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Did You Know… Credit FactsDid You Know… Credit Facts

Nearly Nearly 33%33% of teens owe money to either a of teens owe money to either a person or company, with an average debt of person or company, with an average debt of $230$230..

About About 26%26% of teens ages 16-18 already have of teens ages 16-18 already have more than $1,000 in debt.more than $1,000 in debt.

30%30% of teens say they understand how credit card of teens say they understand how credit card interest and fees work.interest and fees work.

36%36% of teens say they know how to establish of teens say they know how to establish good credit.good credit.

Today you will …Answer these questions:How does credit work in the community?Why do people borrow money?When is it acceptable and unacceptable to use credit?What is the language of credit?How is credit used – what are my options?What are typical costs of credit?How do I calculate the cost of using credit?What is a credit report?

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Terms to know – do you know what these terms mean?AmortizationAnnual Percentage Rate (APR)CapitalCollateralGrace PeriodInstallment CreditInterestPrincipleRevolving Credit

Credit in the Community

(C)2012 National Endowment for Financial Education | Lesson 2-1 Using Credit

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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?

6 Questions to Ask When YouCompare Credit

Stop Drop and Think Before Using Credit

NEFE High School Financial Planning Program® ©2012 | Lesson 2-1 Using Credit 7

CreditCredit means someone is willing to loan you money in exchange for your promise to repay it, usually with interest

The Language of CreditBuying on Credit

Making a purchase now and promising to repay later

Principal $The cost of the item bought on credit or the amount of

money borrowed

Interest %What the lender charges for using credit usually a

percentage of the principal

(C)2012 National Endowment for Financial Education | Lesson 2-2 Credit Costs 9

More Credit LanguageAnnual Percentage Rate (APR) %

Consistent way to report interest;includes interest rate, fees, and loan costs

Maturity DateWhen the final payment is due for a loan

Grace PeriodThe amount of time before interest

starts accumulating on charged purchasesif payment is not received

(C)2012 National Endowment for Financial Education | Lesson 2-2 Credit Costs 10

Credit OptionsRevolving credit (example: credit card)

Borrow for multiple purchases without going over credit limitRepay what is owed each month

Installment credit (example: car loan)Borrow a specific amount of money to buy something nowMake regular payment to repay over time by a set date

Cash loansBorrow a specific amount of cash to repay later by a set date

Service credit (example: cellphone, electricity)Promise to pay for services used each month

(C)2012 National Endowment for Financial Education | Lesson 2-1 Using Credit 11

Simple InterestCalculate a lump sum to be prepaid on a due date.

Interest = Principal x Interest Rate x Time (in dollars) (in dollars) (as decimal) (no. of years)

$1.25 = $150 x .10 x 1/12

(C)2012 National Endowment for Financial Education | Lesson 2-2 Credit Costs 12

Amortization ChartMonthly payments when $100 is borrowed at

40 percent interest to be repaid in six equal payments.

(C)2012 National Endowment for Financial Education | Lesson 2-2 Credit Costs 13

MonthlyPayment

Payment Amount

Principal Repaid

Interest Paid

1 18.66 15.33 3.332 18.66 15.84 2.823 18.66 16.37 2.294 18.66 16.92 1.745 18.66 17.48 1.186 18.66 18.06 .60

Totals 111.96 100.00 11.96

When You Charge“Stuff”You bought “stuff” with your credit card.

In fact, you bought $500 worth of “stuff” with your credit card.

Your APR is 18%.You plan to pay $10 a month to pay it off.

You will pay $431 in interest.Final cost of your purchases = $931.40

It will take seven years and nine months to pay off

balance(C)2012 National Endowment for Financial Education | Lesson 2-2 Credit Costs 14

You Make the Call

Approve or Deny a credit application?

Would you approve or deny Ms. Anderson’s application for credit?

Support your answers.

(C)2012 National Endowment for Financial Education | Lesson 2-3 Credit Rating 15

• Christina L. Anderson• 445 Manor Avenue Downingtown

PA• 610-269-4400• May 29, 1963, (SS # 123-45-

6789)• Mrs. Anderson is a physical

therapist at Sargant Care Clinic, 400 Medical Way, [Downingtown, PA]

• Ms. Anderson started working at Sargant five years ago today and currently earns $5,100 per month.

• The Andersons have a savings account (#123-45-6789) at a bank near you

• Pay $975 per month for mortgage

Applying for CreditFull, legal nameCurrent address and phone numberDate of birth and Social Security numberCurrent employerMonthly incomeBank name and account numberMonthly rent or mortgage payment

(C)2012 National Endowment for Financial Education | Lesson 2-3 Credit Rating 16

Credit ReportingA history of how you have used creditWhere you live and workCredit account amounts (balances and limits)Payment history (on time or late)Recent inquiries from creditorsAny collection or legal action to collect debt

(C)2012 National Endowment for Financial Education | Lesson 2-3 Credit Rating 17

Your Credit ScoreA number that reflects your creditworthiness

FICO: 300 -850

To improve your score:Pay bills on timeMake regular deposits to savings (even small amounts)Apply only for cards and loans you need – keep them for a long

time.Maintain and pay a low balance on one card (better than no

balance at all)

Your credit scoreWays to decrease your credit score

Making late paymentsBouncing checksHaving a lot of credit cards and loans – too much credit

availableMaintaining high balancesChanging credit cards frequently

Who’s Watching?

(C)2012 National Endowment for Financial Education | Lesson 2-3 Credit Rating 20

Starting Out

(C)2012 National Endowment for Financial Education | Lesson 2-3 Credit Rating 21