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

2. What is Consumer Credit?
Answer the following discussion questions:
What is the difference between a credit and debit card?
Do you have a credit card?
If yes, what do you use it for?
If no, would you like to have one? Explain why.
At what age are you allowed to sign up for a credit card on your own?
Why do you think there is an age restriction for signing up for a credit card?
In a paragraph, discuss whether or not high school students should be permitted to have credit cards.
Give details to support your answer.

3. Credit Facts
33%
Nearly of teens owe money to either a person or company, with an average debt of
About of teens ages already have more than $1,000 in debt.
of teens say they understand how credit card interest and fees work.
of teens say they know how to establish good credit.
$230
26%
30%
ASK STUDENTS
Has anyone used a credit card recently?
Was it in your name?
If so, how did you get your card?
How long have you had it?
How, and why, do they use it?
IF NOBODY HAS A CREDIT CARD, ASK
Would you like to have a credit card?
How would you use it?
36%
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4. Top 10 Questions to Ask Before Signing on the Dotted Line
Can I afford to pay the monthly payments?
What will happen if I don’t make the payments on time?
What will be the extra cost of using credit?
What will I have to give up to pay for it?
All things considered, is using credit worth it for this purchase?
Do I really need this item right now, or can I wait?
Can I qualify for credit?
What is the interest rate (APR) on this card?
Are there additional fees?
How much is the monthly payment, and when is it due?
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5. Credit: The Good and the Bad
Rewards, Credit Offers:
Potential Risks:
Interest
Overspending
Debt
Identity Theft
Convenience
Protection
Emergencies
Opportunity to build Credit
Quicker Gratification
Special offers
Bonuses/Points

6. The Language of Credit
Credit is the amount of money or something of value that is loaned on trust with the expectation it will be repaid later to lenders with interest.
Types of Credit
Borrow up to a predetermined limit
Borrow cash to be repaid by a specific date
Borrow money for a major purchase to be repaid in regular payments over time, typically monthly.
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7. Types of Credit Type of Credit Institution Features Credit Card
Banks, Credit Unions, Stores, and Gas Stations
Most can be used about anywhere, some are specific
No payoff deadline
Monthly min. varies
Highest rates
Installment Loan
Banks, Credit Unions, Auto Dealers, Other Financial Institutions
Used for large purchases like a car or appliances
Loan term varies (months to years)
Monthly payments are set for life of loan
Lower rate than credit cards
Student Loan
Banks, Credit Unions, and Federal Government
Tuition and other college expenses
Loan term up to 10 years
Tax break on interest is possible
Mortgage
Banks and Credit Unions
For buying a home
Repaid over 15 to 30 years
Fixed, Variable or ARM rates

