Credit
It may seem like a dream come true – show a card to a clerk at a store, and you can buy whatever you want. The reality, however, is that credit cards just allow you to put off until tomorrow the payments you should probably be making today. And there is a price for that convenience.
Credit cards have become an essential part of everyday life for most people. The important thing is how you manage them, so they don’t control your financial future.
What is credit?Credit is a way to purchase something you want or need without having the money on hand to cover the total purchase price. Banks and other companies issue the credit with the expectation of future payment, often with interest.
Credit usually takes one of two forms:
Convenience aside, you may want to think carefully about whether to use a credit card at all. While credit cards allow you to pay for things later, depending on how long it takes you to pay your debt, you could pay much more than you owe because of the interest companies charge for the privilege of delaying your payments.
Before you get a credit card, be selective about which card you carry, and make sure you’re familiar with these important features:
Read the fine print. Unless you repay the entire balance immediately, fees and finance charges associated with the high interest rates many credit cards charge can continue to pile up and put you into greater debt.
Keep the number of credit cards you have to a minimum. It’s best to only have one or two credit cards. Even unused cards with a zero balance will appear on your credit report. Plus, having large credit lines available can be tempting to use, causing you to spend more than you have budgeted.
Pay as much as you can each month on the credit card balance. Sometimes the minimum payment covers only slightly more than the interest charged each month. If you never lower the principle, you’re really throwing away money every month you could be using to help achieve other financial goals.
Keep credit card balances low. This will help you minimize the impact of high interest rates. Keep responsible credit limits, and close accounts you’re no longer using.
Credit history, credit report and credit score … what do they all mean? In addition to the expenses associated with using credit cards, using them creates a trail of information known as a credit history. In other words, your credit history basically tracks your history of borrowing money and repaying debt.
Companies called credit bureaus take all the information that goes into your credit history to create a credit report and use it to assign each person a credit score. Your credit score is a measure of how reliable you are in paying off your debts. Things that factor into your credit score include:
In addition to lenders, insurance companies sometimes look at your credit history to get an overall picture of how risky you may be to insure. And some employers even take your credit history into account when deciding if they want to hire you, because they may interpret your credit score as one measure of how trustworthy you are.
Because your credit report can impact so many things, it’s a good idea to obtain a copy of your credit report annually or whenever you close a credit card account or pay off a loan. Report items that don’t belong on your credit history or accounts that should be closed to the credit bureau to make sure they no longer appear on your record or adversely affect your credit score.
Ask yourself:You’ve just graduated high school. You’ve never had a credit card, but you don’t owe anyone money. Your credit score should be perfect, right? Not necessarily. Having no credit can sometimes be worse than having questionable credit. Because your credit history is a blank slate, you’ve yet to prove you can be trusted to repay a debt.
Should I worry about identity theft?People love the convenience of credit cards, but they also make it easier for thieves to steal your identity and use your credit to make unauthorized purchases.
Be careful giving your credit card number to anyone, especially over the phone and online. Make sure you get the person’s name you talked with on the phone in case there’s a problem. Only use websites that have security measures to protect your privacy when making purchases online. And never give your personal identification number (PIN) to anyone.
Ask yourself:You’ve just lost your wallet or purse. What might you have been carrying in it that could be used by thieves to impersonate you? What steps would you need to take to protect your identity?
The following table helps demonstrate the true cost of obtaining credit. Let’s assume you make purchases totaling $1,000 on a credit card with a 16% annual interest rate:
Purchases Monthly payment Annual interest rate (16%) Months to pay off Total cost
$1,000 $1,000 $0 1 $1,000
$1,000 $100 $81 11 $1,081
$1,000 $50 $171 24 $1,171
$1,000 $20 $659 83 $1,659
• If you pay off the total balance on time, you pay no interest.
• If you make monthly payments of $100, your account will be paid off in 11 months.
• But if you pay only $50 a month, it will take two years to pay off the balance.
• And if you pay only the minimum monthly payment of $20, it will take 83 months – nearly seven years – to pay off the balance, resulting in a total payment of $1,659.
This example also presumes you never use the card again after the initial $1,000 purchase.
