This document discusses credit and managing personal finances responsibly. It covers key topics like the advantages and disadvantages of using credit, applying for and establishing credit, maintaining a good credit history and credit report, and the consequences of excessive debt. Specific areas covered include different types of credit (credit cards, loans, mortgages), understanding interest rates and fees, building creditworthiness, checking your credit report and score, and the risks of poor credit management.

1. Unit 4: Credit (Good/Bad Debt)
□ Credit
□ Advantages and Disadvantages of Credit
□ Applying for Credit
□ Credit History and it’s Importance
□ Manage Credit
□ Consequences of Excess Debt
□ Inaccurate Credit Report

2. “What Do You Think?”
Fill in the Blank
 33
Nearly _____% of teens owe money to either a person or company, with
230
an average debt of $_____.
 26
About _____% of teen ages 16-18 already have more than $1,000 in debt.
 30
_____% of teens say they understand how credit card interest and fees
work.
 36
_____% of teens say they know how to establish good credit.

3. Credit
 What is credit and why use it?
 Say you dream of buying a $15,000 car. Even if you saved $200 a
month and put it in a savings account where it earned 3%
interest, it would still take you 7 years to save what you needed
to buy the car. Seven years is a long time to wait for a car!
 But there’s a way you can get that car sooner – by taking out a
loan. Taking out a loan allows you to buy what you want or need
now, and pay for it later.
 You’ll still have to save some money for a down payment on the
car, but you’ll end up getting the keys much faster than having to
save the whole amount.
 Your credit score is how well you “use” your credit…

4. Credit
 Credit means someone is willing to loan
you money, called principal, in exchange for
your promise to repay it, usually with
interest.
 Interest is the amount you pay to use someone
else’s money.
 The higher the interest rate, the higher the total
amount you pay to buy something on credit.

5. Common Types of Credit
 Credit Card - banks, credit unions, stores, and gas stations
 Some types of cards can be used anywhere, some only at a
specific place.
 No payoff deadline.
 Monthly minimum payments vary, based on the balance.
 Usually has the highest rate of these four types of credit.
 Installment Loan - banks, credit unions, auto dealers, and
other financial institutes
 Typically used for large purchases (car/appliance).
 Loan term can vary from a few months to many years.
 Monthly payment amounts are often set for the life of the
loan.
 Usually has a lower interest rate than a credit card.

6. Common Types of Credit
 Student Loan - banks, credit unions, and the federal government
 Used for tuition and other college expenses.
 Depending on income level, some loans let you delay making payments
until you graduate.
 Loan term is usually up to 10 years, depending on the amount borrowed.
 Usually lower interest rate than an installment loan.
 May provide an income tax break on interest paid to the lender.
 Mortgage - banks and credit unions
 Used specifically for a loan to purchase a home.
 Usually repaid over 15-30 years
 Monthly payments may be set for the life of the loan depending, or
changed more frequently, on the type of interest rate.
 Usually lower interest rate than an installment loan.
 May provide an income tax break on interest paid to the lender.

7. Borrowing Money
 Borrowing money comes with a
price – interest.
 Shop around for the best interest rate.
 Read the fine print of a credit card or
loan application.
 “Buy it now for only $19 a month!”
 What’s the interest rate? – Doesn’t say. Ask!

8. Cost of Using Credit
 Annual Percentage Rate (APR)
 Tells you the cost of the loan per year as
a percentage of the amount borrowed.
 The law requires lenders to calculate the
APR exactly the same way, so use this to
compare credit offers.
 “Teaser” rates are low introductory rates
that will expire in a few months and
then increase a lot.

9. Cost of Using Credit
 Advertisers like to focus on the size of the
monthly payment, “Buy it now for only $19 a
month!” But that doesn’t tell you what you really
pay for the item.
 First, read the fine print of a credit card or loan
application.
 Second, compare several options before making a
final choice.

10. Cost of Using Credit
 Other factors include:
 Annual Fee – yearly charge you pay for the privilege of using
credit (credit card companies)
 Credit Limit – maximum amount of credit a lender will extend
to a customer
 Over-the-limit fee – spending more than your credit limit
 Finance Charge – actual dollar cost of using credit to maintain a
balance (credit card statement)
 Origination Fee – charge for setting up the loan (home loans)
 Loan Term – length of time you have to pay off the loan, the
longer the term, the lower the monthly payments (installment,
student, and mortgage loans)
 Late fee – penalty for making a payment after the due date
 universal default – clause in their agreement stating they can hike up your interest
rate if you make just one late payment
 Grace Period – length of time you have before you start
accumulating interest

11. FAQ About Credit
 Brainstorm general questions you or someone
your age would have about credit. Write these
questions and their respective answers as a 5
Frequently Asked Questions (FAQs) list that
might appear on a creditor’s Website.

12. Risks and Rewards of Credit
 What are your perceptions about credit?
 What are the risks?
 What do you think are the rewards of using it?
 What else is interesting about credit?
 Perceptions:
 Risks:
 Rewards:
 Just Interesting:

13. Risks and Rewards of Credit
 Rewards of Credit  Potential Risks of Credit
 Convenience  Interest
 Protection  Overspending
 Emergencies  Debt
 Opportunity to Build  Identity Theft
Credit
 Quicker Gratification
 Special Offers
 Bonuses

14. Are You Creditworthy?
 The 4 C’s of Credit
 Collateral (for home mortgage or car loan)
 Asset (something you own) of value that lenders can take from you if
you don’t repay the loan as promised
 Capital
 Personal items of value (investment account or home) that lenders
can sell to repay the loan if you don’t pay your bills
 Capacity
 Ability to repay your loan (income and employment history), pattern
of rising income and steady employment gives lenders more
confidence
 Character
 Trustworthy (credit record), history of paying bills on time shows you
are responsible with your finances

15. The 4 C’s of Credit
 Think about your own creditworthiness.
 Identify specific evidence to show how
you meet any or all of the 4 C’s of
Credit.

