CREDIT & MONEY
Introduction
Big news in 2009:
• Barack Obama’s inauguration
• Sarah Palin quit as Alaska governor
• Deaths of Michael Jackson, Senator
Ted Kennedy
• Credit crisis continues
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POP QUIZ!
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Question 1
Correct Answer: B
Credit is the
ability to borrow money.
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Question 2
Correct Answer: B
Credit is the opportunity to borrow money,
and debt is the money
you have actually borrowed.
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Question 3
Correct Answer: D
For any reason!
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Question 4
Correct Answer: False
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Question 5
Correct Answer: False
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Question 6
Correct Answer: D
All of the above
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Question 7
Correct Answer: A
Overuse or abuse
of credit cards
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Question 8
Correct Answer: B
18 years old.
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Question 9
Correct Answer: E
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How do credit cards work?
• You ―pay‖ with your card, but the credit
card company is actually charged.
• At the end of the month, the credit card
company sends you a bill for everything that
you bought.
• The credit card company offers you a
minimum payment (a lot less than the full
amount), but…
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BEWARE THE
MINIMUM PAYMENT
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Minimum Payments and
Interest
• If you always pay your full Goodbye
, debt?
balance, you only owe
the value of what you
bought. No interest!
• If you pay less than your total bill, you
pay interest (maybe 15% per year).
• It goes up if you miss a payment
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A quick example
You buy $1000 worth of products
from January 1st to January 31st…
If you pay your whole $1000 bill, that’s all you
owe.
But your bill says that you can pay a $25
minimum!
You decide to pay $25.
What do you owe now?
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$1000 - $25 = $975?
Nope! You owe $987.19
(that’s $975 + 1.25% x 975)
Sure, it’s only $12.19 extra,
but it adds up every month.
And what if you want to buy
something else next
month? You still have a
huge balance to pay.
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Review: Definitions
Credit: The ability to borrow money
Credit card: A card that lets you charge
the bank for your purchases and pay for
them later
Debt: Anything owed
Interest: A payment added to the amount
owed as a fee for borrowing money
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Advanced Definitions:
What is APR?
APR = Annual Percentage Rate
• Includes interest and other fees
• Standard for all credit card companies
• Can be changed at any time by the
credit card company!
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Late Fees and Other Penalties
Q: What’s worse than paying
the minimum balance?
A: Making a payment late.
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Late Fees and Other Penalties
•Interest rates go up
•Even 20% higher!
•Late fees are charged
•Credit rating goes down
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Credit Rating
• What: A measure of your spending and
repaying habits
• When: From the first time you borrow
money
• Credit cards
• Student loans
• Where: Everywhere you owe debts!
• Why: For employers, landlords, lenders, etc.
to check that you’ll pay back on time
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What can change your
credit rating?
• Credit card payment history,
including late payments
• Not paying other debts like
rent and doctors’ bills.
• Bouncing checks
• Bankruptcy
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Credit Scores
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Identity Theft
• When someone uses your personal
information — like your name, your
Social Security number, or your credit
card number — to commit fraud.
• Inaccurate information on your
record as a result could affect your
ability to get credit, insurance, or
even a job! 25
How can your credit affect
your life?
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What are the good reasons
to use credit cards?
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• Safety - $50 limit on liability.
• Convenience – automatic payments, track
monthly spending, Internet purchases such
as plane tickets, etc.
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• Special consumer protections.
• Credit cards can provide you leverage
with a merchant.
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Why is good credit important?
• Renting an apartment or getting a job.
• Your history of payments, employment
and salary makes you a good
candidate for a home loan or a car
lease.
• Better interest rates.
• Better loan terms.
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• Different credit cards
offer different
―rewards‖, such as air
mileage, cash back
and other discounts.
• Is it worth it?
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What are the downsides
of using credit?
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• If your payment
record is poor, your
credit rating will
suffer.
• A poor credit
rating means
credit will cost you
more - you’ll pay
higher interest.
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• Or you may be denied credit or a loan
entirely.
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• Money troubles can be embarrassing.
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REAL LIFE SCENARIO:
What if you bought ...
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• Flat Screen
TV for
$1,000
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• You use your credit card to buy it and you
make monthly payments of $25?
• Assume you never miss a payment and
the annual percentage rate on your card
is 15%.
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What will the TV end up costing
you?
&
How long will it take to pay for it?
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• It will take you FIFTY SIX MONTHS (almost 5
years) to pay for it!!
• Your total cost will be $1,394.97
• That means that you will have paid $394 in
interest to the credit card company.
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• Now, instead of a 15% rate, assume that,
because you missed your first payment,
your interest rate increases to a rate of
24%.
• Also assume that you pay the monthly
payment of $25 per month.
• It will take you 82 MONTHS (almost 7
YEARS).
• Total payment: $2,032! (More than
double the cost!)
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• By the time you pay it off, the TV you
purchased will be outdated!
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Your choices:
• pay $1,000 cash - total
• pay $1,394.97 over 56
months (almost 5 years)
• pay $2,032 over 82
months (almost 7 years)
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When you pay interest to the credit card
company, you are paying for nothing. You
do not get anything in return for these
payments.
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If you take the $1,000 you save as a result of
paying cash, and invest it together with
$1,000 every year until you are 60:
You’ll have saved approximately $450,000!
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Recap
• Credit is important because:
– It will allow you to obtain loans to purchase a car or a
home; and
– Some employers may require you to have good credit
before offering you a job.
• Credit abuse is:
– When you borrow more money than you are able to
repay.
• Problems arising from credit abuse:
– Bad credit reports
– Bad credit ratings
– Higher interest rates on credit cards and other loans
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Tips
• Limit the number of credit cards to 2.
• Cancel any unused credit cards.
• Find out what your credit score is.
• Establish good credit.
• Spend only what you can afford to repay
each month by budgeting and
purchasing only essential items.
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Credit Report
• You may obtain your free credit report at:
– www.AnnualCreditReport.com
– (877) 322-8228
– Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
• Your credit score is compiled from three
credit reporting agencies: Equifax,
TransUnion, and Experian.
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Credit Bureaus
Credit Reporting Agencies
Equifax
PO Box 740241
Atlanta, GA 30374
800.685.1111
www.equifax.com
Experian
PO Box 2104
Allen, TX 75013
888.EXPERIAN
www.experian.com
TransUnion
Post Office Box 2000
Chester, PA 19022
800.916.8800
www.transunion.com
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