Module 2 - Jim Casey Youth Opportunities Initiative

Credit Matters
If you ever want:
– A job
– An apartment
– A car
– Insurance
– Education or training after high school
– Affordable utilities
– Affordable choices with a cell phone plans
– A house
Visual Aid 2.1
Credit is. . .
• Do you have good credit? = Do you have a good
credit history as reported on your credit report?
• Did you pay for this care using credit? = Did you
borrow money to buy this car?
• Does your credit qualify you for a good price on
this loan? = Are your credit scores high enough to
get the lowest interest rate on this loan?
• Did the bank credit your account? = Did the bank
add money back into your account?
• Did you get credit for this great idea? = Did you
get recognition or acknowledgement for this
Visual Aid 2.2
Types of Credit
• Installment
– Approved for a specific
– Monthly loan payment
calculated when you take
out the loan.
• Secured
– Asset pledged against the
– This pledged asset is called
• Revolving
– Borrow as much as you
want up to a credit limit.
– Make minimum payment
depending on balance.
• Unsecured
– No asset pledged against
the loan
Visual Aid 2.3
How Credit Works
• Lender (creditor) loans money to borrower
(debtor) with certain terms (rules)
• The amount the borrower borrows = Principal
• Rent for using the money until it is paid back =
Interest (and fees although most fees are paid
one time unless they are penalty-type fees
such as late payment)
Visual Aid 2.44
Key Terms 1
• APR—Includes interest and the fees that
everyone who gets the loan has to pay. It’s a
percentage and allows you to compare loan to
loan. Required by Truth in Lending Act.
• Terms — what you agree to follow when taking
out a loan. Includes: interest rate, kind of interest
rate, length of the loan, where payments are due,
when payments are due and more
Visual Aid 2.5
Key Terms 2
• Fixed Rate—The interest rate does not change
during the term of the loan.
• Variable Rate—The interest rate changes as
market rates change.
• Amortized—Accounting term that means the
interest has been calculated over the life of the
loan so you pay the same amount each month.
Visual Aid 2.6
Answers to KEY ACTIVITY—
Amortized versus Revolving Credit
How much total interest is paid for the installment loan?
– $54.99
How much interest is paid for the revolving credit?
– $45.07 so far.
How much principal is owed on the installment loan after 12 months?
– $0
How much principal is owed for the revolving credit 12 months?
– There is still a balance of 600.07 left.
Which kind of loan seems like it would easier to manage in your budget? Why?
– The installment loans. The payments are predictable and consistent and have an end date.
If the person with revolving credit continues to make payments at this level, how
much interest do you think the person will pay?
– $144.78
How long do you think it will take to pay off the loan in years?
– 5 years
Visual Aid 2.7
Credit versus Debt
• Credit
• Debt
• The ability to borrow
• The result of using
credit. Owing an
individual or business
• This is a liability.
Visual Aid 2.8
How Credit May Help You
Avoid a financial crisis
Get a job
Start a business
Own a home
Provide for your own family
Achieve your own goals and realize your vision
But credit must be used wisely.
Visual Aid 2.9
When You Owe Money
• You obligate your future income.
• In other words, you tie up money you have
not yet earned.
• This could decrease your options in the future.
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Debt to Income Ratio
Monthly debt payment
Divided by
Monthly gross income
Equals Debt to Income Ratio
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Gross Income
What you earn before deductions.
Deductions may be taken for:
Federal income tax
Social security
State tax
Local tax
Visual Aid 2.12
Debt to Income Limits
20% or less with no mortgage (home loan)
– This means that monthly credit card payments, student loan
payments, auto loan payments and other debts should take up
20% or less of your gross income.
28% or less for just the mortgage (home loan)
– This means that monthly principal, interest, taxes and insurance
(called PITI) should take of 28% or less of your gross income.
36% to 43% and below for all debts
– This means that all debts (including the mortgage) should
be between 36% and 43% or less of gross income.
Visual Aid 2.13
How to Use the Debt to Income Ratio
• Figure out whether to take on new debt.
– Should I buy a new car or stick with the old one a little bit longer?
• Make a goal for debt levels.
– Can I get my debt-to-income ratio down to 25% by the end of the year?
• Keep track of how you are doing paying down debt.
– How much has my debt-to-income ratio dropped in the last months?
Am I making improvements?
• Like financial blood pressure--it tells you how much
pressure your debt is putting on your income or on
your budget.
Visual Aid 2.14
Why Credit Reports ARE Important
Many individuals and businesses use them to make decisions about you!
• A bank or credit union may use them to decide whether to give you a loan.
A credit card company may use them to decide whether to give you a credit card.
A landlord may use them to determine whether to rent an apartment to you.
A potential employer may use them to determine whether you will get a job.
An insurance company may use them to determine whether to give you insurance
coverage and the rates you will pay for coverage.
A utility company may use them to figure out how much deposit you must pay
before they will turn on your electric or gas.
A cell phone provider may use them to determine what plans you may be eligible
for and the rates you will pay.
Credit scores are completely based on information in your credit reports.
Visual Aid 2.15
The Credit Reporting Agencies
• Equifax
• Experian
• TransUnion
May have different
information. Must check all 3.
– If over 18, order from website, call them or write to them.
– Use for annual free report.
– May not be useable if you have been the victim of identity
Visual Aid 2.16
Can You Have a Credit Report if You are
Under 18?
• You cannot have credit report if you are under
18 unless:
– You are an emancipated minor
– You are an authorized user on someone’s credit
– You have student loans
– You live in a state where you can be younger than
18 to enter into a financial contract
– Your identity has been stolen and used by
someone else to get credit or services
Visual Aid 2.17
Instruction for Teach Back
• Prepare a commercial highlighting the key points of
your group’s assignment.
• Use a poster/billboard, a rap or jingle or some other
way to creatively and memorably convey the
information quickly to the rest of the group.
• You will have 10 minutes to prepare.
• Be ready to share or perform.
– Group 1, Repairing Credit
– Group 2, Building Credit
– Group 3, Maintaining Good Credit
Visual Aid 2.18
Credit Building and Opportunity
Because good credit is such an important productive asset, you can use your
Opportunity Passport™ Matched Savings to repair or build credit.
Repair your credit history and improve your scores by using your Opportunity
Passport™ Matched Savings to pay for:
accounts you may be late on
debts in collections
accounts you risk becoming late on or
dealing with legal or other issues resulting from identity theft
Build your credit history and improve your scores by using your Opportunity
Passport™ Matched Savings to:
– secure a credit builder loan to build credit
– secure a credit card to build credit
Visual Aid 2.19
FICO Score Distribution
Types of Credit
Used, 10%
New Credit, 15%
Payment History, 35%
Length of Credit History,
Amounts Owed &
Credit Utilization Rate,
Visual Aid 2.20