1. Analyzing Credit and Debt  When you use credit responsibly it can be very convenient because you can use it to buy things now and pay for them later by writing a single check, or making a single electronic funds transfer.  When you use credit irresponsibly, you might wind up with so much debt that you can never pay it back.  The only way to avoid paying additional fees and charges is to pay your balance in full and on time every month.  It takes time to establish credit, but it is worth the effort.  Positive steps for establishing credit include having a credit card and using it responsibly, maintaining bank account balances, earning a paycheck, paying bills on time, and paying rent. 1 Credit is money that you borrow and promise to pay back. Debt is the money that you borrowed and owe. Chapter Money Management 5

2. Dealing with Debt  A credit report is a summary of your credit history. If you have a good credit history, lenders will loan you money.  By law, you can obtain one copy of your credit report for free once a year from Equifax, Experian, and TransUnion.  As long as you make your payments in full and on time, you are managing your debt responsibly.  Excessive debt may be caused by irresponsible use of credit cards and loans, but it can also be caused by unexpected expenses such as medical bills.  When debt grows to the point that you cannot pay more than the monthly minimum, it will affect your well-being.  Bankruptcy is a process in which you declare yourself legally unable to pay your outstanding debts. It should be used as a last resort as it makes it very difficult to get credit again for a long time. 2 Chapter Money Management 5

3. Calculating Interest  Simple interest is calculated based on the principal amount only.  To calculate simple interest: Multiply the amount of Principal (P) times the Interest Rate (r) times the number of Time (t) periods that make up the duration of the loan.  Compound interest is calculated based on the principal and on any interest that has already been added to the principal.  To calculate compound interest, you calculate the simple interest for the time period, add it to the principal, and then calculate the simple interest for the next time period on the new principal balance, add it to the principal, and so on for the duration of the loan. 3 Interest is a fee paid for using someone else’s money. It is calculated as a percentage of the principal—the account balance or loan amount. Chapter Money Management 5

4. Paying Taxes  Income tax is a percentage of your income that you pay to the government.  The U.S. has a progressive tax system, which means the more you earn, the more you pay.  Income is categorized into levels, called tax brackets, which are based on your taxable income.  Your taxable income equals your income less tax deductions, which are expenses that you are allowed to deduct from your income.  You must file income tax returns for the income you earned the previous year with the IRS and your state’s revenue department by April 15th, unless this occurs on a weekend or holiday. 4 A tax is money we pay the government. The government uses the money to pay for public resources. Chapter Money Management 5

5. Keeping Your Personal and Financial Information Safe  Identity thieves will do almost anything to get their hands on your personal, financial, and medical records. You must take reasonable steps to secure these documents.  You can store documents in a safe, or in a safe deposit box, which is a box in a fireproof vault that you can rent from your bank.  If you lose your wallet or purse, assume it will be found by a criminal. Then take immediate steps to protect your identity and your finances. 5 Identity theft is one of the fastest growing crimes. It occurs when someone steals your personal information and uses it to commit fraud. Chapter Money Management 5

6. Analyzing Banking and Credit Regulations  The Federal and state governments have passed laws and regulations to protect you and your money.  The Federal Deposit Insurance Corporation (FDIC) was set up to provide insurance for your deposits, and the Federal Trade Commission (FTC) was established to make sure businesses treat you fairly.  The Securities and Exchange Commission (SEC) is responsible for supervising and regulating companies to protect investors.  Consumer credit laws help consumers and creditors meet their legal responsibilities. Some of the most important of these laws are:  The Fair Credit Reporting Act  The Equal Credit Opportunity Act  The Fair Credit Billing Act  Truth in Lending Act  The Credit Card Act of 2009 6 Chapter Money Management 5

7. Chapter Review  Credit is money that you borrow and promise to pay back. Debt is the money that you borrowed and owe.  A credit report is a summary of your credit history. If you have a good credit history, lenders will loan you money.  Interest is a fee paid for using someone else’s money. It is calculated as a percentage of the principal—the account balance or loan amount.  A tax is money we pay the government. The government uses the money to pay for public resources.  Identity theft occurs when someone steals your personal information and uses it to commit fraud.  The Federal and state governments have passed laws and regulations to protect you and your money. 7 Chapter Money Management 5