Good Debt, Bad Debt:Using Credit WiselyGood Debt, Bad Debt:Using Credit Wisely

NORTH DAKOTA PERSONAL FINANCE EDUCATION

Credit Facts

• Nearly 33% of teens owe money to either a person or company, with an average debt of $230.

• About 26% of teens ages 16 to18 already have more than $1,000 in debt.

• 30% of teens say they understand how credit card interest and fees work.

• 36% of teens say they know how to establish good credit.

Top 10 Questions to AskBefore Signing on the Dotted Line

1.Do I really need this item right now, or can I wait?

2.Can I qualify for credit?

3.What is the interest rate (APR) on this card?

4.Are there additional fees?

5.How much is the monthly payment, and when is it due?

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6. Can I afford to pay the monthly payments?

7. What will happen if I don’t make the payments on time?

8. What will be the extra cost of using credit?

9. What will I have to give up to pay for it?

10.All things considered, is using credit worth it for this purchase?

•Credit is the amount of money or something of value that is loaned on trust with the expectation it will be repaid to lenders later.

•Types of Credit– Borrow up to a predetermined limit (for

example, credit card)– Borrow cash to be repaid by a specific date– Borrow money for a major purchase to be

repaid in regular payments through time, typically monthly (for example, car loan, home mortgage)

The Language of Credit

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• Debt is the entire amount of money you owe to lenders.

• APR (annual percentage rate) is the total cost to use credit in a year.

• Term is how long you have to repay a loan, often expressed in months.

• Fees are charged to use credit. Examples: annual credit card fee, loan origination fee, over-the-limit fee

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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

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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 no longer can make all your required payments. There are specific rules about the types, whether you qualify for bankruptcy, repayment and how often you can file.

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The Language of Credit

Types of Credit

Installment Credit•Fixed payments

•Set period of time to repay

•Set or varying interest rates

•Car loans and home loans are typical examples

Revolving Credit• No stated payoff

time

• Limit to credit

• Minimum monthly payments

• Interest rates may vary

• Finance charges

• Credit cards most typical example

Home Mortgage•Used specifically for a loan to purchase a home

•Usually repaid in 15 to 30 years

•Monthly payments may be set for the life of the loan or changed more frequently, depending on the type of interest rate

•Usually has a lower interest rate than an installment loan

•May provide an income tax break on interest paid to the lender

Sources of Credit

•Banks

•Credit unions

•Department stores

•Automobile dealers

•Oil companies (for gas stations)

•Federal government (for student loans)

•Others?

When You Buy “STUFF”

In fact, you bought $500 worth of “STUFF” with your credit card.

You bought “STUFF” with your credit card.

Your APR is 18%.

You plan to pay $10 a month to pay it off.

You will pay $431 in interest

Final cost of your purchases = $931.40

Paying that off will take 7 YEARS and 9 MONTHS

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How Long Will Paying Take???

APR = 18%

Payment: 4% of current balance

You owe $3,000.

Finance charge: $1,715.69

Total cost of original $3,000 loan = $4,715.69

After you’ve made the last payment, will what you purchased

still be around???

Paying it off will take

nearly 11 YEARS

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Cost of Using Credit

APR = 24%

Payment: 4% of current balance

$700 for a game system

Finance charge: $550.04Your CD player REALLY cost $1,250.04

After you’ve made the last payment,

will your CD player still be around???

And paying it off will take more than

7 years

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Cost of Using Credit

Interest Rate = 24%Payment = 4% of current balance

BALANCETIME TO PAY OFF

INTEREST CHARGED

TOTAL COST

$2,00011 Years6 Months

$1,850 $3,850

$6,00016 Years1 Month

$5,850 $11,850

$10,00018 Years2 Months

$9,850 $19,850

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APR = 21%

Payment: 4% of current balance

$3,000 charged to credit account

Finance charges: $2,220.57

You owed $3,000

butyou paid$6,065+

Includies annual fees

Annual credit card fee: $65Paying the minimum, you will need 11 YEARS and 11 MONTHS to pay off your debt.

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Cost of Using Credit

• Could put you in a state of overspending and perpetual debt, where you get used to carrying a balance and paying extremely high interest rates

• Could adversely affect your credit rating, which makes getting loans when you really need them more difficult

Financial Consequences of Debt

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What if you took the $120 monthly payment in the last example and INVESTED $120 a month for the 12 years paying off the $3,000 debt took, and your investment got an 8% rate of return? Instead of $6,000 paid out for $3,000 worth of “stuff,” your $120 monthly investments would amount to $28,799 in your pocket.

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Financial Consequences of Debt

Credit Laws to Protect You

“The Truth in Lending Act (TILA) protects you against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.For loans covered under TILA, you have a right of rescission, which allows you three days to reconsider your decision and back out of the loan process without losing any money. This right helps protect you against high-pressure sales tactics used by unscrupulous lenders.TILA does not tell banks how much interest they may charge or whether they must grant a consumer loan.”

Source: U.S. Department of the Treasuryhttp://www.occ.gov/topics/consumer-protection/truth-in-lending/index-truth-in-lending.html

Credit Scores• “Based on the information in your credit report, lenders calculate

your credit score so they can assess the risk you pose to them before they decide whether they will give you credit. The higher your score, the less risk you pose to creditors.

• The information in your credit report is used to calculate your FICO (the acronym stands for Fair, Isaac and Company) score. Your score can range anywhere from 300-850…A high score, for example, makes it easier for you to obtain a loan, rent an apartment, or lower your insurance rate.

• Your FICO score is available for a fee. Free credit reports do not contain your credit score, although you can purchase it when you request your free annual credit report.”

Source: USA.gov

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.

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

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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

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How Credit Scores Are Determined

•Types of credit– The different types

of credit accounts you have

– The total number of accounts you have

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Getting Credit

70%Living Expenses

10%Pay Off

Debt

20%Save or Invest

Rule of Thumb

Protect Yourself Against Inaccurate Credit Reports

• Get a copy of your free credit reports from all credit rating agencies.

• Examine those copies thoroughly.

• If you find something that is incorrect, ask the agency to investigate the information.

• If that doesn’t resolve the issue, you can attach a short statement to your credit report.

Credit Reports• “Credit reporting is a system lenders use to decide whether or not to give you credit or a

loan and how much interest they can charge you for it.

• Your credit report is based on the bills payments you have missed or been late paying, loans that you have paid off, plus your current amount of debt.

• A credit report contains information on where you work and live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy. Consumer Reporting Agencies (CRAs) gather this information and sell it to creditors, employers, insurers, and others. The most common type of CRA is the credit bureau.

• The three major national credit bureaus are:

• Equifax, 1-800-685-1111Fraud Hotline: 1-888-766-0008

• Experian, 1-888-397-3742Fraud Hotline: 1-888-397-3742

• TransUnion, 1-800-916-8800Fraud Hotline: 1-800-680-7289

• Request your free credit report online or by calling 1-877-322-8228.”Source: usa.gov

Where can I get advice if I have credit problems?

• U.S. Department of Justice's Approved List of Credit Counseling Agencies

Thank you to…• NDSU: Their curriculum on Financial

Literacy provided the backbone for this unit.

• NEFE• USA.gov• U.S. Department of Justice• U.S. Department of the Treasury

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