WHAT IS FINANCIAL RESPONSIBILITY?

1. WHAT IS FINANCIAL RESPONSIBILITY?

2. Based on theC.A.R.E. Credit Abuse Resistance Education Program

3. Why Do We need this discussion? • $179 billion: amount spent by teens aged 12-17 on goods and services in 2006 • 60% of teens receive money from their parents as their only source of income • 56% of teens have a savings account • 10% of teens have a checking account • 18% of teens wanting to get a credit card in their own name • 200,000: number of bankruptcy cases filed by young adults aged 18-25 in 2006 *Statistics from CARE program

4. Responsible Use of Credit

5. What is Credit? • Means of purchasing without paying the full amount of the item • Spreading the purchase over time

6. TYPES OF CREDIT • Secured Credit • Requires something of value to be promised to the lender as collateral in case the debt is not repaid. • Interest is paid • Unsecured credit • A loan without collateral • The lender depends on the borrower’s promise to repay. • The lender’s risk is greater, so these debts carry a higher interest rate

7. SECURED CREDIT • Car Loans • Duration of the loan should not exceed car’s functionality • FOR EXAMPLE: • A 60 month loan on a 10 year old car is a BAD IDEA • What interest rates mean for payments

8. Comparing VARIABLE rate car loan costs AMOUNT OF LOAN $15,000 INTEREST RATE Variable

9. UNSECURED CREDIT • Examples of unsecured credit • Credit Cards • Department Store credit cards • Pay day Loans • Signature Loans

10. WHY DO PEOPLE CHOOSE UNSECURED CREDIT? • Readily available • Different from Debit Cards because this is NOT your money $$$$$ • Don’t understand the true cost of payday loans and signature loans • Don’t think about the amortization schedule of loan payments • $300 loan can cost you over $1000!!!! • Like throwing away money every month!!

11. How to be responsible • Borrow no more then necessary! • It is OK to wait to buy until you have the $$$$$ • Be sure payment is affordable! • NEVER EVER co-sign a loan for anyone unless you are prepared to make the payments when that person doesn’t pay • Remember: There is a reason they need a co-signer for that loan!!!

12. CREDIT CARDS • Why would people get credit cards? • Convenience of paying at the pump • Not carrying cash • Able to defer payment until you have the $$$$ to pay

13. Why Do We Need This Discussion? • You will soon receive many tempting credit card offers. • 31% teens, 18-19, have a credit card in his/her own name. • Graduating college students average $22,700 of debt -- $3,262 on credit cards.

14. As a young adult, YOU are a TARGET! Those who market credit cards to you – are often other young adults who are nice-looking, successful-looking, fun personalities, look like they have it all, andoffer free gifts with the card!

15. Be Aware! • New credit card law: • Credit card companies are banned from • issuing credit cards to anyone under 21, unless they have adult co-signers on the account or can show proof they have enough income to repay the credit card debt. • Credit card companies must stay at least 1,000 feet from college campuses if they are offering pizza or other gifts to entice students to apply for credit cards.

16. Types of “Magic Plastic” • Debit cards • Store charge cards • Credit cards (Issued by your bank) (Kohl’s, Penney’s, Macy’s, Sears, Target, etc.) (Visa, MasterCard, Discover, American Express)

17. Debit Card: Cost of item(s) you purchase are deducted directly from your bank account. Debit purchases appear on your paper or online bank statement.

18. Store Charge Cards – Facts and Phenomenons: • Shoppers using store credit cards • spend more in the store than those • who use other credit cards or pay cash. • Store tactics -- • Advertising BIG sales, then • 1. Offering deeper discounts IF you use their store charge card • 2. Offering cash coupons to return and buy more - or - cash coupons • if you spend a minimum amount.

19. Examples:

20. Reasons for Having a Credit Card • Emergencies • Establish a credit history • Facilitate other transactions (hotel reservations, car rentals, concert tickets, etc.) • Internet purchases • Safety (less need to carry large amounts of cash) • Large purchases (for necessities; are affordable if paid for in monthly payments)

21. CHOOSING A CREDIT CARDYou have power over the card! The card shouldn’t have power over you! COMPARE: • Annual fee • Interest rate • Grace period / Late fee • How fees are figured • Rewards READ THE FINE PRINT ! (If you don’t get it, ask for help or look up terms online)

22. What Is Interest? It is the money you pay to the bank or lender if you borrow money to the credit card company if you don’t pay in full every month

23. Comparing THE REAL COST OF CREDIT CARDS Example: If Mary charges $2,500.00 on a credit card with a 21% annual percentage rate (APR) and Mary makes ONLY the minimum payment of $20 per month, how long will it take her to pay off the credit card???

