Understanding Credit Personal Management Merit Badge Kelsey Balcaitis Youth Financial Education Coordinator
Class Rules Leave No Trace Wear your uniform to class A Scout is Trustworthy, Loyal, Helpful, Friendly, Courteous, Kind, Obedient, Cheerful, Thrifty, Brave, Clean, Reverent.
Recap Questions Tracking Spending Budget Requirements
CREDIT CHECK
What s the Buzz? Credit Cards Bankruptcy Credit Report Credit Score Student Loans Interest Rate
GOOD DEBT, BAD DEBT
Credit Someone is willing to loan you money (principal), in exchange for your promise to repay it, usually with interest.
Loans Money borrowed from a financial institution or corporation.
Ways to Borrow Credit Unions Banks Federal Government Stores Auto dealers Family Friends Peers
Types of Credit Installment vs. Revolving Secured vs. Unsecured
Installment vs. Revolving Installment Credit Fixed payments Set period of time to repay Set or varying interest rates Car loans and home loans are typical examples Revolving Credit No stated payoff time Limit to credit Minimum monthly payments Interest rates vary or not Finance charges Credit cards most typical example
Secured vs. Unsecured Secured Asset provides collateral Typically have lower interest rates Examples Auto loans Mortgage Unsecured No asset to provide collateral Typically have higher interest rates Examples Credit cards Student loans
DIS INTEREST ED
Interest Payment you make for borrowing money from a financial institution or corporation.
Interest Borrower Interest Funds Financial Institution Funds Interest Depositor
Inverse Relationship Payment Amount Time to pay off loan Interest paid
APR: Annual Percentage Rate Tells you the cost of the loan per year as a percentage of the amount borrowed Incorporates some of the costs of obtaining that loan Gives you a truer estimate of the total cost to borrow than by the interest rate alone One of the best ways to compare loan offers
BARE MINIMUM
Minimum Payments Calculated on credit card balances What you must pay that month Can pay more than the minimum, recommended to do so Best idea: pay off your credit card balance each month
Minimum Danger Example: You buy something for $1,000 and put it on your credit card. Your interest rate is 18% and minimum payment is calculated at 4%.
Minimum Danger 1000 Costs of Paying the Minimum 900 800 700 600 500 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 Minimum $45/month $60/month $100/month
Cost of the Minimum Minimum Payment $45/month Time to Pay Off 71 months/ 5 years, 11 months 28 months 2 years, 4 months $60/month 20 months/1 year, 8 months Interest Paid $473.50 $225.56 $159.43 $100/month 11 months $91.62 Pay in full 0 months $0.00
THE PLASTICS
Credit Card Draws on a line of credit Use it anywhere it is accepted Cannot spend more than the credit limit If you carry a balance, you will pay interest Can be a convenient way to make purchases Can earn rewards
Debit Card Linked to your checking account Purchase costs are deducted from your checking account balance Cannot spend more than you have in your checking account
Charge Card Works exactly like a credit card Issued by a particular company department store, gas company, etc. Can only use at that store Typically have a higher interest rate May offer store specific rewards
USING CREDIT WISELY
4 C s of Credit Collateral Asset of value that lenders can take if you don t pay back as promised Capital Personal items of value Capacity Ability to repay the loan Character Use credit report to determine if you are trustworthy
Credit Report Credit Report = Financial Report Card Record of your personal financial transactions, or credit history.
Credit Report Used by lenders to: Determine your ability to get credit The interest rate Terms of the loan Credit reports can also be used for: Housing Employment Insurance
Get Your Credit Report The Fair Credit Reporting Act requires each of the nationwide credit reporting agencies to provide you with a free credit report every 12 months (you must request it). www.annualcreditreport.com
Components of a Credit Report Recent Inquiries 25% Applicant's Information 25% Account History 25% Credit Summary 25%
Credit Scores Credit Score = Financial GPA Score is a prediction of risk based on your credit history.
Credit Score Factors N Types of Credit Used New Credit 10% 10% 35% Payment History Length of Credit History 1 15% 30% Amount Owed
Managing Credit DON T Pay only the minimum due Charge more than you pay monthly Charge what you used to buy with cash Approach your credit limits and apply for more credit Make payments late Use cash advances Transfer balances frequently DO Pay more than the minimum Pay off balance in full each month Charge only what you can afford to pay off next month Limit number of credit applications made Pay consistently on time Limit number of open accounts to 2-4 Keep balance significantly lower than limit
DEBT
Debt The entire amount of money you owe to lenders.
REDUCE OR ELIMINATE DEBT
Methods to Reduce or Eliminate Debt Refinance Consolidate Roll-Up Snowball
Refinance Debt New loan replaces old loan, usually with better rate/terms May extend payment period
Consolidate Debt Combine all balances into one larger balance Usually has a lower payment May extend payment period
The Roll-Up Method Arrange by interest rate (greatest to least) Debts Balance Interest Rate Credit Card A $1,000 17.9% $15 Credit Card B $500 12.25% $30 Auto Loan $17,500 6.0% $350 Student Loan $23,000 5.2% $250 Monthly Min Payment
The Roll-Up Method Once Credit Card A is completely repaid, roll the $15 payment to Credit Card B to increase that payment to $45. When it is paid off, roll the $45 to the Auto Loan, and so on. Remember, it s not extra money until all debts are repaid.
The Snowball Method Arrange by balance (least to greatest) Debts Balance Interest Rate Credit Card B $500 12.25% $30 Credit Card A $1,000 17.9% $15 Auto Loan $17,500 6.0% $350 Student Loan $23,000 5.2% $250 Mthly Min Payment
The Snowball Method Once Credit Card B is completely repaid, roll the $30 payment to Credit Card A to increase that payment to $45. This creates a snowball effect in reducing and eliminating your debt.
Next Class Next class: Wednesday July 9, 6:30 8:00 p.m. Before July 9 Complete weeks 7 and 8 of the Budget and Spending Tracker Complete the Understanding Credit requirements online