Unit 2: Credit and Debt.

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Presentation transcript:

Unit 2: Credit and Debt

Chapter 4: Dangers of Debt

History of Credit 1950: Birth of the credit card. Was used at several NY City restaurants, called Diners Club, which is still used today. 1958: BankAmericard and American Express was born. 1976: BankAmericard became Visa 1986: Sears created Discover Card

Credit and Debt A credit card is a tool used to finance a purchase. A debit card is linked to your checking account. To make a purchase with a debit card, you must have money in your account. A credit card is the same as borrowing money.

Credit and Debt Credit cards are not for everyone, they can be dangerous. If you lack self-control, avoid them. You are using a bank’s money to pay for products instead of your own. The bank sends you a statement/bill with all of your purchases. You are then responsible to repay the bank, over time…with interest.

Credit and Debt If you pay off the entire bill, you are not charged interest. If you just make a minimum payment, you are then charged interest on the amount you owe. When you pay on time, the bank considers you a good customer and reports this to other companies. This report leads to “good credit”.

How credit card companies make money from you? Credit and Debt How credit card companies make money from you? They don’t want all of their customers to pay in full, so they pay interest on the money owed. Some cards charge an annual fee for you to use their card. They also charge merchants a fee to process their credit cards.

Credit and Debt Debit cards are like checks. They draw upon your checking account. If you don’t have money in your account, the card is rejected. No risk to the bank. Instant access to your money. No risk of falling in debt because you are not borrowing money.

Credit and Debt Annual Fee: fee charged by a credit card company for the use of their credit card. Annual Percentage Rate (APR): cost of borrowing money on an annual basis. (Interest) Credit Limit: maximum amount allowed to be charged on credit card. Depreciation: a decline in the value of property

How People Get Into Debt: Credit and Debt How People Get Into Debt: 1. Loaning money to a friend or family. 2. Co-signing loans. 3. Cash advance/rent-to-own/title pawning 4. Gambling and lotteries 5. Car loans/Car leases

Credit and Debt 6. Home Equity Loans or Debt consolidation 7. Adjustable Rate Mortgages (ARM) or Balloon Mortgages. 8. Credit cards (The author, Dave Ramsey, hates credit cards so much he doesn’t allow people to buy his product with them!)

Credit and Debt 88% of teens don’t like the way it feels to owe someone money. 29% of teens are already in debt. 51% of teens agree that it is easier to buy things with a credit card. 80% of millionaires start out with nothing, did smart stuff, and became millionaires.

Credit and Debt Debt is heavily marketed to young people. You will receive a lot of offers from credit card companies. The best way to beat debt is to quit borrowing money and live on less than you make.

Chapter 5: Consumer Awareness

Consumer Awareness “Caveat Emptor” means buyer beware. Companies use every angle to aggressively compete for your $. For every hour of television per week you watch, you spend an average of $200 extra per year.

Consumer Awareness Significant purchase is anything over $300. Our bodies go through physiological changes when making a significant purchase. Wait and carefully consider significant purchases.

Consumer Awareness Buyer’s Remorse: regretting a purchase soon after making it. Financing: to buy an item with credit; paying over time. Opportunity Cost: the true cost of something in terms of what you have to give up to get an item.

Chapter 6: Credit Bureaus and Mortgages

Credit Bureaus Credit Score: a number based on a person’s creditworthiness. It is used by banks to evaluate the potential risk of lending you money. The higher the score, the less risky it is to loan you money. The lower the score, the higher the interest rate because you are a riskier borrower.

Credit Bureaus Credit score is also called a FICO score (Fair Isaac Corporation). Three major credit bureaus: Equifax, Experian, and TransUnion. Each has their own credit score, but are all around the same number. Credit scores range from a low of 300 to a high of 850.

Credit Bureaus Account information remain on your credit report for 7 years, except for bankruptcy, which stays on for 10. If you miss a payment, it stays on your credit report for 7 years!!!!! Only way to remove something from your report is if it is inaccurate. Do your best to not mess up your credit!

Credit Bureaus A recent survey found the 79% of credit reports contained mistakes! You are allowed to check your credit report for free, once a year from the three credit bureaus. Credit bureaus are companies that collect information and provides credit information on consumer.

Credit Bureaus Identity Theft: Pretending to be someone else to gain access to resources, credit, or other financial gains. The fastest growing crime in America. 80% of identities are stolen by people you know. People age 18-29 are the number one target of identity thieves.

Credit Bureaus Do not give out your social security number unless you know for certain that the company is reputable. (FAFSA, Tax returns, Banks, etc.) Do not give out your information to strange people/websites. Do not give out passwords! Protect your identity, it is the only one you have!

Mortgages Buying your first home will be a very emotional, tiring, scary time. You must understand the process so that you are ready for it. It is not as simple as choosing a house and paying for it. I will give you a simplified overview of buying a house.

Mortgages 1. Get preapproved for a loan. Determine how much you can spend on a home. 2. Find a real estate agent to help you search for your perfect home. You don’t pay the agent, the seller pays the agent a commission. 3. Make an offer on the home. Negotiate to get the best price.

Mortgages 4. Get the right mortgage for you. Do your best to pay 20% of the purchase price so you do not have to pay a private mortgage insurance (PMI). 5. Get a final inspection to make sure there are no surprises in the home. 6. Close on your home. This is where you sign papers to take ownership of the home. 7. Move in!

Mortgages Types of Mortgages 30 year fixed: Fixed payment on the house monthly for 30 years. Most traditional home loan. 15 year fixed: Fixed payment on the house monthly for 15 years. Pay off quicker, but also pay more monthly. In the long term, you pay significantly less than a 30 year fixed mortgage.

Mortgages Adjustable Rate Mortgage (ARM): short-term mortgages that offer an interest rate that is fixed for a short period of time. After that, the rate can adjust every year, up or down, depending on the market. Very risky because you do not know how much you will pay after the initial short-term.

Mortgages Interest Only Mortgages: You pay only enough to cover the interest portion of your payment, never paying the principal. Good for buying more expensive homes with less money. Bad because you don’t really pay off the home and never truly own it.

Mortgages Balloon Mortgages: short-term mortgage where you make regular payments for a specific time and then pay off the balance in one large payment at the end. Usually lower interest rates. Bad if you can’t make that large final payment…you lose your home.