Using Credit TODAY YOU WILL EXAMINE REASONS WHY PEOPLE USE CREDIT. 1 ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit

Good or Bad When is it OK to borrow money? When is borrowing money not a good idea? ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 2

Today you will … Answer these questions: Why do people borrow money? When is it acceptable and unacceptable to use credit? How does borrowing impact spending power? Use what you learn to recognize situations when it makes sense to either use credit or to avoid using credit. 3 ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit

Meet Mariah and Jesse ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 4 Mariah– junior Lives at home Part-time job Responsible for own expenses Saving for college Wants her own credit card Jesse– sophomore Lives at home No job now Saving to buy a truck when he gets license

Using Credit Credit Buy something now; pay for it later ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 5 How we use credit is what’s good or bad

Credit in the Community ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 6

Credit Options Revolving credit (example: credit card) – Borrow for multiple purchases without going over credit limit – Repay what is owed each month Installment credit (example: car loan) – Borrow a specific amount of money to buy something now – Make regular payments to repay over time by a set date Cash loans – Borrow a specific amount of cash to repay later by a set date Service credit (example: cellphone, electricity) – Promise to pay for services used each month ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 7

Jesse’s Plan Jesse’s Monthly Plan No Loan Jesse’s Monthly Plan With Loan ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 8

Now or Later Instant Gratification An unwillingness to give up something now in return for something later Delayed Gratification A willingness to give up something now in return for something later ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 9

Stop Drop and Think Before Using Credit ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 10

Analogy Mariah’s mom is not sure she even understands what credit is and asks her to compare it to something else. Mariah has a difficult time coming up with a comparison. Help her out. Complete the following analogy: “Credit is like a car because …” ©2012 National Endowment for Financial Education | Lesson 2-1: Using Credit 11

Credit Costs TODAY YOU WILL... EXAMINE THE COSTS OF CREDIT. 12 ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs

Which is better? Choose an Option  Computer: Make payments for 24 or 36 months?  Stereo System: Pay 13.5 or 18 percent interest?  Car: Lower price at higher interest rate?  TV: Delay payments for 90 days?  Truck: $1,500 cash back or no cash back? ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 13

Today you will … Today we will answer these questions: How is credit used? What are typical costs of credit? How do I calculate the cost of using credit? Use what you learn today to consider borrowing options for a specific situation. 14 ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs

The Language of Credit Buying on Credit Making a purchase now and promising to repay later Principal $ the cost of the item bought on credit or the amount of money borrowed Interest % What the lender charges for using credit usually a percentage of the principal ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 15

Adding It Up Jesse’s brother had a flat tire on his car, but he didn’t have the money on hand to buy a new tire that day. He was able to purchase a new tire by arranging to repay the $150 owed (principal) for the tire plus 10 percent (interest) in 30 days. Will Jesse pay more or less than $150 for the tire? How could Jesse have avoided paying more than the cost of the tire? ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 16

Simple Interest Calculate a lump sum to be prepaid on a due date. Interest = Principal x Interest Rate x Time (in dollars) (in dollars) (as decimal) (no. of years) $1.25 = $150 x.10 x 1/12 ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 17

Average Monthly Payments As principal is repaid, the interest owed changes Use the amortization calculation formula to determine the average payments Fit average payments into spending plan ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 18

Amortization Chart Monthly payments when $100 is borrowed at 40 percent interest to be repaid in six equal payments. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 19 Monthly Payment Payment Amount Principal Repaid Interest Paid Totals

More Terms to Know Annual Percentage Rate (APR) % Consistent way to report interest; includes interest rate, fees, and loan costs Maturity Date When the final payment is due for a loan Grace Period The amount of time before interest starts accumulating on charged purchases if payment is not received ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 20

Credit Options Revolving credit (example: credit card) – Charge at any time – No interest charged if full payment is received by monthly due date – Very high interest rates if balance carried over each month Installment credit (example: car loan) – Make regular payments to repay amount owed by a set date – Know payments and total interest amount up front (helps in planning) Cash loans – Borrow a specific amount of cash to repay later by a set date – Interest rates vary; compare options Service credit (example: cellphone, electricity) – Payments may vary by use (electricity) or be predictable (phone plan) – Late fees or overuse fees add to cost ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 21

When You Charge “Stuff” You bought “stuff” with your credit card. In fact, you bought $500 worth of “stuff” with your credit card. Your APR is 18 percent. You plan to pay $10 a month to pay it off. You will pay $431 in interest. Final cost of your purchases = $ It will take seven years and nine months to pay off balance. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 22

How Long Will it Take? You owe $3,000. The credit card APR is 18 percent. You currently pay 4 percent of the current balance. You will pay $1,716 in interest Final cost of your purchases = $4,716 It will take nearly eleven years to pay off balance. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 23 After the last payment is made, will you still have the items or want what you purchased?

