Fostering Financial Literacy for Youth Workshop Series, Fall 2016

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1 Fostering Financial Literacy for Youth Workshop Series, Fall 2016 The Fostering Financial Literacy for Youth workshop series is designed to equip afterschool program staff with the knowledge, tools and resources to teach their youth to become financially savvy and in control of their financial futures. The workshops in the 4-part series include: Credit cards, October 5, 2016 Presented by: Douglas Young, The Wiser Choice Budgeting and Saving, October 25, 2016 Presented by: James Gurney and Cameron LeBlanc, Futures and Options Going to College Debt-Free: Is it Possible?, November 1, 2016 Presented by: Clemente Diaz Youth Entrepreneurship, November 29, 2016 Presented by: Greg Valentine, Council for Economic Education Use of Materials These materials are a part of the Fostering Financial Literacy for Youth Series provided by the Partnership for After School Education. They serve as reference materials and can support your work with youth around financial literacy. Fostering Financial Literacy for youth is funded by Morgan Stanley.

2 Fostering Financial Literacy for Youth Credit Cards Resource List 1. Agenda 2. Five Plastics Comparison 3. Activity: It s Gonna Take Me How Long? 4. Scenario I 5. Disclosure Summary 6. Activity: What affects a credit score? 7. Scenario II 8. Lesson 11: What is Credit? 9. PowerPoint Presentation

3 Partnership for After School Education 120 Broadway, Suite 230 New York, NY October 5, 2016 Fostering Financial Literacy for Youth: Credit Cards Presenter: Doug Young THE WISER CHOICE 10:00 10:15 Introductions & Credit Quiz 10:15 10:45 Asset Poor and Use of Credit The Five Plastic Money Cards: Good, Bad and Ugly! Activity: It s Gonna Take Me How Long? 11:30 12:00 Lesson 11 What is Credit? (Activity) Lesson 13 Applying for Credit (Activity) 12:00 12:15 Break 12:15 12:30 What is a Credit report? Activity: 12:30 1:55 What is a Credit Report? Activity: What Affects a Credit Score? 12:55 1:00 Evaluations and Certificates

4 Opening Fee Annual Fee Activation Fee A.P.R. Monthly Fee Point of Sale Fee ATM Withdrawl Fee Transfer Fee Transaction Fee Late Fee Re-Loading Fee Deposit Fee Monthly Statement Fee (Pap) Credit Reportable Fee Grace Period Finance Charges Balance Inquiry Fee Balance Transfer Fee Cash Advance Fee Card Re-load Fee Second Card Fee Late Payments Fee Over the Limit Fee Cancellation Fee For. Currency Fee Check Cashing Fee Pay Bills Fee Credit Check Fee Over Draft Protection Five Plastics Comparison How many ways can you get ripped? Credit Card Debit card Pre- Paid Money Store Card Gift Card

5 IT S GONNA TAKE ME HOW LONG??????? You want, want, want things and things and more things. You just have to have something!!! You can t do without it all your friends have it you ll look so cool with it you ll feel so great showing it off!!!!! What about paying it off????? Use this handy dandy little tool to calculate how long it will take to pay off your debt. 1. You have $10,000 in debt and your credit card interest rate is 8.9%. You figure you can swing paying $200/month IF you don t charge anything new. How long will it take you to pay this back? 2. You have $10,000 in debt and your credit card interest rate is 12.9%. You figure you can swing paying $200/month IF you don t charge anything new. How long will it take you to pay this back? 3. You have $10,000 in debt and your credit card interest rate is 12.9%. You figure you can swing paying $100/month IF you don t charge anything new. How long will it take you to pay this back? 4. You have $10,000 in debt and your credit card interest rate is 12.9%. You figure you can swing paying $150/month IF you don t charge anything new. How long will it take you to pay this back? 5. You have $5,000 in debt and your credit card interest rate is 14.9%. You figure you can swing paying $100/month IF you don t charge anything new. How long will it take you to pay this back? 6. Uh oh!!!! You missed a payment and your interest rate jumped sky high!!!! You have $10,000 in debt and your credit card interest rate is 23.9%. You figure you can swing paying $200/month IF you don t charge anything new. How long will it take you to pay this back? Scenario How Many Months Years (Approximately)

