Name Period GOOD DEBT, BAD DEBT: USING CREDIT WISELY ACCELERATED Say you dream of buying a $15,000 car. Even if you saved $200 a month, it would still take you seven years to save what you needed to buy the car. But there is a way you can get that car sooner - by taking out a loan. Of course, as you'll soon see, you'll have to pay extra for this privilege. Car loans, school loans, installment loans and credit cards are all based on the use of credit. Like any other tool to manage your finances, you can use credit wisely, or you can use it poorly. Regardless of the type of credit you choose, they all follow the same basic pattern: buy what your want now and pay for it later. In this unit, you will learn about ways to manage your credit wisely. IN THIS UNIT, YOU WILL: understand how credit and credit cards work compare credit offers and apply for a credit name the pros and cons of using credit explain what is wrong with making just the minimum payment on a credit card understand the importance of a credit history learn how to create a credit history understand what a credit report records resolve errors on a credit report understand the importance of a FICO score learn how to increase a FICO score respond to situations involving identity theft and deceptive practices explore the consequences of excessive debt and how to correct it YOU KNOW YOU HAVE SUCCEEDED WHEN: You use the decision-making process to decide when to use credit to meet your financial goals You predict the consequences of maintaining your credit history over the next five years You detail strategies that you can implement over the next five years to build a good credit history You analyze credit offers to determine the cost of credit including potential fees You prepare an amortization schedule You show how you would contact a financial institution about inaccurate reporting VOCABULARY Credit Principal Interest Installment loan Service credit Annual Percentage Rate (APR) Annual fee Credit limit Over-the-Limit Fee Finance charge Loan term Grace period Late fee Cash Advance Fee Prepayment Penalty Origination Fee Amortization Collateral Capital Capacity Character Credit report Credit history Credit score Credit reporting agency 70-20-10 Rule 20-10 Rule Bankruptcy ASSIGNMENTS Assessment 4-1: Should I Use Credit?... 20 points Virtual Business Simulation Lesson 8: Getting a Credit Card... 20 points Virtual Business Simulation Lesson 9: Fixing a Credit Card... 20 points Test on Credit... 100 points Page 1
BASIC TERMS 1. How long you have to repay a loan, often expressed in months. 2. Tool used to buy something now and pay for it later. 3. The amount you borrow. 4. The amount you have to pay to use someone else s money. 5. The entire amount of money you owe to lenders. 6. The total cost to use credit in a year expressed as a dollar amount. 7. The total cost to use credit in a year expressed as a percent. A. APR B. Credit C. Debt D. Finance charge E. Interest F. Principal G. Term TYPES OF CREDIT Revolving Credit Installment Credit Service Credit Uses Principal Amount Payment Amount Interest Payment Term Key Concept Alert! NO matter what type of credit you use it always costs than cash. So, use credit to purchase not to pay. Page 2
DEBIT CARD V. CREDIT CARD Debit Money comes out of your checking account No interest Credit You take a loan Have about 1 month to pay Need to pay interest on balance PROS AND CONS OF CREDIT Advantages Disadvantages Page 3
THE 20-10 RULE KNOW WHEN TO SAY WHEN $ Total of Should be LESS Than Of Your BE A SHREWD BORROWER USE THIS CHECKLIST TO SEE IF YOU SHOULD USE CREDIT S H R E W D Once you decide to borrow, remember to use the DECIDE process to make a good decision about the type of credit to use. Key Concept Alert! Interest is always when you use compound interest instead of simple interest. Fees, Fees and More Fees! 1. Fee charged for the privilege of having a company s credit card. 2. Fee charged for being late making a payment. 3. Fee charged for taking a cash loan on your credit card. 4. Fee for charging more than your credit limit. 5. Fee charged to process your loan. 6. Fee charged to make early payments on a loan. Page 4
THE FOUR C'S OF CREDIT MY CREDIT REPORT Your credit is a record of your behavior related to borrowing and repaying loans. Your history is documented in your credit. Credit reporting companies provide a rating, known as your credit, which helps lenders decide whether and/or how much credit you can get. The most common credit score is your score. Each credit reporting company (there are ) calculates its own score. So, you actually have credit scores. Your credit score is based on: Item % of Score A good credit score is or above. Key Concept Alert! A higher credit score will enable you to get credit with a interest rate. Page 5
HOW TO BUILD CREDIT 70-20-10 RULE 70% of your spending should be for 20% of your spending should be for 10% of your spending should go toward VIRTUAL BUSINESS SIM: LESSON 8 GETTING A CREDIT CARD Page 6
FIXING YOUR CREDIT WHEN YOU ARE AT FAULT Get rid of your credit cars Find out exactly how much you owe Contact your Creditors or a Credit Counselor Create a repayment plan Pay off debts one at a time lowest balance first highest interest rate first BANKRUPTCY Please judge, I need mercy! The Last Resort Bankruptcy is the process to get out of debt. Not all debt is or excused. The sets up a plan to repay some debt. Bankruptcy stays on your credit report for years! FIXING YOUR CREDIT WHEN THE CREDITOR IS AT FAULT It s easy! Simply write a as soon as possible and include of the error. Page 7
IDENTITY THEFT If your identity is stolen you might have Identity theft occurs when someone steals your your bank accounts information and uses it. emptied, have to pay How Do People Steal Your Identity for loans you did not 1. Go through your. take, have trouble 2. Steal your or purse. getting a job, get a 3. Steal your. bad credit rating, be 4. Submit a form for your mail. refused loans, sued 5. Use or fake emails to get you to provide for things you know personal information. nothing about or even 6. Steal personal records from their. arrested for crimes What Can You Do? you did not commit. Deter financial documents before discarding them. Protect your. Don t give out unless you re sure who you re dealing with. Don t use obvious. Keep your information. Detect Be alert for mail that doesn t arrive on time or denials of credit for no reason. Inspect your at least once every months by getting a free credit report from each agency once a year. Online: www.annualcreditreport.com Inspect your every. Defend Place a on your credit reports that have been tampered with or opened fraudulently File a report Contact the. VIRTUAL BUSINESS SIM: LESSON 9 FIXING YOUR CREDIT Page 8
