Unit Four Good Debt, Bad Debt: Using Credit Wisely

The Use of Credit A way to get things that you want like a car and money for education

What is Credit? Credit means that someone is willing to loan you money. Principal is the amount of money that you are being loaned. Interest is the amount you pay (over the amount of the principal) to use someone else’s money.

Credit Buy what you want now and pay for it later. Sometimes people use credit purely for convenience. Not carrying around cash Good deal for a period of time

Don’t… Use credit for immediate gratification/satisfaction. Use credit without considering the consequences.

Types of Credit Credit Cards Installment Loans Student Loans Mortgage

Credit Cards Obtained from banks, credit unions, stores, gas stations Some can be used anywhere while some can only be used at a particular store No payoff deadline, but there are minimum due amounts that vary, based on balance Usually has the highest interest rate of the four types of credit

Installment Loans Obtained from banks, credit unions, auto dealers and other financial institutions Typically used for a large purchase such as a car or an appliance Loan term may vary from a few months to many years Monthly payment amounts are usually set for the life of the loan Usually has a lower interest rate than a credit card Some offer special deals with no interest for a set amount of time

Student Loans Obtained from banks, credit unions and the federal government Used for tuition and other college expenses Depending on income level, some loan programs allow you to defer making payments until after you graduate Loan term usually for 10 years depending on amount of loan Monthly payment amounts usually set annually, when interest rates are adjusted Usually has a lower interest rate than an installment loan May provide an income tax break on interest paid to the lender

Mortgage Obtained from banks and credit unions Used specifically to purchase a home Usually repaid in years, depending on the term that is chosen Monthly payments may be set for the life of the loan or they may change, depending on the type of interest rate (fixed versus variable) Usually has a lower interest rate than an installment loan May provide an income tax break on interest paid to the lender

Buyer Beware! Read the fine print of any credit offer before signing your name to it. Always know exactly what the contract you are signing means and how much the credit will actually cost you.

Important Credit Terms APR = annual percentage rate The cost of the loan per year as a percentage of the amount borrowed Annual fee Usually charged by credit card companies A annual fee you pay for the privilege of using credit Credit limit Maximum amount of credit that a lender will extend to a customer

Important Credit Terms Finance Charge Usually seen on credit card statements Actual dollar cost of using credit to maintain a balance Origination Fee Usually associated with home loans A charge for setting up the loan

Important Credit Terms Loan Term Usually applies to student, installment and mortgage loans The length of time that you have to pay off the loan The longer the loan term, the lower your monthly payment, but the cost of using the credit increases because you are paying interest over a longer period of time.

Important Credit Terms Grace Period The length of time you have before you start accumulating interest If you plan to pay your credit card off each month, make sure to get a credit card with a grace period of 25 or more days so you can avoid paying interest on your purchases

Important Credit Terms Over-the-limit-fee Applies to credit cards A fee for spending more than your credit limit Late Fee For all credit types A penalty for making a payment after the due date Universal Default Fee Usually for credit cards Even after just one late payment, the credit card company can raise your interest rate – even if that late payment was made to a different creditor for a different type of credit – like a phone bill, car payment, etc. (This will soon change a little.)

What do you think? Page Nearly 33% of teens owe money to either a person or company, with an average debt of $ About 26% of teens ages already have more than $1,000 in debt % of teens say they understand how credit card interest and fees work % of teens say they know how to establish good credit.

Questions About Credit Class Activity 1. What are the major types of credit and what are they used for? 2. What is the average percent of interest on a credit card? 3. What can you do to get out of debt? 4. Can you apply for other credit cards if you have bad credit? 5. How do you get rid of bad credit? 6. Why is credit important? 7. Can you get a credit card without universal default fees? 8. What do you do when you want to resolve a credit card dispute? 9. Who are the credit collection agencies? 10. Is there anything that you can’t buy with credit? 11. What are the three most popular credit cards? 12. Do you have to pay back your credit card debt if you claim bankruptcy? 13. What kind of hidden fees do credit cards have? 14. What happens to your credit when you die? 15. Are there any tax advantages for credit card debt? 16. What happens to your credit card during identity theft? 17. Can you put credit history on your resume? 18. Can/Should you take out a loan to pay off your debt?