Good Debt, Bad Debt U S I N G C R E D I T W I S E L Y

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1 Good Debt, Bad Debt U S I N G C R E D I T W I S E L Y

2 What is Credit? Someone is willing to lend you money (principal) in exchange for your promise to repay it, usually with interest. Interest amount you pay to use someone else s money

3 Common Types of Credit Credit Card Installment Loan Student Loan Mortgage

4 The Cost of Using Credit Annual Percentage Rate (APR) Fixed Variable Introductory rate Default rate Annual Fee Credit Limit Finance Charge Origination Fee Loan Term Grace Period Minimum Monthly Payment

5 Good Debt vs Bad Debt Sometimes it makes sense to borrow, but a lot of times it doesn t. Good Debt The debt that will grow in value, such as a home, education, or investments Bad Debt The debt you ve taken on for things you don t need and can afford only by using credit cards or store charge cards

6 Dangers of Credit Cards Are you making on the minimum monthly payment? If so, you will end up paying more than double for your purchase? Account Balance: $2,500 Interest Rate: 15% Monthly Payment Term Interest Paid True Cost Minimum Payment $ months $3, $6, Account Balance: $5,000 Interest Rate: 15% Monthly Payment Term Interest Paid True Cost Minimum Payment $ months $12, $17,047.77

7 Dangers of Credit Cards Test Your Credit Card IQ 1) Credit cards won t hurt my credit report if I don t carry a balance. 2) I don t have to pay any interest during my grace period. 3) A credit card company charges the same interest rate for every type of transaction. 4) I don t need to worry about my credit report and credit score until I buy a house or car. 5) Credit and debit cards are the same. 6) Good credit can help me get a better interest rate on loans, car insurance, and even a job.

8 The Good and the Bad Rewards Risks Convenience Protection Emergencies Opportunity to Build Credit Quicker Gratification Special Offers Bonuses Interest Overspending Debt Identity Theft

9 6 Questions to Ask When You Compare Credit 1. What s the interest rate for purchases? 2. How long is the loan for? 3. What s my minimum monthly payment? 4. What s the grace period? 5. What extra fees and penalties may be charged? 6. Which is the best deal for me?

10 The 4 C s of Credit Collateral Capital Capacity Character

11 Keeping Score With Your Credit A credit report tracks your success in managing money responsibly. is a record of your personal financial transactions (credit history). is your credit report card for the past 7 10 years. A credit score is a number that reflects your creditworthiness, based on the 4C s, at a moment in time.

12 What makes up your credit score? 15% 10% 10% 35% Payment History Amount Owed Length of Credit History New Credit Types of Credit Used 30%

13 Understand Your Credit Report Effects of Your Credit Score: Eligibility for future credit Insurance Employment Housing Interest Rates on future loans Below chart is based on a 36-month car loan for $20,000 with no money down and no trade in. Credit Score Interest Rate % % % 9.498% 7.386% 6.674% Monthly Payment $ $ $ $ $ $ Total Expense $26, $25, $23, $23, $22, $22,125.60

14 Understand Your Credit Report Improve Your Credit Score Avoid the following: Make your payments on time. Establish a long-term account with a reputable credit card company. Don t take on more debt than you can handle. Be choosy about your credit cards and loans. Maintain a low balance on one card and pay it off each month Make late payments Bouncing checks Having a lot of credit cards and loans Maintain high balances on your credit card and loans Change credit cards frequently

15 Credit Card Debt Eliminate Credit Card Debt Track your spending Stop using your credit cards Stop new credit card offers by calling optout Consolidate your debt Use automatic bill pay Create a budget Budget a specific amount to pay your credit cards until all are paid in full

16 Credit Card Debt Account Balance: $2,500 Interest Rate: 15% Monthly Payment Term Interest Paid True Cost Minimum payment $ months $3, $6, Budgeted amount $ months $1, $3, What you save by paying the budgeted amount 120 months $2, Account Balance: $5,000 Interest Rate: 15% Monthly Payment Term Interest Paid True Cost Minimum payment $ months $12, $17, Budgeted amount $ months $3, $8, What you save by paying the budgeted amount 176 months $8,844.89

17 Free Credit Report Request Your Free Credit Report Go to Call This is the only authorized source for consumers to access their annual credit report online for free. If you go directly to the credit reporting agencies (Equifax, Experian, and TransUnion), you may be charged.

18 Rule A Good Way to Keep Debt in Check Save or Invest 20% Pay Off Debt 10% Living Expenses 70%