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8 Scenario #1 Scenario #2 Scenario #3 Click the link right below this!!! Let s take a look at what affects a credit score. MY CREDIT SCORE IS BETWEEN MY CREDIT SCORE IS BETWEEN MY CREDIT SCORE IS BETWEEN You have three credit cards that you use regularly. Two of the cards you pay on time, but one of them is more than 30 days late. You have applied for about 5 new credit cards in the last 2 years. You have one open installment loan. You have about four open credit cards. Your total credit limit is between $5,000-$9,999. Your balance on the credit cards is between $1,000-$1,499. Thankfully, none of them are maxed out (meaning charged to their limit). Thankfully you ve never had bankruptcy, a judgment or a tax lien. You opened your last credit card five months ago. You have 15 credit cards that you use regularly. You have two accounts that are past 30 days, five credit cards that have previously been past 30 days late, three accounts that are past 60 days late, and six that were more than 60 days late. You have applied for more than 5 credit cards in the last 2 years. You have four open installment loans. You have 11 open credit accounts. Your total credit limit is over $50,000. Your total balance on all open credit cards is between $30,000- $39,999. You have three cards that are maxed out. Thankfully you ve never had bankruptcy, a judgment or a tax lien. You opened your last card between 7-12 months ago. You have 10 credit cards that you use regularly. None of them have are now or have ever been 30 or 60 days late in payment. You have applied for two new credit cards in the last two years. You have two open installment loans. You have twelve open credit cards. Your total credit limit is over $50,000. Your total balance on all open credit cards is between $500- $999. You have no cards that are maxed out. Thankfully you ve never had bankruptcy, a judgment or a tax lien. You opened your last card more than 48 months ago. Think about the conclusions you can make from the above. What advice would you give people who wanted to make sure their credit score was a good one?

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10 LESSON 11 What Is Credit? LESSON DESCRIPTION AND BACKGROUND Decisions about credit loom large in the lives of adults as they consider buying big-ticket items a home or a new car, for example. Young people often use credit, too using credit cards to buy goods and services, for example, or taking out loans to pay for college expenses and the decisions they make in these cases can have important consequences. This lesson introduces the concept of credit, with special attention paid to the advantages and disadvantages of using credit. It also describes particular types of loans including home mortgage loans, car loans, college loans, personal loans, and credit card loans. Lesson 11 correlates with national standards for economics and personal finance as shown in Tables 1-2 in the introductory section of the publication. ECONOMIC AND PERSONAL FINANCE CONCEPTS Credit Credit score Interest Risk OBJECTIVES At the end of this lesson, the student will be able to: Identify and explain the meaning of key terms such as credit, interest, risk, and credit score. Explain the advantages and disadvantages of using credit. Identify types of financial institutions that offer credit. Explain that most credit transactions are voluntary ones in which both sides expect to gain. TIME REQUIRED One 45-minute class period MATERIALS A copy for each student of Theme 4 Introduction from the Student Workbook. A copy for each student of Exercise 11.1, 11.2, and 11.3 from the Student Workbook ADDITIONAL RESOURCES To download visuals, find related lessons, correlations to state standards, interactives, and more visit /lesson11. PROCEDURE 1. Distribute a copy of Theme 4 Introduction from the Student Workbook. Ask the students to read the section to become acquainted with the concepts presented in this theme. 2. Explain that this lesson focuses on the concept of credit. It raises a basic question: When does it make sense to use credit? Stress the point that decisions about using credit are similar to other decisions people make. Therefore, it is important to understand both the advantages and disadvantages of using credit. 3. Give each student a copy of Exercise 11.1 from the Student Workbook. Ask the students to read this exercise and answer the questions at the end. When they have finished, discuss the answers. a. Why use credit? (Credit allows people to obtain the use of money that they do not have. In return, people who use credit repay the amount they borrow, plus interest.) b. What are the advantages of using credit? (Credit can help people in many ways by enabling them to acquire valuable assets, FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades Council for Economic Education 53

