Credit and Debt *1. What is Credit? Someone lends you money 2. The original amount borrowed is called the ___ Principal

Common Types of Credit *3. 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. The ability to spend(borrow) is revolving…never ends

Revolving Credit vs. Installment Loan *Installment loan (car, student, mortgage) - when you borrow, you have a schedule of an exact number of payments, with exact amounts (with interest calculated), and when it will be paid off When it is paid off, your relationship with the bank/loan ends The ability to spend (borrow) ends ….(*for this specific account)

*4. Which type of credit has the lowest interest rates? Student Loan / Mortgage *5. Which type of credit has no “term”? Credit Card

*6. Which type of credit has the longest term? Mortgage 7. Which type of credit usually has a 10 year term? Student *8. 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 *9. 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 Grace Period Late Fee Loan Term

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

*Six Questions to Ask When You Compare Credit (know them) What is the interest rate (for purchases)? How long is the loan for? Minimum Monthly Payment? Grace Period ? Extra fees/penalties? Which is best deal for me?

The 4 C’s of Credit *10. An asset that lenders can take from you if you do not repay a loan is …. Collateral 11. If you put up a house or car as an asset to guarantee your loan, it is called a ……loan Secured *12. 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

*13. A pattern of rising income and steady employment help determine your ____ to repay your loan. Capacity *14. 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 *15. 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 # 16. The average consumer has ___ on record at a credit bureau. Thirteen credit obligations 17. Your credit score reflects your … Credit worthiness

18. Credit scores range from ……..to…….. 300-850 19. 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 good (the average score is 725) a score above 700 indicates relatively low credit risk, while scores below *600 indicate relatively high risk... " Anything below about 550 is considered awful."

*What does a good score get you?

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 = < 30% ; Very Bad = > 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

Too many credit cards/loans High balances *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 *20. 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 21. Your first credit card will most likely have… Low limit

10% Pay Debt 20% Save Invest 70% Living Expenses

Pitfalls and Warnings *Making ONLY THE MINIMUM payment raises the cost of Debt (credit card co’s make most of their profit off of interest charges) *Too much available credit may look risky to other lenders…..why? *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 - 48 912 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 4. 7-10 year history 5. Make a Plan to Pay it Off If Multiple Sources of Debt Pay off smallest balance first = easy to see progress Pay off largest interest first = paying less in the long run

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

Consequences of Failing to Manage Your Credit 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

What exactly is bankruptcy? Will it wipe out all my debts? Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidation" (Chapter 7) or "reorganization" (Chapter 13). Under a Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out (discharge) the debts you owe. Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court proposing how you will repay your creditors. You must repay some debts in full; others may be repaid only partially or not at all, depending on what you can afford. 

When you file either kind of bankruptcy, a court order called an "automatic stay" goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections. 

Certain debts cannot be discharged in bankruptcy; you will continue to owe them just as if you had never filed for bankruptcy. These debts include back child support, alimony, and certain kinds of tax debts. Student loans will not be discharged unless you can show that repaying the debt would be an undue burden, which is a very tough standard to meet. And other types of debts might not be discharged if a creditor convinces the court that the debt should survive your bankruptcy.