1. What is Credit and What is Debt? 2. Using Credit: The Rewards & Risks 3. Four Types of Debt 4. The Cost of Using Credit 5. Running the Numbers

 Credit means a lender is willing to loan you money – called principal – in exchange for your promise to repay it, usually with interest.  Interest is the amount you pay to buy something on credit. The higher the interest rate, the higher your monthly payments.  Debt is how much you owe the lender, including all interest and fees. These lenders have legal claims against your future income should you not be able to repay a debt.

 The Rewards  Convenience  Protection  Emergencies  Opportunity to Build Credit  Special Offers and Bonuses  The Risks  Interest  Fees  Overspending  Debt

There are 4 main types of debt: 1. Credit Cards 2. Student Loans 3. Installment Loans 4. Mortgages

 Credit Cards  No payoff deadline.  Monthly minimum payments vary depending on the balance and Annual Percentage Rate (APR), either a fixed or variable rate.  Usually has the highest interest rate of these four types of debt.

 Student Loans  Used for educational expenses.  Some programs offer deferred payments until after graduation.  Loan term is usually up to 10 years, and monthly payments are adjusted annually when interest rates are adjusted.  May provide an income tax break on interest paid to the lender.

 Installment Loans  Typically used for large purchases, i.e., cars or appliances.  Loan terms can vary from a few months to several years.  Monthly payment amounts are set for the life of the loan.

 Mortgages  Used specifically to purchase real estate.  Loan terms vary, and payments may be set for the life of the loan (fixed rate) or may change more frequently (adjustable rate).  May provide an income tax break on interest paid to the lender.

 Unsecured Loans  Annual Fee: Yearly fee for having credit available.  Credit Limit: Maximum amount of credit a lender will extend.  Over Limit Fee: Fee/penalty for going over your credit limit.  Grace Period: Length of time before you accumulate interest.  Finance Charge: Monthly fee for maintaining a balance.  Late Fee: Fee/penalty for not making a payment on time.

 Secured Loans  Loan Term: Length of time you have to pay off the loan.  Origination Fee: Charge for setting up the loan (usually for mortgages).  Grace Period: Length of time to make payment for a late fee is assessed.

 There is no federal limit on the interest rate a credit card company can charge.

Universal Default: A practice, especially in the credit card industry, where lenders agree to change the terms of a loan from the normal terms to the default terms, when they are informed that their customer has defaulted with another lender or has generally taken on too much risk. This means a lender may increase your rates even if you have never paid late with this lender.

 Let’s say you want to purchase a car for $7,500. You put $1,500 down and need to borrow $6,000.

 Let’s say you want to purchase a $2,000 flat screen TV on your new credit card.  If you pay the minimum every month, how long will it take to pay off this debt? MORE THAN 30 YEARS, and you will pay almost $5,000 in interest!

 Making purchases on credit has rewards and risks.  Credit offers convenience and protection in emergencies.  Borrowing money costs money and can result in debt.  Use credit wisely and manage debt responsibly.  Be aware of credit terms and fees, and read the disclosures carefully.  Run the numbers before making large purchases.

For more info, please visit financialfitnessassociation.org.