11 LESSON 11 THEME 4 Lesson 11: What Is Credit? or by helping out with emergency expenses.) c. What are the disadvantages of using credit? (Goods and services can cost more when purchased on credit. When people buy things on credit, the interest and fees they must pay amount to a deduction from the money they might otherwise use to buy things they currently want. Also, people sometimes borrow too much. That is, they use too much credit in relationship to their income. When people are overextended and making heavy credit payments, they have less money left to pay for food, transportation, clothing, and other bills. And finally, items bought on credit can be repossessed by the lender if borrowers are unable to make the required payments.) d. What institutions are sources of credit? (Commercial banks, savings and loans, credit unions, and consumer finance companies. Utilities and medical providers extend service credit.) e. What is interest? (From a borrower s point of view, interest is the price paid for using someone else s money.) f. Who most often wins in a credit transaction? (Ordinarily, both parties expect to benefit from a credit transaction.) g. How does risk influence the rate of interest? (As risk goes up, interest rates usually go up too. Higher-risk loans usually result in higher interest rates. Lower-risk loans result in lower interest rates.) h. What is an unsecured loan? (An unsecured loan is one that doesn t require collateral. It is granted based solely on the borrower s creditworthiness.) i. What is collateral? (Collateral is an asset used to back a loan. For example, a car loan is backed by the car that is being purchased. If you fail to repay your loan, the lender can repossess the car and sell it to pay off the loan. If there is still a balance owed after the sale of the collateral, the borrower will be expected to pay off this remaining balance.) 4. Give each student a copy Exercise 11.2 from the Student Workbook. Ask the students to follow along as you explain the types of credit found in the table, as well as the advantages and disadvantages of each. Make sure that the students understand the key characteristics of the lending institutions identified in the table. These characteristics include the following: Commercial banks and savings and loans are very similar in the types of financial services they provide their customers; these include loans, savings accounts, and checking accounts. Credit unions are not-for-profit cooperatives enterprises owned by their members that provide many of the same financial services as commercial banks and savings and loans. Consumer finance companies lend money to individuals (and sometimes businesses) for the purchase of such things such as automobiles or household appliances. Sometimes their customers do not qualify for bank credit and therefore pay a higher rate of interest. Department stores and other financial service providers sometimes offer their own credit cards for their customers use. 5. Ask the students to answer the questions at the end of Exercise When they have finished, discuss the answers: a. What are the advantages of home loans and college loans compared to credit card and personal loans? (Home and college loans usually help people acquire assets that increase in value. Interest rates on these loans are usually lower than the rates for credit cards or personal loans.) b. What are the disadvantages of credit card and college loans? (Sometimes young people borrow more than they should for college loans. Upon graduation, new graduates may have difficulty repaying the money they have borrowed. Sometimes young 54 FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades Council for Economic Education

12 THEME 4 Lesson 11: What Is Credit? LESSON 11 people overuse their credit cards. Credit card loans have relatively high interest rates, and large credit card balances therefore can be burdensome for long periods of time.) CLOSURE Use the following questions to review the lesson: What is a key advantage of using credit? (Using credit allows you to obtain goods or services today and pay for them later. Using credit can help people acquire valuable assets like a college education or a home. Using credit can also add to the enjoyment of life.) What is a key disadvantage of using credit? (When credit is easily available, some people borrow and spend more money than they should. Loans have to be repaid. Lenders charge interest for the use of their money. Individuals who borrow heavily have to give up some things they would like to have today because they are required to pay for goods or services they have already consumed.) Who gains from credit transactions? (Both sides in a credit transaction expect to benefit. Borrowers are able to purchase something that may be of value today and/or in the future. Lenders are repaid the money that they lent, plus interest and sometimes fees.) EXTENSION Give each student a copy of Exercise 11.3 from the Student Workbook. Assign the students to contact local financial institutions to determine the annual percentage rate of interest for the various types of loans listed in the chart. You may wish to have the students discuss this information with the other members of the class. ASSESSMENT Assign the students to write an essay outlining their planned use of credit over the next 10 years. What do they plan to buy by using credit? What institution(s) will they use to furnish the credit? What advantages do they expect to gain by using credit? What about the disadvantages? Explain. FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades Council for Economic Education 55

13 THEME 4 Introduction Spending and Credit Just about every adult in America uses credit. The Federal Reserve Board s Survey of Consumer Finances provides some interesting figures for U.S. household uses of one form of credit: credit cards. In 2007, 73 percent of all households in the United States had a credit card, but only 46 percent of households carried a balance from one month to the next. Many families use these cards as a convenience and pay their balances off each month. For those U.S. households maintaining a balance on their credit cards, the median amount owed in 2007 was $3,000. Median figures mean that half of the households had more debt and half had less. On the other hand, the Federal Reserve Board reports that, for households maintaining balances on their credit cards, the average balance was much higher: $7,300. Some people are afraid of using credit. Neither a borrower nor a lender be is an old adage such people might quote. Other people are fearless about using credit, especially credit cards. They might say, Hey, it s only plastic! Let s go for it! There are problems with both viewpoints. Used in a smart way, credit can be a tremendous help to you now and in the future. Used in a stupid way, credit can result in harassment from creditors, broken relationships, and bankruptcy. What is credit? Credit means obtaining the use of money that you do not have. To obtain credit, you must convince someone else (usually a financial institution like a bank, savings and loan, credit union, or a credit card company) to provide a loan to you in return for your promise to pay the borrowed money back later, plus an additional charge called interest. FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 Council for Economic Education 83