As you can see, every dollar you pay in interest on a credit card bill costs you the opportunity to use that dollar for something else. Avoid making hasty decisions that make cash management more difficult for you.
Click on the link below and watch the powerpoint on how to calculate credit card interest charges. Do the worksheet and share the finished form with Mrs. P through the google drive.
Credit cards have become an essential part of everyday life for most people. The important thing is how you manage them, so they don’t control your financial future.
What is credit?Credit is a way to purchase something you want or need without having the money on hand to cover the total purchase price. Banks and other companies issue the credit with the expectation of future payment, often with interest.
Credit usually takes one of two forms:
- Deferring payments in order to purchase a particularly expensive item or service, such as a house, car, education costs or home repairs; or
- Deferring payments for convenience, typically by using a credit card.
Convenience aside, you may want to think carefully about whether to use a credit card at all. While credit cards allow you to pay for things later, depending on how long it takes you to pay your debt, you could pay much more than you owe because of the interest companies charge for the privilege of delaying your payments.
Before you get a credit card, be selective about which card you carry, and make sure you’re familiar with these important features:
- Annual fee – a fee charged by the lending institution each year just for the privilege of having the card. Try to choose a card with no annual fee.
- Balance – the amount of money owed on a credit card. Think of this as being similar to the “principle” owed on a loan.
- Cash advance or check writing fee – extra charges you pay for using your card to get cash or to write a convenience check on the account.
- Credit limit – a preset limit for the balance the lender will allow you to incur.
- Finance charges – a blanket term covering any costs associated with the credit card. This includes the interest rate charged, as well as fees for having a balance over the preset limit or for using the credit card to get cash.
- Grace period – the period of time you can be late on a payment without being charged an extra fee.
- Interest rate – the percentage paid on unpaid balances. Beware of cards that offer a low initial interest rate or no initial interest rate, as the rate may rise significantly after a few months.
- Late payment fee – extra charges you pay making a payment after its due date. Avoid late payments, as the interest rate on your credit card may increase significantly if you are late paying your bill.
- Over limit fee – charges you pay for going over your credit card’s preset limit.
Read the fine print. Unless you repay the entire balance immediately, fees and finance charges associated with the high interest rates many credit cards charge can continue to pile up and put you into greater debt.
Keep the number of credit cards you have to a minimum. It’s best to only have one or two credit cards. Even unused cards with a zero balance will appear on your credit report. Plus, having large credit lines available can be tempting to use, causing you to spend more than you have budgeted.
Pay as much as you can each month on the credit card balance. Sometimes the minimum payment covers only slightly more than the interest charged each month. If you never lower the principle, you’re really throwing away money every month you could be using to help achieve other financial goals.
Keep credit card balances low. This will help you minimize the impact of high interest rates. Keep responsible credit limits, and close accounts you’re no longer using.
Credit history, credit report and credit score … what do they all mean? In addition to the expenses associated with using credit cards, using them creates a trail of information known as a credit history. In other words, your credit history basically tracks your history of borrowing money and repaying debt.
Companies called credit bureaus take all the information that goes into your credit history to create a credit report and use it to assign each person a credit score. Your credit score is a measure of how reliable you are in paying off your debts. Things that factor into your credit score include:
- how much money you owe now and how much you’ve owed in the past;
- how many different institutions you owe money to;
- how regularly you make payments; and
- how much your payments are.
In addition to lenders, insurance companies sometimes look at your credit history to get an overall picture of how risky you may be to insure. And some employers even take your credit history into account when deciding if they want to hire you, because they may interpret your credit score as one measure of how trustworthy you are.
Because your credit report can impact so many things, it’s a good idea to obtain a copy of your credit report annually or whenever you close a credit card account or pay off a loan. Report items that don’t belong on your credit history or accounts that should be closed to the credit bureau to make sure they no longer appear on your record or adversely affect your credit score.
Ask yourself:You’ve just graduated high school. You’ve never had a credit card, but you don’t owe anyone money. Your credit score should be perfect, right? Not necessarily. Having no credit can sometimes be worse than having questionable credit. Because your credit history is a blank slate, you’ve yet to prove you can be trusted to repay a debt.
