Unit 4 Credit and Debt What is Credit? Someone lends you money 1. The original amount borrowed is called the ___ Principal

Common Types of Credit 2. Which type of credit has the highest interest rates? Credit Card (Revolving Credit) Revolving Credit – credit that is renewed as debts are paid off Joe has a credit card with a $1000 credit limit He spends $500 – He now has $500 left on his credit limit that he can spend. He receives the bill and pays off all $500. He credit limit is now (again) $1000.

3. Which type of credit has the lowest interest rates? Student Loan / Mortgage 4. Which type of credit has no “term”? Credit Card

5. Which type of credit has the longest term? Mortgage 6. Which type of credit usually has a 10 year term? Student 7. Which type of credit usually offer tax breaks for the interest paid? Student / Mortgage

Tax Break for Interest Paid If I make $10,000 and the government has a 10% income tax rate, then I pay $1,000. Assume I had a loan and paid $1,000 in interest in a year. Then subtract $1,000 from your income (= $9,000) - now assess the 10% income tax – End up paying only $900 in income tax instead of $1000.

Mortgage Details Requires a credit check Requires a down payment (typical 20%) Typically 15 or 30 year term Interest rates may be fixed or variable (ARM) =Adjustable Rate Mortgage

ARM need to know for test Adjustable Rate Mortgage Many people bought homes leading up to the recession with very low interest rates (1%) But then the interest rates increased (up to 12%) And now could not afford the payments = Default and Foreclosure Foreclosure the process of taking possession of a mortgaged property as a result of the mortgagor's failure to keep up mortgage payments.

The Cost of Using Credit 8. If an advertisement states “Buy now and pay only $19 a month.” – What is the ad NOT telling you? Interest rate, payoff time and payoff amount **Know the bold terms on p. 44 and 45 Credit Limit Finance Charge Loan Term Grace Period Late fee

Credit: The Good and the Bad Understand the “risks” and “rewards” of credit Risks: Interest, Overspending, Debt (legal claims against your future income), Identity Theft Rewards: Convenience, Protection, Emergencies, Build Credit, Quicker Gratification, Special Offers, Bonuses

6 Questions to Ask When You Compare Credit (know them) 1.What is the interest rate (for purchases)? 2.How long is the loan for? 3.Minimum Monthly Payment? 4.Grace Period ? 5.Extra fees/penalties? 6.Which is best deal for me?

The 4 C’s of Credit 9. An asset that lenders can take from you if you do not repay a loan is …. Collateral 10. If you put up a house or car as an asset to guarantee your loan, it is called a ……loan Secured 11. When assessing your credit worthiness, lenders want to know if you have …... That is, if you failed to pay the loan, they can sell your assets. Capital

12. A pattern of rising income and steady employment help determine your ____ to repay your loan. Capacity 13. A history of paying bills on time helps demonstrate to lenders that you have good ___ and are worthy of getting a loan Character

Keeping Score With Your Credit 14. What is a FICO score? A number that reflects your credit worthiness based on the 4 C’s. Don’t need to know the following: Fair Isaac Corporation 1958 use predictive analytics to help businesses automate, improve and connect decisions across organizational silos and customer lifecycles. *there are several other credit scoring agencies

Don’t need # 15. The average consumer has ___ on record at a credit bureau. Thirteen credit obligations 16. Your credit score reflects your … Credit worthiness

17. Credit scores range from ……..to…… Building and maintain a good credit score is as simple as…… Discipline You have the right to receive one free credit report per year from each of the three credit bureaus.

"The very best rates go to people with scores above 770, but a score of 700 is considered goodThe very best rates go to people with scores above 770 (the average score is 725) a score above 700 indicates relatively low credit risk, while scores below 600 indicate relatively high risk... "above 700 indicates relatively low credit risk Anything below about 550 is considered awful."550 is considered awful

Your Credit Score is made up of…. ( Do not need for test) 1. 35% - payment history 2. 30% - “debt to credit limit ratio”: Balances on all credit cards and loans ($5000) Compared to ….. Available credit limits on all cards ($20000) = 25% Keep as low as possible Good = 50% 3. 15% - length of credit history

Do not need for test 4. 10% - # of recently opened accounts and credit inquiries - when you pay for a credit score or potential lenders look into your score don’t want too many cards (3-4) ; don’t want to seek lots of credit in limited time 5. 10% - mix of credit : higher scores if you can manage 2-3 cards and other loans at same time

Be able to summarize the five ways to hurt your credit history and score. Late payments Bouncing checks Too many credit cards/loans High balances Changing credit cards frequently These are not good ways to manage your credit

Getting Your Piece of the Credit Pie 19. As a student, there are 5 ways to begin building your credit history. Identify them. Co-sign on credit card Credit card from “your” bank Store credit card Secured Credit Card (pre-pay) …like debit Rent and/or Utility bills in your name 20. Your first credit card will most likely have… Low limit

70% Living Expenses 20% Save Invest 10% Pay Debt Know for test “ Rule”

Pitfalls and Warnings * = need to know 1.*Making ONLY THE MINIMUM payment raises the cost of Debt (credit card co’s make most of their profit off of interest charges) 2.*Too much available credit may look risky to other lenders…..why? 3.*Late Payments = Triple Threat Fees Increase interest rates Lower credit score Previous Balance 1000 Paid the min - 50 New Balance ????? 950 But that 950 is charged interest. So….. New Balance 960 Pay the min But add interest = 922 So you paid $98 on $1000 balance Should owe $902 but owe $922

Pitfalls and Warnings do not need to know year history 5. Make a Plan to Pay it Off If Multiple Sources of Debt a.Pay off smallest balance first = easy to see progress b.Pay off largest interest first = paying less in the long run

Pitfalls and Warnings do not need to know 6.Hounded by Creditors a.Negotiate with Creditors b.Seek help (credit counseling agencies) c.Bankruptcy

Consequences of Failing to Manage Your Credit need to know for test a. Bankruptcy Unable to meet financial obligations b. Foreclosure -Inability to make mortgage payments; bank claims ownership c. Repossession -bank sends contractors to take your possessions back (cars, boats, etc..) d. Difficulty securing job …why? -especially in business or finance e. Hard to obtain future credit