14 THEME 4 Can using credit help you? You bet! But loans have to be repaid. Lenders charge interest for the use of their money. As people pay off their loans, plus interest, the money that goes for repayment is money they do not have for spending on things they may wish to have today. Credit that is used unwisely can harm you financially, but you should not be afraid of using credit if you understand the basics. The key is to be smart about the use of credit. What do lenders look for when they approve a loan to an individual? Ordinarily, they look for the Three Cs : Character: Will the applicant be responsible and repay the loan? Your history of credit use is stored in your credit report. Credit reporting agencies use a scoring formula to summarize your creditworthiness. This number is your credit score. Credit scores are used by lenders to determine whether or not you qualify for loans; credit scores also determine in part the interest rate you will be offered. Insurance companies use credit scores in determining how risky you are to insure. Landlords use credit scores in their tenant-screening process. Some employers use credit scores in their evaluation of job candidates. Capacity: Does the applicant have enough income to comfortably make the payments on the loan amount requested? Collateral: Will the loan be secured, or guaranteed, by collateral that can be used to repay the debt in case the borrower defaults on the loan? Consumers sometimes make mistakes in using credit. They are not perfect. People in the lending business also make mistakes. They are not perfect either. The world of finance can be complicated. Some business people take advantage of consumers. Several state and federal laws are designed to protect credit consumers from dishonest business practices. Among the more important consumer-credit protection laws are the Truth in Lending Act and the Fair Credit Reporting Act. And then there are the scheme artists and swindlers. Unfortunately, the credit and finance industry sometimes attracts unsavory sorts who prey on people s greed or financial fears. If you receive a phone call describing a fantastic loan and a debt repayment plan that sounds too good to be true, it probably is. Hang up the phone. And try to avoid businesses that provide financial services but at very high costs such as payday loans and rent-to-own plans. 84 FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 Council for Economic Education

15 THEME 4 Lesson 11: What Is Credit? EXERCISE 11.1 NAME: CLASS PERIOD: What Is Credit? Credit allows people to obtain the use of money that they do not have. To obtain credit, a prospective borrower must convince someone else (a lender) to provide a loan in return for the borrower s promise to pay the money back, plus an additional charge called interest. People obtain loans to buy cars, homes, and major appliances, to improve their homes, to pay for college education, and so forth. Credit decisions whether to borrow money, and for what reasons can be difficult. Like all difficult decisions, credit decisions involve examining the advantages and disadvantages facing the individual making the choice. The hard part, of course, is figuring out whether the advantages of using credit outweigh the disadvantages. There are many advantages to using credit. Credit can help people acquire assets. Assets are goods or services that usually retain or increase their value. Ordinarily, a home or post-secondary education is considered an asset. Credit also can help people lead happier lives by enabling them to obtain the goods and services they wish to have now while paying for them in the future. And credit can help people in an emergency. There are also disadvantages to using credit. Some people make the mistakes of using too much credit in relation to their income; they may then incur heavy burdens of debt from which it is difficult to recover. Many new college graduates, for example, spend a lot of the income from their first jobs repaying large credit card debts they have rolled up while in college. As they spend a great deal of their current income paying for previous purchases, they are left with less money to buy things they would like to have in the present. And if they miss payments or default on loans altogether, they may face serious negative consequences, including the inability to get credit at a later time when it would otherwise make sense to borrow money for a major purchase. Financial institutions (commercial banks, savings and loans, credit unions, and consumer finance companies) hold money that they, in turn, lend out to others. The owners of financial institutions expect to be compensated when they make a loan. This compensation is called interest. Interest is the price a borrower pays to a lender for use of the credit provided by the lender. Interest is the reward lenders receive for allowing others to use their funds. Both sides in a credit transaction expect to benefit. Borrowers are able to purchase something that may be of value to them today and/or in the future. Lenders are repaid the money that they lent, plus interest. An important factor in determining the rate of interest to be charged is the amount of confidence the lender has that the amount of the loan, plus interest, will be repaid in the agreed-upon time. Higher-risk loans loans where it is uncertain that the borrower can repay usually result in higher interest rates. Lower-risk loans loans where it seems evident that the borrower can repay usually result in lower interest rates. FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 Council for Economic Education 85