Should I worry about identity theft?People love the convenience of credit cards, but they also make it easier for thieves to steal your identity and use your credit to make unauthorized purchases.
Be careful giving your credit card number to anyone, especially over the phone and online. Make sure you get the person’s name you talked with on the phone in case there’s a problem. Only use websites that have security measures to protect your privacy when making purchases online. And never give your personal identification number (PIN) to anyone.
Ask yourself:You’ve just lost your wallet or purse. What might you have been carrying in it that could be used by thieves to impersonate you? What steps would you need to take to protect your identity?
The following table helps demonstrate the true cost of obtaining credit. Let’s assume you make purchases totaling $1,000 on a credit card with a 16% annual interest rate:
Purchases Monthly payment Annual interest rate (16%) Months to pay off Total cost
$1,000 $1,000 $0 1 $1,000
$1,000 $100 $81 11 $1,081
$1,000 $50 $171 24 $1,171
$1,000 $20 $659 83 $1,659
• If you pay off the total balance on time, you pay no interest.
• If you make monthly payments of $100, your account will be paid off in 11 months.
• But if you pay only $50 a month, it will take two years to pay off the balance.
• And if you pay only the minimum monthly payment of $20, it will take 83 months – nearly seven years – to pay off the balance, resulting in a total payment of $1,659.
This example also presumes you never use the card again after the initial $1,000 purchase.
As you can see, every dollar you pay in interest on a credit card bill costs you the opportunity to use that dollar for something else. Avoid making hasty decisions that make cash management more difficult for you.
Click on the link below and watch the powerpoint on how to calculate credit card interest charges. Do the worksheet and share the finished form with Mrs. P through the google drive.
Bankruptcy
Under the U.S. Constitution, you have the ability to relieve all or part of your debts when you can no longer meet your obligations to creditors and lenders. Two major types of personal bankruptcy apply to consumers. Chapter 7 bankruptcy allows debtors to discharge all or part of their debt. In Chapter 13 bankruptcy, debtors repay all or part of their debt based on a payment plan.
Under Chapter 7 bankruptcy, you can have all or part of your debts discharged, after your liquid assets are used to repay some of the debt.
What are liquid assets?
In your possession, you might have liquid assets. These are assets that can quickly be converted into cash, e.g. checking and savings accounts. Some of your liquid assets must be turned over to the courts to be distributed among your creditors as partial repayment of the debt you owe. These are non-exempt assets. Assets that cannot be used to repay creditors are called exempt assets. Your state has laws that dictate which liquid assets are non-exempt and which are exempt.
After any non-exempt liquid assets have been distributed to your creditors, any remaining debt is discharged. You are no longer liable for any debt discharged. Furthermore, neither creditors nor third-party collectors can attempt to collect these debts from you.
How do I qualify?
To qualify for Chapter 7, you must pass a means test proving that your income is less than the median income for your family size in your state. If you fail the means test, you will not be allowed to file Chapter 7. Instead, you can file Chapter 13.
Chapter 13 Bankruptcy
Under Chapter 13, you repay all or part of your debt through a three- to five-year repayment plan. When you make the personal bankruptcy filing, you will also submit a repayment plan to the court. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn’t been approved.
After a few weeks, there will be a hearing to approve your payment plan. While creditors can object to the payment amounts, the judge has the final say. After your plan has been approved, you’ll continue making payments to the court. Once you’ve completed your Chapter 13 payment plan, any remaining debt is discharged. You are no longer liable for discharged debts.
Why would I file Chapter 13?
You might choose to file Chapter 13 instead of Chapter 7 if you have secured debt, like a car loan, that you want to continue paying. Since Chapter 7 bankruptcy requires you to give up certain liquid assets, Chapter 13 might be a better option if you want to keep these assets. Furthermore, if your income above the median for your family size in your state, you will not be able to file Chapter 7 bankruptcy.
According to the U.S. Bankruptcy Code, to file Chapter 13, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt.
Like Chapter 7, you must receive credit counseling from an approved credit counseling agency.