8. The Language of Credit Finance Charge APR (Annual Percentage Rate)
the total dollar amount you pay to use credit.
APR (Annual Percentage Rate)
is the total cost to use credit in a year expressed in a %.
Ex. 18% APR means you pay $18 per year for each $100 you owe.
Term
How long you have to repay a loan, often expressed in months.
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9. The Language of Credit Credit Limit Universal Default Fees
Charges to use credit. Examples:
Annual Credit Card Fee - Yearly charge to use credit
Loan Origination Fee – Charge for setting up loan (home loans)
Over-the-Limit Fee - Charge for spending more than limit
Late Fee – Penalty for making payment after due date
Credit Limit
Maximum amount of credit a lender will extend to a customer
Universal Default
Allows a credit card company to increase your interest rate if you make just one late payment.
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10. WHEN YOU BUY “STUFF” Your APR is 18%.
You bought “STUFF” with your credit card.
In fact, you bought $500 worth of “STUFF” with your credit card.
Your APR is 18%.
You plan to pay $10 a month to pay it off.
You will pay $431 in interest
Final cost of your purchases = $931.40
And it will take SEVEN YEARS and NINE MONTHS
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11. How Long Will It Take??? And it will take nearly 11 YEARS to pay off!
You owe $3,000.
And it will take nearly
11 YEARS to pay off!
APR = 18%
Payment: 4% of current balance
Finance Charge $
Total cost of original $3,000 loan = $
After you’ve made the last payment, will what you purchased still be around???
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12. The Cost of Using Credit
$700 for a Game System and
Accessories
And it will take over
7 years
to pay off!
APR = 24%
Payment: 4% of current balance
Finance Charge $550.04
Your game system REALLY cost $1,250.04
After you’ve made the last payment, will your game system still be around???
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13. The Cost of Using Credit
Interest Rate = 24%
Payment = 4% of Current Balance
BALANCE
TIME TO PAY OFF
INTEREST CHARGED
TOTAL COST
$2,000
11 YEARS
6 MONTHS
$1,850
$3,850
$6,000
16 YEARS
1 MONTH
$5,850
$11,850
$10,000
18 YEARS
2 MONTHS
$9,850
$19,850
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14. The Cost of Using Credit
$3,000 Charged to Credit Account
You Owed $3,000
but
You Paid
$6,065+
Includies annual fees
APR = 21%
Payment: 4% of current balance
Finance Charges $2,220.57
Annual Credit Card Fee: $65
Paying the minimum, it will take you 11 YEARS and 11 MONTHS to pay off your debt.
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15. Financial Consequences of Debt
What if you took the $120 monthly payment in the last example and INVESTED $120 a month for the 12 years it took to pay off the $3,000 debt, and your investment got an 8% rate of return?
Instead of $6,000 paid out for $3,000 worth of “stuff”, your $120 monthly investments would amount to $28,799 in your pocket!
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16. 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.
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17. The Four “Cs” of Credit Capital – What are your assets and Net worth?
Want to know you have enough capital to pay back the loan
What are your assets?
What are your liabilities?
Collateral – What if you do not repay the loan?
What assets do you have to secure the loan? (vehicle, home, furniture)
Do you have any other assets? (bonds or savings)
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18. The Four “Cs” of Credit Character – Will you repay the loan
Want to know what kind of person they are lending money to
Have you used credit before?
How long have you lived at your present address?
How long have you held your current job?
Capacity – Can you repay the loan?
What is you job, and how much is your salary?
Do you have other sources of income?
What are your current debts?

19. Credit Score Credit Report Credit Score
A record of your personal financial transactions
Three major credit reporting companies: Equifax, Experian, TransUnion
Credit Score
A number that reflects your credit worthiness based on the 4 C’s
FICO score ranges from 300 to 850

20. How Credit Scores Are Determined
Your payment history
Information about how you make your payments on credit cards, store accounts, car loans, finance companies, mortgages
Accounts in collection or past due, and how long past due
Information in public records, such as bankruptcy, judgments, liens, wage attachments or child support
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21. How Credit Scores Are Determined
Your overall debt
How much you owe on all your accounts
How much credit you have available to use
Your credit account history
When you opened and used each of your accounts
How recently you applied for new credit
Recent good credit history following past payment problems
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22. How Credit Scores Are Determined
Types of Credit
The different types of credit accounts you have
The total number of accounts you have
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23. Get and Keep a Good Score
Make sure your credit report is accurate.
Pay all your bills on time.
Apply for credit only when you need it.
Lower the balances on all your credit accounts.
Pay off debt rather than moving it around.
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24. Getting Out of Debt Reduce Your Debt Put away the plastic
Create a repayment plan (Debt Snowball)
Order your debts from lowest balance to highest balance.
Designate a certain amount of money to pay toward debts each month.
Pay the minimum payment on all debts except the one with the lowest balance.
Throw every other penny at the debt with the lowest balance.
When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance

25. Debt Snowball Card Balance Monthly Minimum Credit Card A 500 $26
Credit Card B
5000
$200
Credit Card C
250
$25
Credit Card D
2500
$150
The person has an additional $100/month which can be devoted to repayment of debt
Card
Payment
Credit Card C
Credit Card A
Credit Card D
Credit Card B
$125 ($ )
$151 ($26 + $125)
$301 ($150 + $151)
$501 ($200 + $301)

26. Getting Out of Debt Bankruptcy Chapter 7 (a straight bankruptcy)
A legal process to get out of debt when you can no longer make your required payments
Chapter 7 (a straight bankruptcy)
An individual is required to draw up a petition listing his or her assets and liabilities.
Many but not all debts are forgiven. Most of the debtors assets are sold to pay off creditors.
Some Assets are protected:
Social Security Payments
Unemployment compensation
Net value of your home, vehicle, household goods and appliances, tools for work and books

27. Getting Out of Debt Bankruptcy
Chapter 13 (A wage earner plan bankruptcy)
A debtor, with a regular income, proposes a plan to use future earnings or assets to eliminate debts over a specific period of time
Debtor normally keeps all or most of his/her property
Make payments to Chapter 13 trustee (appointed by court) who then distributes the money to the creditors.