16 EXERCISE 11.1 THEME 4 Lesson 11: What Is Credit? A loan for an intangible item, like a vacation, is likely to cost more in interest than a loan for a tangible item, like a home. Secured loans (those that are backed by other assets, like your home or your car), are likely to have lower interest rates than unsecured loans (those that are not backed by other assets). An asset used to back a loan is called collateral. Questions: a. Why use credit? b. What are the advantages of using credit? c. What are the disadvantages of using credit? d. What institutions are sources of credit? e. What is interest? f. Who most often wins in a credit transaction? g. How does risk influence the rate of interest? h. What is an unsecured loan? i. What is collateral? 86 FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 Council for Economic Education

17 THEME 4 Lesson 11: What Is Credit? EXERCISE 11.2 NAME: CLASS PERIOD: Common Forms of Credit Types of Credit Lender Advantages Disadvantages Home Mortgage Commercial bank Savings and loan Credit union Consumer finance company Homes can increase in value. Interest rates for mortgage are relatively low. The interest paid is tax-deductible. Mortgages are usually long-term commitments. Obtaining a home loan involves extensive credit checks. Car Loans Commercial bank Savings and loan Credit union Consumer finance company Cars can make it easier to work and earn an income. Cars lose their value relatively quickly. The car you purchase on credit may have little value when the last payment is made. College Loans Commercial bank Credit union Savings and loan associations A college education is usually a good investment. Students sometimes borrow more than is necessary. New graduates can face difficulty in repaying large loans. Personal Loans Commercial bank Savings and loan Credit union Consumer finance company Personal loans allow individuals to purchase today that boat or vacation they want. Personal loans have relatively high interest rates. Some people may borrow more than their income should allow. Credit Cards Commercial bank Savings and loan Department stores Other financial institutions Credit union Credit cards are convenient to use and useful in an emergency. Credit cards provide a record of charges. Credit cards may have relatively high interest rates. Some card holders may borrow more than their income should allow. Questions: a. What are the advantages of home loans and college loans compared to credit card and personal loans? b. What are the disadvantages of credit cards and college loans? FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 Council for Economic Education 87

18 EXERCISE 11.3 THEME 4 Lesson 11: What Is Credit? NAME: CLASS PERIOD: Credit Research Directions: Outside of class, identify one example of each of the four types of financial institutions listed below. Try to find examples from within your community. As necessary, look beyond your community by using the Internet. After you have identified the four examples, get in touch with a representative from each one. You may do this by telephone, in person, or via the Internet. Ask each representative what the current annual percentage rate (APR) is, at his or her institution, for each of the five types of loans listed. The APR is the best way to compare the cost of credit from one lender to another. Record the information in the correct places on the chart and report the results to class. Credit Research Results Loans APR for a 4-year car loan APR for a college loan APR for a 30-year home mortgage APR for a credit card APR for a personal loan to pay for a vacation Institutions Commercial Bank Savings and Loan Credit Union Consumer Finance Company Questions: a. Which local institutions offered the best APR for each type of loan? b. Which local institutions offered the highest APR for each type of loan? c. How did the loans from online lenders compare to loans from lenders in your community? 88 FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 Council for Economic Education

19 The Five Plastic Money Cards: The Good, Bad and Ugly Doug Young CEO Head Coach THE WISER CHOICE Economic and Financial Coaching Critical Credit Questions 1) What is the Schumer Box? 2) How long do negative items stay on your credit report? 3) What does opting-out mean in banking? 4) What is the average debt of a college graduate? 5) What is the utilization rate for credit cards? 6) In banking, what is the ChexSystem? 7) Where can you get your credit report for free? 8) How many credit scores are there? 9) Name the three credit bureaus. 10) Most banks accept only one credit score when applying for a loan. Which one is it? 1

20 When you hear the word personal finance, what do you think of? But How Do You Make Economics Interesting? The traditional way economics is taught: Can teachers make economics and personal finance more interesting? I think we can: 1. By showing students that economics is everywhere. 2. By demonstrating that personal finance is part of our everyday life: from inception to finality. Cost of raising a child from birth to age 18 averages over $280,000. The cost of just having that child - $28,000 The average cost of a funeral is: $7,000 and $10,000. 2

