credit reporting agencies in the United States: **Equifax **Experian **TransUnion By law, you are entitled to a free copy of your credit report from each one of these agencies once every 12 months. t is against the law for you to obtain anyone else's credit report, or for anyone else to obtain yours. The most popular credit score is the FICO score. The score ranges from 300 to 850. The higher the score the lower the risk for the lender. The lender wants o make loans to the person with the higher scores. Apr 5 9:13 AM Apr 5 9:21 AM

3 Warm Up: 1. Why is it helpful to have good credit? 2. Name three things you can do to establish good credit. 3. What types of things will hurt your credit? Good Credit Always pay your bills on time. Get a savings account and make regular deposits. Only apply for credit cards & loans you really need and keep them for a long time. Keep a low balance on one credit card and pay it off over time. May 1 7:39 AM Apr 5 9:26 AM Bad Credit Making late payments. Even one late payment can drop your score. Bouncing checks. Having a lot of credit cards and loans. Maintaining high balances on credit cards and loans. Changing credit cards frequently BEWARE of "balance transfer" offers. What Does it Matter? It matters A LOT!!! You could possibly get denied for a loan, be denied an apartment, or not get hired for a job. People with bad credit can get approved for some things, but the interest rate they pay is usually A LOT higher. Look at the difference 1% of interest makes on a home loan. $150,000 $150,000 x.05 x.06 Apr 5 9:29 AM Apr 5 9:32 AM Justin's Credit Card Mess Justin's Card: - $500 limit - 18% APR - 5% minimum payment January: Justin charges $300 worth of items on his credit card. When the bill comes in, he pays the minimum payment. How much is the minimum payment? $15 ($300 X.05) What is his remaining balance? $285 Apr 4 10:06 PM Apr 4 9:45 PM

4 February: Justin charges $150 on his new credit card. Again when the statement comes, he can only afford the minimum balance. New Charges: $150 Previous Balance: $285 Finance Charge on Previous Balance: 4.25 Total: $ Minimum Payment: Remaining Balance $21.96 $ : March: Justin charges a $45 car repair on his card. He still only pays the minimum payment. New Purchases: $45 Previous Balance: $ Finance charge on previous balance: $6.26 New Total: $ Minimum Payment: $23.43 Remaining Balance $ Apr 4 10:13 PM Apr 4 10:22 PM Think about Justin's situation. How does compound interest work AGAINST borrowers? Borrowers PAY INTEREST on top of INTEREST!! A good rule to follow is the Rule. Spend 70% of your income of living expenses. Save or invest 20% of your income for the future. Spend 10% on paying off debt. 20% Save or Invest 10% Pay Off Debt 70% Living Expenses Apr 4 10:29 PM Apr 5 9:34 AM Pitfalls to Avoid With Credit Always read the fine print of a credit card or loan. Avoid the high interest rates of credit cards by only getting loans for large purchases. Don't apply for more credit than you actually need. Pay as much as you can every month. Pay your bills at least a week before the due date. Arrange for automatic payments so you don't forget to pay. Save money regularly so you will have the money to pay for a purchase instead of taking a loan for the purchase. Look Out The higher the interest rate and the longer the loan, the higher the cost of credit. Making minimum payments raises the cost of what you bought, and takes a long time to pay off the balance. Charging small amounts everyday can cost you if you don't pay your balance each month. Having too much debt for your income level will make creditors hesitate to give you a loan. Apr 5 9:38 AM Apr 5 9:52 AM

5 Reading a Credit Card Statement 1. What is the due date for payment on this card? 2. What is the statement billing period for this card? 3. How much is the customer's total credit line? 4. How much was the customer's previous balance? 5. How much did the customer pay on the previous balance? 6. What type of finance charge (interest) did the customer have to pay? 7. How much does the customer owe for this month? 8. What is the minimum payment the customer must make? 9. What will happen if the customer fails to make at least the minimum payment by the due date? 10. How long will it take the customer to pay off the balance if he/she only makes minimum payments? 11. How much will he/she save if he/she pays $98 a month instead? 12. What will cost the customer the least in the long run? a. pay off the full balance by 3/9/11 b. pay only the minimum payment each month until it is paid off c. pay $98 each month until it is paid off Apr 5 9:56 AM

6 Attachments What is Credit.pdf