Chapter 4

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NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Bellwork
1. When do you think it is appropriate to
use a credit card?
2. When do you think it is not appropriate to
use a credit card?
3. Why do you think people get into so
much financial trouble using credit
cards?
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Bellwork
1. Where do we draw the line for public
responsibility versus personal
responsibility? (think taxes)
2. Should the government pay for health
care, education, and income for the
unemployed, or is it the citizen’s
responsibility to pay for those services??
Did you know? American Airlines saved
$40,000 in 1987 by eliminating one olive
from each salad served in first class
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
What do you Think?
• Nearly ____% of teens owe money to
either a person or company, with an
average debt of $____
• About ___% of teens age 16-19 already
have mor than $1000 in debt
• _____% of teen say they understand how
credit card interest and fees work
• ______% of teens say they know how to
establish good credit
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Answers
• Nearly __33__% of teens owe money to
either a person or company, with an
average debt of $_230___
• About _26__% of teens age 16-19 already
have mor than $1000 in debt
• _30____% of teen say they understand
how credit card interest and fees work
• __36____% of teens say they know how
to establish good credit
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
What is credit and debt?
• Credit is when someone is WILLING to loan you
money in return for interest paid.
• Debt is the ENTIRE amount of money you owe
to lenders.
• Interest is the amount you pay to use someone
else’s money.
• For example: I’ll loan you $5, but you need to
give me $1 in interest for loaning you the money.
In total, you will get your $5 back, and $1 in
interest= $6.
4-A
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Credit
• The best part of using a credit card is
being able to buy something NOW
• But, you have to remember that the credit
card company will expect payment back
PLUS INTEREST.
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Types of Credit #3
1. Credit card (gas company, department
store, grocery store)
2. Installment loan (car, appliance, etc)
3. Student loan
4. Mortgage (home loan)
4-B-2
4-B-3
4-B-1
1
2
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
What are some benefits of using
credit?
•
•
•
•
•
•
•
4-C-1
YOU CAN BUY SOMETHING NOW!
Protection
Emergencies
Opportunities to Build Credit
Special offers
Bonuses
Convenience
1
of
4
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
What are some disadvantages
(risks) of using credit? (#9)
•
•
•
•
Interest
Overspending
Debt
Identity theft
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
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.
4-C-4
4
of
4
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
The 4 C’s of credit
• Collateral: this is an asset that lenders
can take from you
• Capital: lenders like knowing you have
personal items of value
• Capacity:Are you able to repay the
loan?
• Character: Are you trustworthy?
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
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.
4-C-3
3
of
4
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
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
– Your credit score does change over time as you are
carefully, or not carefully using credit
4-M-1
1
2
3
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
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
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
•
•
•
•
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
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Credit Score
• Who looks at your credit score? Land lords,
employers, lenders
• What if you have a low credit score?
–
–
–
–
You may not be able to get a loan
You may not be able to rent an apartment or house
You may not get a job
You may not get a credit card
• You may have to pay a higher interest rate and
pay more fees if you ARE approved for a loan or
credit card
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Bankruptcy #18
• Chapter 7: allows you to erase most of
your debt (to qualify you typically must
be unemployed or have a very low
income. You must also undergo
financial counseling)
• Chapter 13: Allows you to repay many
of your debts over a period of time,
usually no more than 5 years.
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
A few other things…
• The longer you have a loan (any loan), the
more expensive it will be
• The maximum amount you should go
towards any loan is 20%
• How can you reduce your debt? Make
regular minimum payments until the
balances are paid off.
• Debt is not necessarily bad
4-E
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Acts…
• Fair Debt Collection Act- Creditors are
allowed to hire a collection agency to
collect what you owe, call any co-signer of
a loan, send you a notice of what you owe.
• Truth in Lending Act- Lenders have a
right to know why they were turned down
for a loan
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
The Cost of Using Credit
$300 for a CD Player
APR = 24%
Minimum Payment of 4% or $12
Finance Charge $149.99
Your CD player REALLY
cost $449.99
And it will
take 3 years
and
8 months
to pay off!
After you’ve made the last payment, will
your CD player still be around???
4-H
1
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
The Cost of Using Credit
Interest Rate = 24%
Minimum Payment = 4%
4-I
BALANCE
TIME TO
PAY OFF
INTEREST
CHARGED
TOTAL
COST
$2,000
11 YEARS
5 MONTHS
$1,850
$3,850
$4,000
14 YEARS
4 MONTHS
$3,850
$7,850
$6,000
16 YEARS
$5,850
$11,850
1
2
3
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
The Cost of Using Credit
$3,000 Charged to Credit Account
APR = 21%
Minimum Payment of 4% or $120
Finance Charges $2,220.56
Annual Credit Card Fee: $65
Paying the minimum, it will
take you 11 YEARS and 10
MONTHS to pay off your debt.
4-J
1
You Owed
$3000
but
You Paid
$5936
NEFE High School Financial Planning Program
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
• Any questions???????????
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