21 What is the basic economic problem? Scarcity: Unlimited human wants in a world of limited resources. Setting Financial Goals Oh, Scarcity Tune: Oh, Christmas Tree Oh, scarcity! Oh, scarcity! We can't have all the things we want. Oh, scarcity! Oh, scarcity! We cannot have it all. We really want a lot of stuff. But sometimes there's just not enough. Oh, scarcity! Oh, scarcity! We cannot have it all. n-frame2012.mp4 3

22 Wants versus Needs Glasses, glasses on my head, What monies will I need as I look ahead? Setting Financial Goals Long term 1) 2) 3) Mid term 1) 2) 3) Short term 1) 2) 3) The Devil Conspicuous consumption is the spending of money on and the acquiring of luxury goods and services to publicly display economic Shop! Goes the Consumer Tune: Pop Goes the Weasel Consumers want a lot of goods. Consumers want to use them. Mike wants to buy LeBron sneakers, Shop! Goes the consumer. Consumers want some services. Consumers want to use them. Elizabeth wants to add new apps. Shop! Goes the consumer. 4

23 A New Class: The Asset Poor An asset-poor household is one in which a sudden halt in income would have serious consequences immediately. Asset poverty is a measure of whether a household can support itself using savings or other available assets for 12 weeks at a poverty-level income. Asset Poverty Rates by Race in the United States African American Hispanic Native American Asian White 43.2% 39.0% 34.5% 23.1% 16.6% Let s Start Budgeting! Let s find a job d=1,11&nodeid=2&soccode=&stfips=&jobfam=&menumode= Gross Income - Taxes = Disposable income Disposable income = consumption + saving Saving = disposable income consumption 5

24 The Five Plastic Money Cards: The Good, Bad and Ugly All Cards Are Not The Same! Gift Card Costs: Benefits: 6

25 Debit Cards: The Pay Now Card Costs: Benefits: Store Cards Costs: Benefits: 7

26 Pre-Paid Money Cards Costs: Benefits: Terminology for Credit Card Users Good, Bad and Ugly Triggerer I racked up over $25,000 in credit card charges as a result of: (divorce, health issues, loss of job). Surfers I open up card after card, searching for cheaper fees. As a result, I now have 15 cards, all with huge debt, and a very low credit score. Ponzi Schemer I run up huge amounts of debt on my credit card and then open new accounts to pay off the old debt. I have over $30,000 in credit card debt right now. Revolver I carry balances, paying off those balances over time, thus "revolving" them. Zombie I have old credit card debt that is beyond the statute of limitations, so a debt collector cannot collect from me. However, they still harass me and my relatives for payment. So debts don't die, they rise to live on and on. Like zombies. Dead Beat Credit card companies don t like me. I charge EVERYTHING and pay off my balance each month. (Rack up those incentive points). 8

27 Credit Cards The Cornerstone of the U.S. Economy Beware of MAXING OUT Let s hear from some credit card victims. Types of Expenses Contributing to Credit Card Debt 9

28 The New and Improved Schumer Box How Credit Card Companies Make Their Money: Let Me Count the Ways! What s a Credit Report? From age 18 on, agencies collect data about your spending habits. Monitor your ability to handle risks (i.e. installment loans and revolving charge accounts) Impacts: amount you can borrow and the interest rates on that loan. Who Can Access Your Report? Creditors Collection agencies Insurance companies Employers Landlords Many others!!! 10

29 What is in a Credit Report? Personal Data Employment History Public Records (liens, judgments, secured loans, foreclosures, bankruptcies, etc.) Collection Accounts (defaults and lateness) Credit Information (open accounts, date account was opened, payment status) Inquiries (approved requests and others seeking credit information) How Long Does the Information Remain On A Credit Report? TYPE Suits & Judgments Tax Liens Paid Tax Liens Unpaid Charged to Profit & Loss Criminal Record Limitations Other adverse information Late Payments Debt Collections Bankruptcy LIMITATION 7 years 7 years from payment No limitation 7 years No limitations 7 Years 7 Years 7 Years 10 Years 11

