Good Debt, Bad Debt: Using Credit Wisely Unit 4 - Good Debt, Bad Debt: Using Credit Wisely

Lesson Objectives Explain different types of credit Calculate interest on revolving credit using all three methods Identify the 3 major credit bureaus Identify and define the 4 C’s of credit Identify and explain the 5 factors that make up a good credit score Describe how bankruptcy affects your credit score

Activity: Credit vs. Debit Exploration

Video: The Debt Trap

Credit Facts-2017 U.S. household consumer debt profile: Average credit card debt: $9,600 Average mortgage debt: $309,200 Average student loan debt: $37,172 In total, American consumers owe: $12.58 trillion in debt $779 billion in credit card debt $8.48 trillion in mortgages $1.31 trillion in student loans

The Language of Credit Credit - the ability to borrow money with the agreement to pay it back later. The repayment usually involves interest. Types of Credit Borrow up to a predetermined limit (i.e., credit card) Borrow cash to be repaid by a specific date (bank loan) Borrow money for a major purchase to be repaid in regular payments over time, typically monthly (i.e., car loan, home mortgage)

Types of Credit Installment Credit Revolving Credit Fixed payments Set period of time to repay Car loans and home loans are typical examples. Revolving Credit No stated payoff time Limit to credit Minimum monthly payments Finance charges Credit cards most typical example

*Interest is the COST of using credit!!!* The Language of Credit APR (Annual Percentage Rate) is the interest rate the credit card company charges you. *Interest is the COST of using credit!!!* Fee – amount of money charged for using credit. Examples: Annual Credit Card Fee, Loan Origination Fee, Over-the-Limit Fee, Late Fee

Credit Card Act of 2009 Goal: bring reform to the credit card industry stop deceptive action towards consumers Signed by President Barack Obama on May 22, 2009 Made significant changes to existing credit card law and created new protections for credit card users Bill went into full effect on February 22, 2010 (9 months after it was introduced)

Financial Consequences of Debt 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, making it harder to get loans when you really need them.

Video: Credit Card Basics

Minimum Payments Minimum Payments – Usually 3-5% of the balance owed at the end of the billing period. Example: The final amount owed for the billing period is $567.50. If the minimum payment is 5% of the balance, what is the minimum payment? 567.50 x .05 = $28.38 Most credit card companies round this number up to the nearest dollar ($28.38 - $29.00)

Activity: Minimum Payment Calculation **Saved to K Drive**

What are the priorities? Using the credit information below, prioritize the order of the debts to be paid. A car loan with a balance of $6,000, monthly payments of $250, and an interest rate of 8.9%. A bank credit card with a balance of $800, minimum monthly payments of $20, and an interest rate of 19.5%. A student loan with a balance of $30,000, monthly payments of $175, and an interest rate of 6%. A store credit card with a balance of $2,300, minimum monthly payments of $70, and an interest rate of 15.0%. A credit union credit card with a balance of $3,500, minimum monthly payments of $110, and an interest rate of 12%.

Answer Key The goal is to pay off the loan with the highest interest rate first, so from top to bottom, the debts would be ranked as follows: 4-A car loan with a balance of $6,000, monthly payments of $250, and an interest rate of 8.9%. 1-A bank credit card with a balance of $800, minimum monthly payments of $20, and an interest rate of 19.5%. 5-A student loan with a balance of $30,000, monthly payments of $175, and an interest rate of 6%. 2-A store credit card with a balance of $2,300, minimum monthly payments of $70, and an interest rate of 15.0%. 3-A credit union credit card with a balance of $3,500, minimum monthly payments of $110, and n interest rate of 12%.

Three Major Credit Reporting Agencies Experian Equifax TransUnion These are the main agencies that lenders use to access information about your credit history.

Building Credit From Scratch In order to build your credit score you will need a credit card or some kind of loan but there are a few places you can start first: The easiest way to start building your credit is by opening a checking account at your local bank. This won’t build credit with the 3 major credit bureaus (Experian, Equifax, and TransUnion) but it will build a relationship with your bank that could help you open a line of credit with them in the future. You don’t need any credit history to open a checking account or savings.

Building from Scratch Other ways to start building your credit include Putting utilities (phone, internet, water, TV, lights) in your name. Not all utility companies report your payment history but some will if you request them to. Keep in mind: if your bills become overdue or are late, it is possible that your credit report will be affected.

Secured Credit Cards Secured Credit cards are credit cards that banks offer to people that want to establish, strengthen or rebuild their credit history The amount borrowed is secured with a “security deposit” aka: collateral (something lenders keep if you default on your loan) The credit line is equal to the amount you deposit You cannot touch the money once it’s deposited or use it to pay off your balance Proof of income is also still required Great option for the bank because the collateral builds their confidence in you as a borrower.

