Financial Literacy Skills Unit 3: Using Credit Wisely

Objective 1: Distinguish among types of sales credit. Installment credit Regular credit Open-end credit

Objective 2: Identify sources of credit. Commercial bank Credit union Finance company Life insurance policy Oil company Online lender Payday loan company Pawnbroker Private lender Retail store Savings and loan association Travel-and-entertainment credit card company

Objective 3: Distinguish between credit and charge cards. Credit card Issued by a company such as a bank, gasoline company, or department store May charge an annual fee Gives you access to credit up to a certain limit. May offer additional benefits Monthly statement gives a minimum payment due; you are charged interest if you do not pay the balance in full

Objective 3: Distinguish between credit and charge cards. Issued by a few companies (American Express, Diners Club) Charges an annual fee You are charged interest on any unpaid balance No credit limit Entire balance due when the monthly statement arrives Often offer more benefits than credit cards Frequently used by businesses Many retailers will accept credit cards but not charge cards.

Objective 4: Identify disadvantages and advantages of using credit. Using credit encourages you to spend more than you can afford, even if you plan to pay off the balance at the end of the month. It may encourage impulse buying. Credit ties up future income to pay debt. Credit contracts and terms can be difficult to understand. Maintaining a balance, rather than paying off your credit card every month, increases the cost of items.

Objective 4: Identify disadvantages and advantages of using credit. Low introductory interest rates are temporary, and increase when payments are missed. Using credit can encourage a need for “instant gratification.” Inability to pay your credit card bills contributes to a poor credit rating. Items bought on credit can be repossessed if you cannot make payments. Relying on credit may encourage you to shop only at stores where you have credit cards. Improper use of credit can increase family stress, including family conflict.

Objective 4: Identify disadvantages and advantages of using credit. Credit can allow you to take advantage of bargains. Credit allows you to use goods and services while paying for them. Credit cards can be a source of emergency funds. Credit allows you to raise your standard of living Instead of waiting until you have saved enough cash. Credit helps you make purchases that are part of a long-range financial plan.

Objective 4: Identify disadvantages and advantages of using credit. Using credit responsibly establishes your credit rating. Credit card statements and receipts help simplify record keeping and budgeting. Buying items with credit makes returns more convenient. Carrying a credit card eliminates the need to carry large amounts of cash Credit card companies can help in negotiating about problems with products after the sale.

Objective 5: Match factors that affect interest rates to their descriptions. Ability to repay Collateral offered Current rate of interest Economic conditions Length of time to repay credit early by making larger payments with no penalties. Source of credit Total amount of money borrowed Type of credit selected

Objective 6: Calculate the cost of interest.

Objective 7: Complete sentences about wise credit practices. Limit the total amount borrowed to 20 percent or less of your yearly take-home pay. Limit the total of monthly payments to 10 percent or less of your monthly take-home pay. Buy items that will outlast the credit payment period. Make the largest down payment possible. Understand how much credit costs. Use credit to buy items that increase in value. Pay double or a few dollars more on each payment. Shop for credit. Keep a good credit reputation.

Objective 8: Select ways to establish a good credit record. If you have no credit history yet and cannot get a major credit card, apply for a department store credit card. Show responsibility by using your credit and paying it off. Pay bills when they are due. Use credit only if your income is steady and reliable. Understand and follow the terms of every credit contract. Do not borrow up to your credit limits. Review your credit report regularly

Objective 9: Describe options for payments on credit cards. Pay the balance in full every month. Pay the balance in full more often than once a month. Pay more than the minimum payment, but less than the balance, every month. Pay the minimum payment every month.

Objective 10: Calculate credit card payment options.

Objective 11: Match factors used to determine credit risk to their descriptions. Payment record Employment record Certain personal factors

Objective 12: Discuss the consequences of bankruptcy. The petition for bankruptcy becomes part of your permanent credit record for ten years. Your property and possessions (within limits) are seized and sold. Monies received are applied to each of the debtor’s financial obligations. Once granted bankruptcy, you cannot file again for another seven to ten years, and will have difficulty obtaining credit in the future.

Objective 13: List the credit warning signals. Putting off one creditor so you can pay another Receiving past-due notices Paying only the minimum amount on credit balances Charging more each month than you can pay Using one charge account to make the payment on another Having a monthly payment mentality rather than knowing the total amount owed

Objective 13: List the credit warning signals. Ignoring the high cost of interest when you open or use credit Using cash advances for monthly living expenses Obtaining higher credit limits or additional cards to help juggle payments Routinely running out of money before payday Failing to save some money each month

Objective 14: Identify credit warning signals.

Objective 15: Discuss the effects of debt consolidation. Advantages One creditor to work with One debt amount and one monthly payment Possibility of a lower interest rate if the loan comes from a bank or credit union and is used to pay off high-interest credit cards Interest may be tax-deductible if you use money from a home equity loan to consolidate your debts

Objective 15: Discuss the effects of debt consolidation. Disadvantages Debt period may be extended for a longer time, resulting in more interest paid Interest rate may be higher if consolidation credit comes to you through finance companies Your home may be at risk if you use money from a home equity loan to consolidate your debts Consumers may continue to use credit cards and find themselves even deeper in debt

Objective 16: Describe services that offer counseling and advice to consumers with credit problems. National Foundation for Consumer Credit (Consumer Credit Counseling Service) “Mom-and-Pop” counseling services Psychologists Credit counselors at financial institutions

Objective 17: Discuss in order the steps involved in challenging an inaccurate credit report. If you are denied credit, request a summary of your credit report. If you find out-of-date, false, or incomplete data, ask the credit bureau to recheck that information. If the bureau finds their information is incorrect, it must change the report and notify those who received copies. If the bureau finds their information is correct, file a brief statement of your version of the story to be sent with all future reports.

Objective 18: Distinguish among legal means of debt collection. Arrangement Bankruptcy Garnishment Repossession

Objective 19: Identify true statements about garnishment. Creditors can legally use garnishment to collect a debt after regular collection procedures fail. Wages can be garnished for up to 25% of the disposable weekly paycheck or for the amount by which the disposable weekly paycheck is greater than 30 times the federal minimum hourly wage, whichever is less. The creditor requests and receives a court order granting the right to garnish a debtor’s wages. The employer receives a copy of the garnishment court order which states that the employer must withhold a percentage of the employee’s paycheck each pay period.

Objective 19: Identify true statements about garnishment. An employee cannot be fired simply because his/her wages have been garnished. Money garnished from paychecks is sent to the court clerk’s office where it is applied to the debt owed. When the debt and all resulting legal fees have been collected, the garnishment is completed and the employer is notified to stop. The Department of Labor has rules to protect you if your wages are garnished.

Objective 20: Choose alternatives when debts cannot be paid.

Objective 21: Evaluate a credit situation.

End of Unit 3