30 Improving Your FICO Credit Score What is a Credit Score? A tool created from your credit report which can assess your financial status, history, and debt repayment record. Credit rating is determined by three bureaus that all banks, employers, companies you deal with check to see if you are a good risk. Two most commonly used credit scores are the: FICO (Fair Isaac Corp.), which ranges from Vantage (Experian), scores go from There are hundreds of credit scores which are used by mortgage lenders; auto dealerships; and insurance companies for homeowners, life and health policies. 12

31 What doesn t Count in a Score. The scoring model doesn't look at: race sex income education marital status job or length of employment at your job whether you've been turned down for credit length of time at your current address whether you own a home or rent information not contained in your credit report age Why is a Credit Score Important? A poor credit score can affect a person s ability to: Obtain credit cards, car loans and mortgages Receive favorable interest rates and preferred credit limits on cars and credit cards Qualify for utility and cell phone services with no down payment or substantial security deposit Rent or lease a house or apartment Obtain government-sponsored student loans Obtain private student loans with low rates It might also affect: Your car insurance rate Life insurance rates Health insurance premium 13

32 Distribution of FICO Fair Isaac reports that the American public's credit scores break out along these lines: Credit score Percentage 499 and below 2 percent percent percent percent percent percent percent 800 and above 13 percent 14

33 The key credit score elements Payment history Utilization Balances Depth of credit Recent credit Available credit Repayment behavior (satisfactory, delinquency, derogatory) Percentage of credit amount used/owed on accounts Amount of recently reported balances (current and delinquent) Length of credit history and types of credit Number of recently opened credit accounts and credit inquiries Amount of credit available Recent credit 10% Depth of credit 13% Balances 15% Available credit 7% Utilization 23% Payment history 32% To compare your Vantage Score to a FICO Score: Multiply your Vantage Score by 0.86 Vantage Score of 800 times 0.86 = FICO Score of

34 CREDIT BUREAU RISK SCORE REASON CODES EQUIFAX TRANS UNION EXPERIAN Amount owed on accounts is too high Level of delinquency on accounts Too few bank revolving accounts Too many bank or national revolving accounts Too many accounts with balances Too many consumer finance company accounts Account payment history is too new to rate Too many recent inquiries last 12 months Too many accounts recently opened Proportion of balances to credit limits is too high on bank revolving or other revolving accounts Amount owed on revolving accounts is too high Length of time revolving accounts have been established Time since delinquency is too recent or unknown Length of time accounts have been established Lack of recent bank revolving information Lack of recent revolving account information No recent non-mortgage balance information Number of accounts with delinquency Too few accounts currently paid as agreed Length of time since derogatory public record or collection is too short How Much Will My FICO Score Drop? Alex Blanca Current FICO Score Score after one of these is added to the credit report One inquiry for a new credit card 675 (5) 775 (5) A new charge card (additional hit) 665 (15) 760 (20) Maxing out credit card 660 (20) 745 (35) A 30-day delinquency 610 (70) 680 (100) Settling a debt 625 (55) 665 (115) Foreclosure 585 (95) 630 (150) Bankruptcy 540 (140) 550 (230) An $18 million Lesson in Handling Credit Report Errors by Sara Siegel Bernard 16

35 What Rate Will Your Score Get You? FICO Score 30-year fixed-rate mortgage 36-month new auto loan 15-year home equity loan Credit Card APR % 6.4% 8.1% 7.3% % 6.4% 8.4% 10.0% % 7.9% 8.9% 15.0% % 9.9% 9.7% 15.0% % 9.9% 11.2% 18.0% What is APR? APR is the Annual Percentage Rate on a loan or a credit card. It is interest rate that will determine how much you pay in interest each year. How much will you pay? A home theater system for $1,000, when purchased on credit card and each month you pay minimum payment will actually cost FICO Score Credit Card APR You will pay off the balance in about You will end up paying an interest of You will end up paying an estimated total of % 5 years $196 $1, % 7 years $580 $1, % 8 years $863 $1,863 17

36 Instructional Strategies Have students DEBATE whether gift cards are a good gift using the projected Have students CALCULATE the cost of paying the minimum payment on a $10,0000 store card debt Have students EXPLORE Ask CFPB for various questions on debit card fees. Have students use the Federal Reserve credit card tools to COMPARE two different credit card solicitations. Have students RESEARCH how much money Justin Bieber received to endorse his PrePaid Money Card. Have students SAVE in their phones a reminder on their 18 th birthday that repeats every year to go to annualcreditreport.com and CHECK their credit score. Questions & Answers 18