Challenge 2-A: DECIDE the Best Deal Compare credit costs and options for a major purchase, loan, or phone plan. Use the DECIDE process to establish criteria and compare options to select the best credit option for your situation. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 24

Credit Rating TODAY YOU WILL... START DOWN THE PATH TO BUILD A REPUTATION AS A RESPONSIBLE BORROWER. 25 ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating

Can I Borrow? What were you trying to borrow, and were you successful in negotiating a deal to borrow the item? Why or why not? What were the conditions (if any) for you to follow so you could borrow or use the item? When you were asked to loan the item, what influenced your decision to let the person borrow the item? ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 26

Preview Today we will answer these questions: How do I get a loan or credit card? Will I automatically get approved for a loan? How much can I borrow? Use what you learn today to establish a borrowing code of conduct. 27 ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating

Applying for Credit Full, legal name Current address and phone number Date of birth and Social Security number Current employer Monthly income Bank name and account number Monthly rent or mortgage payment ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 28 Christina L. Anderson [use your own address, phone number] May 29, 1963, (SS # provided) Ms. Anderson is a physical therapist at Sargant Care Clinic, 400 Medical Way, [your town] Ms. Anderson started working at Sargant five years ago today and currently earns $5,100 per month. The Andersons have a savings account (# ) at a bank near you Pay $975 per month for mortgage Christina L. Anderson [use your own address, phone number] May 29, 1963, (SS # provided) Ms. Anderson is a physical therapist at Sargant Care Clinic, 400 Medical Way, [your town] Ms. Anderson started working at Sargant five years ago today and currently earns $5,100 per month. The Andersons have a savings account (# ) at a bank near you Pay $975 per month for mortgage

You Make the Call Approve or Deny a credit application? ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 29

Credit Reporting A history of how you have used credit: Where you live and work Credit account amounts (balances and limits) Payment history (on time or late) Recent inquiries from creditors Any collection or legal action to collect debt ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 30

Who’s Watching? (C)2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 31

Starting Out ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 32

Challenge Assignment Devise a plan for action you can take now to practice sensible borrowing habits and to build a good reputation as a borrower. ©2012 National Endowment for Financial Education | Lesson 2-3: Credit Rating 33

Borrowing Rights TODAY YOU WILL... EXPLORE THE RIGHTS AND RESPONSIBILITIES OF BORROWERS AND LENDERS. 34 ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities

What do you think? Is credit good or bad? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 35 How we use credit is what’s good or bad.

Preview Today we will answer these questions: What are my legal responsibilities when I sign a contract? What are guidelines for borrowing? Where can I get help when I have credit problems? Use what you learn today to take on the responsibilities of borrowing. 36 ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities

Win Loans and Influence Interest Do the following actions help your credit score? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 37 1.Pay your bills on time. Yes, paying on time is the single best way to get a good credit score. 2.Open several accounts in a short period of time. No, opening several accounts in a short time frame hurts your score, especially when starting out. This makes you look desperate to borrow. 3.Own a credit card you don’t ever use. No, creditors want to see how well you use credit. If there’s no activity for a long time, the account may be considered inactive.

Win Loans and Influence Interest Do the following actions help your credit score? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 38 4.Frequently move credit card balances to new cards with better interest rates. No, card hopping decreases the average age of your credit accounts, and lenders like to see long-term relationships. 5.Get a credit card when you already have a car and student loan. Yes, adding a credit card when you only have loans can help because lenders prefer to see a mix of credit types.

Win Loans and Influence Interest Do the following actions help your credit score? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities Close a credit card that you made a lot of late payments on. No, closing an account with negative items won’t help. The account will still remain on your credit report for up to 10 years, whether inactive or closed. 7. Use a debit card responsibly. No, debit card usage doesn’t show up in a credit report because these transactions are withdrawals from your own bank account rather than borrowing from someone else.

