Debt
Chapter 4
Key Terms
• » Annual fee: A yearly fee that’s charged by the credit card company for the convenience of the
credit card
• » Annual percentage rate (APR): Cost of borrowing money on an annual basis; takes into account
the interest rate and other related fees on a loan
• » Credit card: Type of card issued by a bank that allows users to finance a purchase
• » Credit report: A detailed report of an individual’s credit history
• » Credit score: A measure of an individual’s credit risk; calculated from a credit report using a
standardized formula
• » Debt snowball: Preferred method of debt repayment; includes a list of all debts organized from
smallest to largest balance; minimum payments are made to all debts except for the smallest,
which is attacked with the largest possible payments
• » Depreciation: A decrease or loss in value
• » Introductory rate: An interest rate charged to a customer during the early stages of a loan; the
rate often goes up after a specified period of time
• » Loan term: Time frame that a loan agreement is in force, and before or at the end of which the
loan should either be repaid or renegotiated for another term
• » Tax deduction: An expense, such as a charitable contribution, that can be deducted from one’s
taxable income
The Second Foundation: Get Out of Debt
WE LIVE IN A WORLD where it takes a total national economic
meltdown to get most people’s attention about crazy mortgages and
stupid credit card debt! If there’s one good thing that’s come from the
national economic mess of 2008 and beyond, it’s that some people are
finally getting the message: Debt is dumb!
Debt is Everywhere Video 1.1
70
» Almost _____%
of Americans are living paycheck to paycheck. A
Reuters survey of 30,600 people found that 68% said it would be
somewhat difficult or very difficult if their paychecks were delayed for a
week. The problem? Overspending and way too much debt.
myth
» When it comes to debt, if you tell a lie or spread a __________long
enough, eventually it becomes accepted as the ______________.
The
truth
truth is, debt is a product—the most successfully marketed product in
history.
service
» The world wants us to believe that debt is a ________________
or
reward
______________
that is offered to help consumers. This is simply
__________
true!
NOT
marketed
» Debt has been __________________to
us with such intensity for so
long that to imagine living without it requires a complete
paradigm
______________shift—a
completely new way of looking at things.
Financial Myths Young Adults Fall For Video 1.2
credit
» The first one is the belief that you have to build ________________.
The credit industry wants you to believe this. Credit is NOT necessary to
no
survive. The truth is there is ________good
reason to go into debt.
» The second myth is that you can spend money on whatever you want
college
while in _________________and
pay for it later when you’re making
money
more __________________.
* REMEMBER: Taking on a lot of debt when you’re young will limit your
options later in life.
new
» The third myth is that you need a ___________car.
You should buy
the car you can afford—with cash. Don’t fall for these myths.
Avoid
____________debt,
save for emergencies and large purchases, and
learn to say no, even when people around you won’t.
Hidden Cost of Credit Activity
Money Myths Video 2.1
loan
MYTH If I __________money
to a friend or relative, I will be helping
them.
destroyed
TRUTH The relationship will be strained or ____________.
co-signing
MYTH By ________________a
loan, I am helping out a friend or
relative.
TRUTH The bank requires a co-signer because the person isn’t likely to
repay
__________.
Be ready to pay the loan and have your credit damaged.
Cash advance
MYTH _______________________,
payday lending, rent-to-own, title
services
pawning, and tote-the-note lots are needed _____________for
lower
income people to help them get ahead.
Money Myths Video 2.1
millionaires
Eighty percent of ______________________in
America are first-generation
rich. That means they started with nothing, did smart stuff, and became
millionaires. That’s the opposite of what we’re talking about here.
lottery
MYTH The __________________and
other forms of gambling will make me
____________.
rich
tax
TRUTH The lottery is a ________on
the poor and on people who can’t do
math.
Texas Tech University did a study on the Texas Lottery and found that, of
those who play the lottery, people without a high school diploma spent an
173
average of $ ______a
month playing the lottery. College graduates spent $
49
_____a
month on average.
The Truth About Car Loans Video 2.2
Car
MYTH ______payments
are a way of life, and you’ll always have one.
TRUTH Staying away from car payments by driving reliable used cars is
millionaire
what the typical _______________does.
That is how they became
millionaires.
Three Huge Ways You Lose When Buying a New Car
purchase
1. Payments. Spreading the ______________
of an automobile over
pay off
four or five years hinders your ability to ____________debt
or save
money for that time.
interest
2. Interest. Included in the payment, of course, are the _____________
more
charges. That means you pay ________
than the sticker price. It’s like
$20,000
$23,000
buying a ___________vehicle
for _____________.
$20,000
3. Depreciation. This is the biggest one. If you purchase a ________car,
$8,000
it will be worth about _________in
four years. That’s in addition to all
the gasoline, maintenance and other stuff. You could buy a
________beater
and get the same use out of it for those same four
$2,000
$12,000
years without taking a ________hit.
The Truth About Leasing a Car 2.3
Leasing
MYTH __________________your
car is what sophisticated financial people
do. You should always lease things that go down in value. There are tax
advantages.