Important Things to Consider Your first card will be the key to building your credit so it is important to make sure the lender is reporting your payment to the 3 bureaus. Most banks and credit unions do this automatically but retail stores may not. Don’t apply for a bunch of different cards if you keep getting declined All these “hard inquiries” are not good for your overall credit score “Hard Inquiries” -Inquiries on new lines of credit when creditors ask for a copy of your score Secured Cards are different than pre-paid cards Pre-paid cards are loaded with a specific amount to use at a later date but will not help you establish credit (Visa gift cards)

Co-signing The last way to help establish credit is to have someone co-sign a loan with you You can use THEIR good credit history to help you get approved Then you build YOUR credit by making on time payments to that account Co-signers will be responsible for the debt if you stop making payments or default on the loan Video 2:14

Activity: Credit Card Scavenger Hunt Use the link to help you find the information You can print out, or complete on Word document We will go over info

Are You Credit Worthy? Lenders look at four specific categories before deciding to offer potential customers a line of credit: Character- borrower's reputation and credit. Capacity- Borrower's ability to repay a debt on a timely basis, determined by deducting total cash outflows from the borrowers total income during a month. Collateral- Specific asset (such as cash, land, building, cars) pledged as a secondary (and subordinate) security by a borrower or lender in case a borrower defaults. Capital- Wealth in the form of money or assets (net worth)

Credit Scores Your credit score is a number (FICO score) that helps evaluate how much of a risk it is to lend you money It shows lenders how responsible or irresponsible you are with your finances. Good scores can help you access lower interest rates for short-term (credit cards) or long-term items (houses) Negative financial habits could damage your future ability to borrow money Having a low credit score can still allow you to borrow for things, but you may pay more in the long run in interest and fees.

FICO Score (Credit Score) Fair Isaac Company Ranges between 300 & 850 U.S. Average: 720-725 < 620 = sub prime > 760 = best rates

Other Ways Credit Scores are used…… Credit Card Issuers & Lenders Annual Percentage Rate (APR) Auto Insurers Insurance Premium Amount Employers Job! Are you a worthy hire? Landlords Ability to pay rent! Are you a reliable tenant?

…Should You Borrow??

…Should You Borrow??

…Should You Borrow??

…Should You Borrow??

…Should You Borrow??

5 factors that build a good credit score Payment History- includes ALL bills! This portion makes up the majority of your overall score (35%) Consistency is key; even if you are just making minimum payments How Much you Owe- the amount of debt you have compared to the amount of credit you have (debt-to-credit ratio) (30%) Getting too close to your credit limit creditor could result in a negative shift in your credit score Credit History- How long you’ve been using credit and how you’ve handled your payment responsibilities (15%)

5 Factors continued Credit Types- credit bureaus want to know that you can manage a variety of account types (10%) This could include a mix of mortgage, credit cards, installments (car, phone payments) New Credits and Inquiries- creditors will look into any new accounts that have been opened lately and where you are inquiring about credit. (10%) Applying for too much credit can be risky because it looks like you are desperate for loans.

10%

Monitoring your Credit You are entitled to one free report from each bureau every year You will receive three different reports for each of the three credit bureaus. This can be requested from AnnualCreditReport.com ONLY the reports are free (history of spending, what calculations were used etc.) There is a fee for your actual score. Always check for inaccuracies and take care of any issues ASAP! This will prevent surprises in the future

What Makes a “Good” Score Most commonly used credit scores is provided by Fair Isaac Corporation, and is commonly referred to as a FICO score FICO credit scores have a 300–850 score range. The higher the score, the lower the risk. But no score says whether a specific individual will be a “good” or “bad” customer. While many lenders use FICO credit scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

FICO Score (Credit Score) Fair Isaac Company Ranges between 300 & 850 U.S. Average: 720-725 < 620 = sub prime > 760 = best rates

Bankruptcy and your credit One of the great myths about bankruptcy is that it erases bad credit history. This is NOT true! Declaring bankruptcy frees you from paying all or part of the debt you owe. Accounts will be updated in your credit report to show “included in bankruptcy.” BUT, the accounts will not be deleted from your credit report. Student loans can never be erased with bankruptcy!

Bankruptcy continued Chapter 13 (repayment plan bankruptcy with debt limits) remains on your credit history for 7 years. Chapters 7 (liquidation; unsecured debt items are canceled–most common for individuals, businesses, and some farms) remains for 10 years Chapter 11 (business filing –Kodak) are reported for 10 years. Credit accounts may be deleted at different times depending on their status prior to being included in bankruptcy. Bankruptcy isn’t an easy way to escape a bad credit history. It doesn’t erase your credit report!

Activity: Credit Score Calculation

Activity: How Good Credit Will Help Me