Follow Through or Risk... Embarrassment if card is declined at the checkout Having property repossessed State of perpetual debt which can increase personal stress Paying higher interest rates and/or late fees Negative details for others to see on your credit report Having your wages garnished Contact with a collection agency Unplanned expenses for legal action to enforce the contract ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 40

The Contract ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 41

Ignorance is No Excuse Read the fine print: P ayment amount P ayment due date(s) C onsequences of late or no payments: –P–Payment penalties? Collection costs? Repossession of property? A ny insurance coverage requirements (i.e. car, apt) H ow to notify about changes to personal information W hat to do if you have problems with the arrangement Pay attention to updates! ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 42

On Your Side Federal Trade Commission, Consumer Financial Protection Bureau, Equal Credit Opportunity Act Fair Credit Reporting Act Fair Credit Billing Act Truth-in-Lending Act ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 43

Know the Limit: The Rule ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 44 *This rule does not included mortgage-related debt.

When to Say When Borrower Annual Net Income Maximum Total Debt (20% Net Income) Maximum Monthly Payments (10% Monthly Net Income) Mariah’s sister$6,500$6,500 x.20($6,500/12) x.10 Jesse’s brother$24,750?? Jesse’s sister$35,800?? You??? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 45

When to Say When: The Rule Borrower Annual Net Income Maximum Total Debt (20% Net Income) Maximum Monthly Payments (10% Monthly Net Income) Mariah’s sister$6,500$1,300$54.17 Jesse’s brother$24,750$4,950$ Jesse’s sister$35,800$7,160$ You$N$N x.20($N/12) x.10 ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 46

Be a SHREWD Borrower Is there a S incere need or want? Am I H appy to pay? Is there R oom in my spending plan? Will there be E xtra cost? What is the W aiting cost? Will I be D isciplined to repay on time? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 47

What Would You Say? If you were to be interviewed on the street today, how would you answer this question: What two tips can you offer about using credit? ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 48

Challenge Assignment 2-C Create your own Credit Code of Behavior to use as a guide when you borrow items or money. ©2012 National Endowment for Financial Education | Lesson 2-4: Rights and Responsibilities 49

Identity Fraud TODAY YOU WILL... TAKE STEPS TO PROTECT YOURSELF AGAINST FRAUD 50 ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud

What’s in your wallet? Give yourself a point for each of these items listed below. __ Credit card (The actual number of cards) __ ID card with photo (school, employment) __ $5 bill __ Change (coins) totaling $2 or more __ Original Social Security card __ Picture of a close relative __ Computer password (The actual number of passwords) __ Bank/Credit Union ATM PIN number __ Library card ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 51 __ Paycheck stub __ Bank or credit union deposit slip __ Any type of money-saving coupon __ Car keys __ Flash drive for computer __ Cell phone __ Driver’s license __ Kleenex __ Membership card __ Food

Preview Today we will answer these questions: How am I at risk for identity fraud? What should I do if I’m a victim of identity fraud? How can I protect my personal information? Use what you learn today to take action to keep your personal information safe. 52 ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud

Theft or Fraud … Both are Trouble ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 53

Teens are Targets Too! 10 percent of U.S. youth had someone else using their Social Security Number Identity fraud is growing for minors. Teens 15 – 18 years old are the main target. Fraud may go undiscovered for years: – Businesses only see clean credit history when someone applies. – Credit reports are not available for minors to check for any activity. Fraud is often detected only when the victim applies for a loan or credit card in his or her own name. Source: Richard Power, Child Identity Theft, Carnegie Mellon CyLab Report ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 54

Protect From Fraud The Federal Trade Commission (FTC) recommends: Deter misuse of your information Detect when you have a problem Defend yourself from loses ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 55

7 Tips to Thwart Thieves Keep sensitive information close to the vest. Lighten up your wallet. Never leave blanks on a charge slip. Stick to secure web pages. Shred ruthlessly. Be computer safe by using firewalls, anti-spyware and anti-virus software. Guard your Smartphone too! ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 56

Be on the Lookout! Review your accounts and billing statements. Sign up for or text-messaging alerts. Review your credit report (at least once a year). ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 57

Take Action Unauthorized Charges File a dispute Contact the FTC Stolen Purse or Wallet File a report with company Call your cellphone company ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 58 File a police report Place a Fraud Alert on your credit report with all three credit- reporting agencies Write your credit card companies Document everything Check your credit report in a few months

Challenge Assignment Put up your own shield to protect yourself from identity fraud. A. Create a checklist of at least five actions you will take, starting now, to protect your personal data. B. Over the next week, document evidence that you have carried out the actions. ©2012 National Endowment for Financial Education | Lesson 2-5: Identity Fraud 59