Financial Literacy Credit, Loans, and Debt Management

CREDIT, LOANS, AND DEBT MANAGEMENT ● TYPES OF CARDS ○ Credit card: a line of credit that allows you to borrow money from a bank or credit card company to make purchases, transfer balances, or get cash advances. In exchange, you agree to pay back the money you borrow, plus interest, by a certain date. ■ These typically have a credit limit, which is the most amount you can charge to the card. ■ For example, if your credit limit is $15,000 and you have $12,000 in outstanding charges, you can only charge $3,000 additional. ○ Debit card: A debit card is a bank card that allows you to access money from your checking account to make purchases and withdraw cash. Debit cards are similar in appearance to credit cards, but they work differently. When you use a debit card to make a purchase or withdraw cash, the funds are immediately deducted from your checking account. ○ Prepaid Debit card: A prepaid debit card, also known as a stored-value card or prepaid card, is a reloadable card that allows you to make purchases and withdraw cash as if it were a debit or credit card. You can load money onto the card before you use it, and you can spend up to the amount you load. ● SCHUMER BOX ○ Standardized table that summarizes a credit card’s rates and fees in an easy-to-read format. ● APR ○ Annual percentage rate - the yearly interest rate and fees associated with a credit card if the balance is carried over (not paid in full). APRs can vary between cards and credit card companies consider a person's credit score when setting it. Generally, those with higher credit scores will have lower APRs. ● GRACE PERIOD ○ The period between the end of a billing cycle and the date your payment is due. During this time, you are not charged interest as long as you pay your balance in full by the due date. ● CREDIT SCORES ○ A credit score is a three-digit number that lenders use to evaluate a person's ability to repay borrowed money. It's based on information from a person's credit report, such as payment history, credit history length, and amounts owed. Credit scores typically range from 300 to 850, and a higher score indicates a lower perceived credit risk. ■ Tracked by one of three credit reporting agencies: Equifax, Experian, TransUnion ○ What goes on your credit report? ■ Personal information, accounts, payment history, loan history, inquiries ■ Payment history and total debt (amounts owed) are the two most important factors in calculating your credit score A diagram illustrating what factors into your credit score. ● LOANS & MORTGAGES VOCABULARY ○ Principal: Loan amount ○ Rate: Interest rate on the loan ○ Down Payment: Helps to reduce loan payments ■ Principal = Purchase price - down payment - discounts or cash allowances ● TYPES OF LOANS & MORTGAGES ○ Installment loans - Same, fixed payment amount each month ○ Secured loan - A loan backed by collateral ■ Collateral: An asset owned by the borrower that the lender can repossess if the borrower fails to make payments ○ Payday loans - Have an APR of ~400% - if they are not paid in full within the first two weeks, you renew the loan for a high-penalty fee. An easy way to fall into debt. ○ Fixed-rate mortgage - Interest rates stay the same ○ ARM (Adjustable rate mortgage) - Stays the same fixed rate for a few years (usually lower than fixed-rate) and then changes according to the market (can get very high) ● AMORTIZED LOANS ○ Payment amounts are the same each month with an amortized loan ○ Over time, the amount of the monthly payment applied to the interest decreases and the amount of the monthly payment applied to the principal increases over time. ● DEBT MANAGEMENT & STRATEGIES TO PAY DOWN DEBT ○ Strategies to pay down debt: ■ Reduce spending ■ Take on additional work opportunities ■ Pay more than the minimum required payment each month on credit cards or loans ○ Methods to pay down debt ■ Snowball Method: List out all of your debts. Pay off the smallest debt first as quickly as possible, then roll the money that you were using to pay that debt into paying the next smallest debt. ● Helps to build momentum and you will feel a sense of accomplishment as you pay off each debt ■ High Rate Method: List out all of your debts from highest to lowest interest rate. Pay as much as possible on the debt with the highest interest rate. Continue making minimum payments on all debts. Once the highest-interest debt is paid off, put that money towards the next highest-interest debt. Repeat until all debts are paid off.