Filing Personal Bankruptcy
Since personal bankruptcy laws are so complex, it’s a good idea to seek advice from an attorney before filing for bankruptcy. This is the best way to ensure your paperwork is filed completely and accurately.
Chapter 13 Bankruptcy
Under Chapter 13, you repay all or part of your debt through a three- to five-year repayment plan. When you make the personal bankruptcy filing, you will also submit a repayment plan to the court. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn’t been approved.
After a few weeks, there will be a hearing to approve your payment plan. While creditors can object to the payment amounts, the judge has the final say. After your plan has been approved, you’ll continue making payments to the court. Once you’ve completed your Chapter 13 payment plan, any remaining debt is discharged. You are no longer liable for discharged debts.
Why would I file Chapter 13?
You might choose to file Chapter 13 instead of Chapter 7 if you have secured debt, like a car loan, that you want to continue paying. Since Chapter 7 bankruptcy requires you to give up certain liquid assets, Chapter 13 might be a better option if you want to keep these assets. Furthermore, if your income above the median for your family size in your state, you will not be able to file Chapter 7 bankruptcy.
According to the U.S. Bankruptcy Code, to file Chapter 13, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt.
Like Chapter 7, you must receive credit counseling from an approved credit counseling agency.
Filing Personal Bankruptcy
Since personal bankruptcy laws are so complex, it’s a good idea to seek advice from an attorney before filing for bankruptcy. This is the best way to ensure your paperwork is filed completely and accurately.
Societal Costs of Personal Bankruptcy
Under the U.S. Constitution, you have the ability to relieve all or part of your debts when you can no longer meet your obligations to creditors and lenders. Two major types of personal bankruptcy apply to consumers. Chapter 7 bankruptcy allows debtors to discharge all or part of their debt. In Chapter 13 bankruptcy, debtors repay all or part of their debt based on a payment plan.
Under Chapter 7 bankruptcy, you can have all or part of your debts discharged, after your liquid assets are used to repay some of the debt.
What are liquid assets?
In your possession, you might have liquid assets. These are assets that can quickly be converted into cash, e.g. checking and savings accounts. Some of your liquid assets must be turned over to the courts to be distributed among your creditors as partial repayment of the debt you owe. These are non-exempt assets. Assets that cannot be used to repay creditors are called exempt assets. Your state has laws that dictate which liquid assets are non-exempt and which are exempt.
After any non-exempt liquid assets have been distributed to your creditors, any remaining debt is discharged. You are no longer liable for any debt discharged. Furthermore, neither creditors nor third-party collectors can attempt to collect these debts from you.
How do I qualify?
To qualify for Chapter 7, you must pass a means test proving that your income is less than the median income for your family size in your state. If you fail the means test, you will not be allowed to file Chapter 7. Instead, you can file Chapter 13.
Chapter 13 Bankruptcy
Under Chapter 13, you repay all or part of your debt through a three- to five-year repayment plan. When you make the personal bankruptcy filing, you will also submit a repayment plan to the court. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn’t been approved.
After a few weeks, there will be a hearing to approve your payment plan. While creditors can object to the payment amounts, the judge has the final say. After your plan has been approved, you’ll continue making payments to the court. Once you’ve completed your Chapter 13 payment plan, any remaining debt is discharged. You are no longer liable for discharged debts.
Why would I file Chapter 13?
You might choose to file Chapter 13 instead of Chapter 7 if you have secured debt, like a car loan, that you want to continue paying. Since Chapter 7 bankruptcy requires you to give up certain liquid assets, Chapter 13 might be a better option if you want to keep these assets. Furthermore, if your income above the median for your family size in your state, you will not be able to file Chapter 7 bankruptcy.
According to the U.S. Bankruptcy Code, to file Chapter 13, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt.
Like Chapter 7, you must receive credit counseling from an approved credit counseling agency.
Filing Personal Bankruptcy
Since personal bankruptcy laws are so complex, it’s a good idea to seek advice from an attorney before filing for bankruptcy. This is the best way to ensure your paperwork is filed completely and accurately.
