DebtChapter 4

Key Terms• » Annual fee: A yearly fee that’s charged by the credit card company for the convenience of the credit card• » Annual percentage rate (APR): Cost of borrowing money on an annual basis; takes into account the

interest rate and other related fees on a loan• » Credit card: Type of card issued by a bank that allows users to finance a purchase• » Credit report: A detailed report of an individual’s credit history• » Credit score: A measure of an individual’s credit risk; calculated from a credit report using a standardized

formula• » Debt snowball: Preferred method of debt repayment; includes a list of all debts organized from smallest

to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments

• » Depreciation: A decrease or loss in value• » Introductory rate: An interest rate charged to a customer during the early stages of a loan; the rate often

goes up after a specified period of time• » Loan term: Time frame that a loan agreement is in force, and before or at the end of which the loan

should either be repaid or renegotiated for another term• » Tax deduction: An expense, such as a charitable contribution, that can be deducted from one’s taxable

income

The Second Foundation: Get Out of DebtWE LIVE IN A WORLD where it takes a total national economic meltdown to get most people’s attention about crazy mortgages and stupid credit card debt! If there’s one good thing that’s come from the national economic mess of 2008 and beyond, it’s that some people are finally getting the message: Debt is dumb!

Debt is Everywhere Video 1.1 » Almost _____% of Americans are living paycheck to paycheck. A Reuters survey of 30,600 people found that 68% said it would be somewhat difficult or very difficult if their paychecks were delayed for a week. The problem? Overspending and way too much debt.» When it comes to debt, if you tell a lie or spread a __________long enough, eventually it becomes accepted as the ______________. The truth is, debt is a product—the most successfully marketed product in history.» The world wants us to believe that debt is a ________________ or ______________ that is offered to help consumers. This is simply __________ true!» Debt has been __________________to us with such intensity for so long that to imagine living without it requires a complete ______________shift—a completely new way of looking at things.

70

myth

truth

service

reward

NOT

marketed

paradigm

Financial Myths Young Adults Fall For Video 1.2» The first one is the belief that you have to build ________________. The credit industry wants you to believe this. Credit is NOT necessary to survive. The truth is there is ________good reason to go into debt.» The second myth is that you can spend money on whatever you want while in _________________and pay for it later when you’re making more __________________.* REMEMBER: Taking on a lot of debt when you’re young will limit your options later in life.» The third myth is that you need a ___________car. You should buy the car you can afford—with cash. Don’t fall for these myths. ____________debt, save for emergencies and large purchases, and learn to say no, even when people around you won’t.

credit

no

college

money

new

Avoid

Hidden Cost of Credit Activity

Money Myths Video 2.1MYTH If I __________money to a friend or relative, I will be helping them.TRUTH The relationship will be strained or ____________.MYTH By ________________a loan, I am helping out a friend or relative.TRUTH The bank requires a co-signer because the person isn’t likely to __________. Be ready to pay the loan and have your credit damaged.MYTH _______________________, payday lending, rent-to-own, title pawning, and tote-the-note lots are needed _____________for lower income people to help them get ahead.

loan

destroyed

co-signing

repay

Cash advance

services

Money Myths Video 2.1Eighty percent of ______________________in America are first-generation rich. That means they started with nothing, did smart stuff, and became millionaires. That’s the opposite of what we’re talking about here.

MYTH The __________________and other forms of gambling will make me ____________.TRUTH The lottery is a ________on the poor and on people who can’t do math.

Texas Tech University did a study on the Texas Lottery and found that, of those who play the lottery, people without a high school diploma spent an average of $ ______a month playing the lottery. College graduates spent $ _____a month on average.

millionaires

lottery

rich

tax

17349

The Truth About Car Loans Video 2.2MYTH ______payments are a way of life, and you’ll always have one.TRUTH Staying away from car payments by driving reliable used cars is what the typical _______________does. That is how they became millionaires.

Car

millionaire

Three Huge Ways You Lose When Buying a New Car

1. Payments. Spreading the ______________ of an automobile over four or five years hinders your ability to ____________debt or save money for that time.2. Interest. Included in the payment, of course, are the _____________ charges. That means you pay ________ than the sticker price. It’s like buying a ___________vehicle for _____________.3. Depreciation. This is the biggest one. If you purchase a ________car, it will be worth about _________in four years. That’s in addition to all the gasoline, maintenance and other stuff. You could buy a ________beater and get the same use out of it for those same four years without taking a ________hit.

purchase

pay off

interest

$20,000 $23,000

more

$8,000

$2,000

$20,000

$12,000

The Truth About Leasing a Car 2.3MYTH __________________your car is what sophisticated financial people do. You should always lease things that go down in value. There are tax advantages.TRUTH Consumer Reports, Smart Money magazine and a good calculator will tell you that the car _____________is the most _________________way to finance and operate a vehicle.If you own a business, you can __________________your paid for car on taxes without making payments for the privilege.The way to ____________________the money lost on things that go down in value is to buy slightly _______.MYTH You can get a good deal on a _______car.TRUTH A new car loses _____% of its value in the first four years. This is the largest purchase most consumers make that goes down in value.