16. Loans
 What information do you think you need for a
loan?
 Social Security number
 Driver’s license number
 Date of birth
 Address and phone number
 Name of employer
 Monthly income amount
 Total monthly payments on other debts
 Amount of monthly rent or mortgage payment

17. Credit
 Just as your report card tracks your success in
school, a credit report tracks your success in
managing money responsibly.
 Your credit history will follow you for the rest of your life.
A. Lenders look to see how well you’ve managed credit in the
past before issuing credit.
B. Credit report tells lenders any credit you have, loan
amounts you’ve received, credit card balances and limits,
whether you paid your bills on time for the past 7 to 19
years – Credit Score tells lenders all this information with
one number.

18. Good/Bad Credit
C. Credit reporting agencies sell credit report
information to businesses that are interested in
finding out your creditworthiness.
 Good Credit History score, you won’t get approved to borrow
If you have a bad credit
theAlways pay your bills nottime able to rent an apartment, or not
money you need, on being

getting aa job. You can get approved, but you pay a lot more for the
Have savings account and make regular deposits
privilege formakecredit cards and loans you reallypay higher interest for a
Apply
– only higher down payments or need and keep them

long time
rates. better to maintain a low balance on one card and pay it off each
It’s
month than to have no balance at all
 Hurt your Credit History
 Make late payments
 Bounced checks (writing checks when you don’t have enough money in
your account to cover them)
 Having a lot of credit cards and loans
 Maintaining high balances on your credit cards and loans
 Changing credit cards frequently

19. Credit Score
 Wrong Credit Score
 The law requires that credit bureaus provide
information about your credit history correctly,
completely, and confidentially.
 You have the right to see everything in your report and
who reported the information.
 You are entitled to a free credit report every year, so
monitor your score for fraudulent use of your identity
 Contact a credit reporting agency, ask a representative to
investigate the information. You can also attach a short
statement.
 By law, the agency must research the questionable item and correct or
delete anything that’s incorrect
 They must delete any unfavorable information that is 7 years old
 They must remove any bankruptcy information that more than 10 years old

20. Credit Score
 How do you get credit with no credit history?
 Asking a trusted adult to co-sign a credit card or car loan
for you
 They are equally responsible for paying the debt and if you
don’t pay the bill, they are held legally and financially
responsible
 Ask the place where you have your savings or checking
account for a credit card application (you already have a
track record there)
 Apply for a credit card from a store (easier to get)
 Apply for a secured credit card (you deposit money in an
account and can make charges against that amount)
 If you’re renting a place with some friends, make sure to get
at least one of the utility bills in your name and pay it on
time

21. Debt
 A good way to keep debt in check is to
follow the 70-20-10 Rule.
 Spend 70% of your income on
living expenses such as rent, food,
utilities, and gasoline.
 Save or invest 20% of your
income for your financial goals
and emergency expenses.
 Spend 10% on debt payments for
items such as credit cards and car
and school loans.

22. Taking Care of Debt
 Keep financial files
 Terms and agreements for your loan applications
 Receipts of items you charged to your credit card
 Monthly statements for at least 1 year
 Tax returns for 7 years
 A list of credit card numbers and telephone numbers for each card
issuer
 Put the plastic away, stop adding to your debt, and start
living entirely on cash.
 Commit to repay all your debts
 Figure out how much you really owe (calculate interest)
 Create a repayment plan

23. Taking Care of Debt
 If debt occurs because of an illness, divorce,
business loss, or other event beyond your control,
contact your creditors immediately, they will work
with you because they want to be repaid. It also
costs them money to send your debt to a
collection agency, so they’d rather avoid that if
you seem committed to repaying the debt in full.
If they don’t work with you, contact AICCCA
(Association of Independent Consumer Credit
Counseling Agencies) at www.aiccca.org

24. Taking Care of Debt
 Last resort is bankruptcy
 Chapter 7 (much harder to declare) – effectively
allows you to erase most of your debt. You must
typically be unemployed or have a very low income
and undergo financial counseling to apply.
 Chapter 13 – allows you to repay many of your
debts over a period of time, usually no more than 5
years. A court typically oversees the repayment plan
to make sure that you do.
 Not all debt can be erased by bankruptcy
 Student loans
 Child support
 Alimony
 Penalties and fines for crimes committed

25. Vocabulary
 Annual Fee (usually charged by credit card companies)
 A yearly charge you pay for the privilege of using credit.
 Credit Limit
 The maximum amount of credit a lender will extend to a
customer.
 Finance Charge (usually seen on credit card statements)
 The actual dollar cost of using credit to maintain a balance.
 Origination Fee (usually associated with home loans)
 A charge for setting up the loan.
 Loan Term (usually applied to installment, student, and mortgage
loans)
 The length of time you have to pay off the loan. The longer the
loan term, the lower your monthly payments.

26. Vocabulary
 Grace Period
 The length of time you have before you start accumulating
interest.
 Over-the-Limit Fee
 Spending more than your credit limit.
 Late Fee
 A penalty for making a payment after the due date.
 Universal Default (clause in credit card company
agreements)
 They can hike up your interest rate if you make just one late
payment.