Chapter 13 Bankruptcy
Under Chapter 13, you repay all or part of your debt through a three- to five-year repayment plan. When you make the personal bankruptcy filing, you will also submit a repayment plan to the court. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn’t been approved.
After a few weeks, there will be a hearing to approve your payment plan. While creditors can object to the payment amounts, the judge has the final say. After your plan has been approved, you’ll continue making payments to the court. Once you’ve completed your Chapter 13 payment plan, any remaining debt is discharged. You are no longer liable for discharged debts.
Why would I file Chapter 13?
You might choose to file Chapter 13 instead of Chapter 7 if you have secured debt, like a car loan, that you want to continue paying. Since Chapter 7 bankruptcy requires you to give up certain liquid assets, Chapter 13 might be a better option if you want to keep these assets. Furthermore, if your income above the median for your family size in your state, you will not be able to file Chapter 7 bankruptcy.
According to the U.S. Bankruptcy Code, to file Chapter 13, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt.
Like Chapter 7, you must receive credit counseling from an approved credit counseling agency.
Filing Personal Bankruptcy
Since personal bankruptcy laws are so complex, it’s a good idea to seek advice from an attorney before filing for bankruptcy. This is the best way to ensure your paperwork is filed completely and accurately.
Societal Costs of Personal Bankruptcy
- Who really pays for personal bankruptcy filings in the long run? Personal bankruptcy itself pays back creditors usually pennies on the dollar: when the bankruptcy is over, the debt is entirely discharged even though the company has only received a small percentage of the actual amount owed. The company has to absorb those losses, which usually raises operating costs short term and overall costs to consumers in the long term.
- Corporate bankruptcy reorganization often results in a loss of jobs in the company to make the company more effective. If the company has long been cutting prices in order to bring in more sales for the company, the bankruptcy can have further effects on other companies in the same market but forcing them to slash their prices just to remain competitive. Often after this price gouging war is over, consumers are reluctant to purchase goods at regular prices again, further hurting the other companies' profit margins. The societal costs of corporate bankruptcy last much longer than personal bankruptcy and consumers usually end up paying for corporate bankruptcy in loss of jobs and higher prices of goods.
- What Is Consumer Collections?
Consumer loans consist of auto, boat, credit cards and signature loans. If you have loans of these type, and they fall past due, they could go to the consumer collection department, which is responsible for the collection of overdue consumer loans.
- Function - Consumer collections can consist of a department within the original lender's facility. This would be an in-house collection department, which will send letters and make phone calls when you are behind on your consumer loans
- Significance - When an in-house collection department is unable to collect on your account, it will forward your account to a third-party debt collector, also known as a collection agency, which continues with collection efforts.
- Considerations - Collection agencies will begin legal action if they have tried unsuccessfully to get you to pay your account using the usual methods of letters and phone calls.
- Warning - A third party debt collector could get a judgment against you and garnishee your wages. The money taken out of your paycheck would be applied against your past-due debt.
- Prevention/Solution - Collection agencies must abide by the laws outlined in the Fair Debt Collection Practices Act, (FDCPA). This is a law put into effect by Congress that governs the activities of third-party debt collectors. In-house collection departments are not bound by these laws, but most comply with them.
Essential Learning Targets
B.12.2.2 Describe and calculate interest and fees applied to various forms of spending, debt, and saving.
C.12.7.1 Explain the advantages and disadvantages of debt.
C.12.7.2 Assess and apply leveraged debt.
C.8 Describe the implications of bankruptcy.
C.9 Analyze the pros and cons of high cost alternative financial services.
C.12.9.1 Explain products and practices such as instant tax refunds and payday lending.
C.12.9.2 Identify and discuss examples of predatory lending practices.
B.12.2.2 Describe and calculate interest and fees applied to various forms of spending, debt, and saving.
C.12.7.1 Explain the advantages and disadvantages of debt.
C.12.7.2 Assess and apply leveraged debt.
C.8 Describe the implications of bankruptcy.
C.9 Analyze the pros and cons of high cost alternative financial services.
C.12.9.1 Explain products and practices such as instant tax refunds and payday lending.
C.12.9.2 Identify and discuss examples of predatory lending practices.