Leasing

lease expensive

write off

minimizeused

new

70

Drive Free Activity

Credit Cards Video 2.5MYTH You need a _________________________to rent a car or make a purchase online or by phone.TRUTH A ______________card does all of that. The only thing you can’t do with a debit card that you can do with a credit card is go into debt!MYTH I pay my __________________________off every month with no annual payment or fee. I get brownie points, air miles and a free hat.TRUTH When you use cash instead of plastic, you spend _____________% less because spending cash hurts.MYTH I’ll make sure my ___________________ gets a credit card so he or she can learn to be responsible with money.TRUTH Teens are a huge _____________of credit card companies today. The reason is that the adult market is saturated. Also, researchers have discovered that there is a strong brand loyalty to your first credit card. Therefore, credit card companies are competing to have ________ card be your _________ card.

credit card

debit

12-18

credit card

teenager

target

theirfirst

Making the Minimum Activity

Staying debt free is the key to building wealth.

Steps Out of Debt1. Quit borrowing more money!2. You must save money.3. Sell something.4. Get a part-time job or work overtime (temporarily).5. Use the debt snowball method.

Activity

What Your Credit Score Really Measures Video 3.1• MYTH You need to take out a credit card or car loan to “build up your

________________________.”• TRUTH The __________score is an “I love __________” score and is

not a measure of winning financially. In fact, it can often mean the opposite. If you were to inherit $10 million tomorrow, it would have NO effect on your credit score!

credit score

FICO debt

The Five Components of the FICO Score

Type of Debt10%

Duration of the Debt15%

Debt Level30%

Debt History35%

New Debt10%

The only thing measured here is ________!debt

What Is a Credit Bureau?

» A __________________ is an agency that researches and collects individual credit information and sells it for a fee to creditors so they can make a decision on granting loans. Typical clients include banks, mortgage lenders, credit card companies and other financing companies.» Individual account information is removed from your credit report ___________________ after the last activity on the account, except for ________________, which stays on for ___________________________.» _____________ of credit clean-up scams. The _________information that may be legally removed from a credit report is inaccurate information.» The three main credit bureaus are: __________________, __________________ and ____________.

credit bureau

7 years

Chapter 7 bankruptcy 10 years

Beware only

ExperianTransUnion Equifax

Identity Theft

Identity theft is the fastest growing ________________________crime in North America today.

white-collar

Warning Signs That You May Have Had Your Identity Stolen:

» Checks ____________ from your checkbook.» Your credit report shows accounts you ____________ open.» A collection agency _________ about a debt you didn’t incur.» Bank and billing statements __________arrive on time.» You_______________ a bill from a credit account you didn’t open.» ___________________________ charges appear on your cell phone or bank accounts.» You are __________________________ for a loan, mortgage or other form of credit because of unauthorized debts on your credit report.

disappear

didn’t

calls

don’t

receive

Unauthorized

turned down

What you should do if you think you are a victim:» Obtain a _____________ of your credit report and look for any suspicious activity.» Place a ___________________alert on your credit bureau report (stays on for 90 days without a police report).» If your purse or wallet is stolen, ______________ all cards immediately and get replacements. Also put a “_________________________” on all lost or stolen cards.» File a _________________report and keep a copy of the report for your personal records.» Report any____________________ charges and accounts to the appropriate credit issuers and credit bureaus_________________________ via the phone and in writing. ____________________________________________________________.

copy

fraud-victim

cancelstop payment

police

suspiciousimmediately

Cancel all the accounts!

Tips to Protect Your Identity

» Use a ___________________________ and destroy credit card offers and other documents with your personal information.» Check your credit report _______________. Many people don’t even know that their identity has been stolen. Bottom line, you can’t ____ the problem if you’re not aware of it.» __________________ your Social Security number or driver’s license number on your checks.» Sign the back of your debit card and write “____________________________________.”» Create _______________________________ using a combination of letters, characters and numbers.» Keep passwords and personal information___________________________.» ________________________identity theft protection.

paper shredder

annuallyfix

Never print

PHOTO ID REQUIRED OR SEE IDstrong password

confidential

Purchase

Debt Snowball: How it Works

List your debts in order from smallest to largest. Pay minimum payments on all your debts except for the smallest one, and attack that one with intensity! Every extra dollar you can get your hands on should be thrown at the smallest debt until it is gone.Then you attack the second one. Every time you pay off a debt, you add its old minimum payment to your next debt payment. So as the snowball rolls over, it picks up more snow. * REMEMBER: Even if your other loans have higher interest rates, you should still start with your smallest one first. That way you experience quick wins and build momentum along the way!