REVIEW CREDIT Part A: Answer each question. 1. What is the principle difference between debit cards and credit cards? 2. What do you need to do to get a credit card? 3. In what situations is it best to use a bank loan for a purchase? 4. In what situations is it best to use a credit card for a purchase? 5. In what situations is it best to use cash for a purchase? 6. What should you do if you see an unauthorized charge on a bank or credit card statement? 7. How many years of information are stored on a typical credit report? 8. How many free credit reports can you receive in one year? 9. For each item, identify whether the action will increase (I) or decrease (D) your credit score. pay bills on time bounce checks have many credit cards keep a card for a long time maintain no balance on credit cards have bank loans regularly add to savings use your credit card each month payoff your bill in full each month pay only the minimum payment apply for as many cards as you can set up automatic payments 10. What is the 70-20-10 rule? 11. What is the 20-10 rule? Page 9
12. What types of fees can credit card companies charge? 13. If you always pay more to buy something with credit, why does Ms. Olson think you should get a starter credit card as soon as you can? 14. You and your friend have decided to purchase matching cars. You have a FICO score of 730, and your friend has a FICO score of 650. Who will receive the lower interest rate on a car loan? Why? 15. Why do financial advisors tell you not to pay only the minimum amount due on a credit card? 16. What can you do to help deter criminals from stealing your identity? 17. How often should you check financial statements to make sure they match your records? Why? 18. Oh, no! Despite your best efforts, someone has stolen your identity. What should you do? Page 10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Across 2. card that can be used at a variety of stores 4. type of credit that uses a line of credit 5. to combine many loans into a single loan 6. period of time during which no interest is due 9. the income a person receives 11. a measure of your ability to make credit payments on time (2 words) 12. credit condition that requires a person s assets to exceed their liabilities 13. rate charged for borrowing a full year (abbrev.) 16. type of credit used in a mortgage 17. rate charged for a short period of time, such as six months 19. credit condition that requires trust and reliability 20. type of credit used when you pay a cell phone bill 21. someone to whom money is owed 22. the borrowed amount 23. periodic charge for borrowed money test Down 1. total cost of borrowing money (2 words) 2. to move the amount you owe from one credit card to another credit card (2 words) 3. number of years a bad credit rating stays with you 5. companies that keep track of how people use credit (2 words) 7. fee that is paid for the privilege of having a credit card 8. credit condition that requires a certain income 10. small loan on a credit card (2 words) 14. form of security for a loan 15. maximum amount a person can borrow (2 words) 18. fee that is charged if you do not make payments on time 20. credit card that can be used at only one company s store Page 11
IS IT A DEAL? For each purchase, check the option that you think would be the best credit deal. COMPUTER. YOU HAVE TWO OPTIONS TO PURCHASE A COMPUTER PRICED AT $1,400. Store Financing: 24 monthly payments at 11.9% interest. Credit Card: 36 monthly payments at 15.9% interest. STEREO SYSTEM. YOU HAVE TWO OPTIONS TO PURCHASE A STEREO SYSTEM THAT COSTS $800. Store Financing: 12 monthly payments at 13.5% interest. Credit Card: 24 monthly payments at 18% interest. CAR. YOU CAN PURCHASE ONE OF THE FOLLOWING NEW CARS FROM A LOCAL DEALER. Car A: costs $20,000 at 7% interest for 60 months. Car B: costs $23,000 at 3.9% interest for 30 months. LARGE SCREEN TV. CHOOSE AN OPTION TO PURCHASE A $1,900 TV. Store Financing: no payments for 90 days, but interest charges start immediately at 10% interest; then 6 months of payments. Credit Union: 11% interest for 12 months. TRUCK. YOU HAVE TWO OPTIONS TO PURCHASE A NEW TRUCK SELLING FOR $25,000. Option A: $1,500 cash back now with 2.9% interest for 48 months. Option B: $0 cash back now at 0.9% interest for 36 months. CALCULATING INTEREST The formula is a quick way to calculate interest. Most people payoff loans in installment payments. As you make a payment, a bit of the principal is paid which the amount of interest you owe on the unpaid balance. An table can be used to show your monthly payment and how much of the payment goes toward principal and interest. Simple Interest Formula Interest = Principal x Rate x Time Amount to be Repaid Formula Interest = Principal x (1+Rate) x Time Amortization Formula Use an online calculator ASSIGNMENT: 4.1 SHOULD I USE CREDIT Page 4A
Part C: Calculate the values. 1. You borrowed $500 from your parents for a summer vacation. Your parents are charging you 5% interest on the amount you borrowed and expect you to repay the loan in six months. How much money will you owe your parents in six months? 2. You just signed the papers on a student loan for $5,000. The interest rate on the loan is 6.2%. The loan will take you 10 years to payoff. What will your monthly loan payment be? 3. You are buying your first car. The cost of the car is $25,000 and you need a loan for the full amount. Which loan offer is better? a. 5-year loan at 5.8% b. 4-year loan at 5.5% c. 3-year loan at 5.0% 4. You have agreed to loan a sibling $100. Because this is your least favorite sibling, you are charging 3% interest on the loan. You want the loan to be paid back with interest in 2 years. How much money will you receive from your sibling in 2 years? Page 10A