TRUTH Consumer Reports, Smart Money magazine and a good calculator will
lease
expensive
tell you that the car _____________is
the most _________________way
to
finance and operate a vehicle.
write off
If you own a business, you can __________________your
paid for car on
taxes without making payments for the privilege.
minimize
The way to ____________________the
money lost on things that go down
in value is to buy slightly _______.
used
new
MYTH You can get a good deal on a _______car.
70
TRUTH A new car loses _____%
of its value in the first four years. This is the
largest purchase most consumers make that goes down in value.
Drive Free Activity
Credit Cards Video 2.5
MYTH You need a _________________________to
rent a car or make a
credit card
purchase online or by phone.
debit
TRUTH A ______________card
does all of that. The only thing you can’t do
with a debit card that you can do with a credit card is go into debt!
credit card
MYTH I pay my __________________________off
every month with no
annual payment or fee. I get brownie points, air miles and a free hat.
12-18
TRUTH When you use cash instead of plastic, you spend _____________%
less because spending cash hurts.
teenager
MYTH I’ll make sure my ___________________
gets a credit card so he or
she can learn to be responsible with money.
target
TRUTH Teens are a huge _____________of
credit card companies today. The
reason is that the adult market is saturated. Also, researchers have
discovered that there is a strong brand loyalty to your first credit card.
their
Therefore, credit card companies are competing to have ________
card be
your _________
card.
first
Making the Minimum Activity
Staying debt free is the
key to building wealth
.
Steps Out of Debt
1.
2.
3.
4.
5.
Quit borrowing more money!
You must save money.
Sell something.
Get a part-time job or work overtime (temporarily).
Use the debt snowball method.
Activity
What Your Credit Score Really Measures
Video 3.1
• MYTH You need to take out a credit card or car loan to “build up your
credit score
________________________.”
FICO
debt
• TRUTH The __________score
is an “I love __________”
score and is
not a measure of winning financially. In fact, it can often mean the
opposite. If you were to inherit $10 million tomorrow, it would have
NO effect on your credit score!
The Five Components of the FICO Score
THE ONLY THING MEASURED HERE IS ________!
debt
New Debt
10%
Type of Debt
10%
Duration of the Debt
15%
Debt History
35%
Debt Level
30%
What Is a Credit Bureau?
credit bureau
» A __________________
is an agency that researches and collects
individual credit information and sells it for a fee to creditors so they can
make a decision on granting loans. Typical clients include banks, mortgage
lenders, credit card companies and other financing companies.
» Individual account information is removed from your credit report
7 years
___________________
after the last activity on the account, except for
Chapter 7 bankruptcy
10 years
________________,
which stays on for ___________________________.
Beware
only
» _____________
of credit clean-up scams. The _________information
that
may be legally removed from a credit report is inaccurate information.
Experian
» The three main credit bureaus are: __________________,
TransUnion
Equifax
__________________
and ____________.
Identity Theft
white-collar
Identity theft is the fastest growing ________________________crime
in North America today.
Warning Signs That You May Have Had Your
Identity Stolen:
disappear
» Checks ____________
from your checkbook.
» Your credit report shows accounts you ____________
open.
didn’t
calls
» A collection agency _________
about a debt you didn’t incur.
don’t
» Bank and billing statements __________arrive
on time.
receive
» You_______________
a bill from a credit account you didn’t open.
Unauthorized
» ___________________________
charges appear on your cell phone
or bank accounts.
turned down
» You are __________________________
for a loan, mortgage or other
form of credit because of unauthorized debts on your credit report.
What you should do if you think you are a victim:
copy
» Obtain a _____________
of your credit report and look for any suspicious
activity.
fraud-victim
» Place a ___________________alert
on your credit bureau report (stays on
for 90 days without a police report).
cancel
» If your purse or wallet is stolen, ______________
all cards immediately and
stop payment
get replacements. Also put a “_________________________”
on all lost or
stolen cards.
police
» File a _________________report
and keep a copy of the report for your
personal records.
suspicious
» Report any____________________
charges and accounts to the
immediately
appropriate credit issuers and credit bureaus_________________________
via the phone and in writing.
____________________________________________________________.
Cancel all the accounts!
Tips to Protect Your Identity
paper shredder
» Use a ___________________________
and destroy credit card offers and other
documents with your personal information.
annually
» Check your credit report _______________.
Many people don’t even know that
fix the problem if you’re
their identity has been stolen. Bottom line, you can’t ____
not aware of it.
Never print
» __________________
your Social Security number or driver’s license number on
your checks.
» Sign the back of your debit card and write
PHOTO ID REQUIRED OR SEE ID
“____________________________________.”
strong password
» Create _______________________________
using a combination of letters,
characters and numbers.
confidential
» Keep passwords and personal information___________________________.
Purchase
» ________________________identity
theft protection.
Debt Snowball: How it Works
List your debts in order from smallest to largest. Pay minimum
payments on all your debts except for the smallest one, and attack that
one with intensity! Every extra dollar you can get your hands on should
be thrown at the smallest debt until it is gone.
Then you attack the second one. Every time you pay off a debt, you add
its old minimum payment to your next debt payment. So as the
snowball rolls over, it picks up more snow.
* REMEMBER: Even if your other loans have higher interest rates, you
should still start with your smallest one first. That way you experience
quick wins and build momentum along the way!