24. The highest interest rate a credit card company can charge is 25%. • True • False

25. Answer: FALSE The limit on interest rate is governed by state law. Most credit cards are issued from either South Dakota or Delaware. These two states have very weak or no usury laws (laws that limit interest rates) which means there is little or no cap on the interest rate that can be charged.

26. Hours of Work to Pay Interest on $1,000 Debt Interest Rate

27. What Is the Minimum Payment? • 4% of the balance each month • If you don’t pay at least the minimum payment, you may be charged late fees and higher interest.

28. Making the Minimum Payment Sometimes people think they are handling their debt by making the minimum payment – CHECK THIS OUT…

29. …NOT TRUE!

30. It has been a tough day at school and you decide to splurge on a Big Mac combo meal. You charge it on your credit card which has a $1,000 balance. You make the minimum payment each month. What will the $5.00 meal eventually cost you? • $6.75 • $9.10 • $11.77 • $14.32

31. Answer: $11. 77 Under typical credit card terms, your combo meal will cost you 135% more than if you had paid cash.

32. WHAT HAPPENS IF CHARGE CARD BILLS ARE NOT PAID ON TIME? • Late • charges • Higher • interest • rates

33. The average “late fee” on a credit card is: • $15 • $50 • $34 • $25

34. Answer: $34 This is the average fee charged for not paying the minimum payment on time. Interest rates may actually go up to 30% or more if your payment is late.

35. CREDIT CARD MARKETING • Clever Marketing Schemes • Department Store discounts if you apply for credit • Example: 10% off on ALL store purchases today of you apply for credit • Teaser Rates • Rates that start low (1.9% APR) and go up without warning (23.99% APR) • False Prizes • Promises of cash back, “bonus miles,” and “points” • Often backfire when you are not able to make the minimum payment each month

36. UNDERSTANDING THE TRUE COST OF CREDIT

37. WHAT ARE FICO/CREDIT SCORES? Reprinted from FICO.com

38. FICO SCORE/CREDIT SCORE WHY IT MATTERS? • Lenders pull these scores • Employers often pull these scores • Insurance providers look at these scores

39. HIGH/LOW SCORES • The HIGHER your FICO and credit scores, the LESS interest a lender would require you to pay • The LOWER your FICO and credit scores, the MORE money a lender would require you to pay for any time of loan, car, and house

40. WHAT HAPPENS IF YOU TAKE OUT A LOAN THAT YOU CANNOT PAY? • Repossession or foreclosure of that property • You may still owe the rest of the loan • Can be sued, have your paycheck garnished and possibly jailed if you refuse to show up in court • Unsecured debts (credit cards, payday loans) • Go to collections, get harassed by the creditors • Can be sued, have your paycheck garnished • In Indiana, creditors can garnish 25% of your wages for a civil judgment

41. Consequences of Credit Abuse: • Can make it impossible to complete • your degree • (More students drop out of school due to debt than • poor grades.) • Denial of employment • Denial of credit • Higher interest rates • Higher insurance rates • Denial of a lease • Denial of student loans • Emotional stress – often severe

42. Checking and SAVINGS AS A TOOL TO BUILD WEALTH, AVOID NEED TO USE CREDIT

43. CHECKING ACCOUNT • A checking account is a service provided by financial institutions (banks) which allows individuals to deposit money and withdraw funds from a federally-protected account.  • Usually a initial deposit is required to open an account • What you use to cash and deposit a paycheck from an employer • You are the ONLY person responsible for balancing the account and making sure you do not overdraft your checking account

44. Savings account • Banks pay YOU $$$$ to keep your funds in their bank! • Often it is not much, but it is something • Good idea to have an emergency fund • Avoid needing credit for day to day emergencies • Ex: If your car breaks down and not under warranty, it is much better to have your own $$$ to cover these repairs, then to borrow a lender’s $$$ at a high interest rate! • How do you become a millionaire? • BY SAVING A MILLION DOLLARS!!!

45. pros of saving • Potential to increase future income and wealth • To be better prepared to cover unexpected spending in the future, such as for emergencies, without having to borrow • Ability to give savings to others in the future, allowing them to increase their consumption of goods and services

46. CONS OF NOT BEING RESPONSIBLE • If you do NOT balance your check book or know how much money you have in your bank account, you will NOT have an accurate balance • Your Cell Phone is NOT a reliable method of checking your bank balance • If you write a bad check, you can be charged with a Class A Misdemeanor, Check Deception • A Class A Misdemeanor in the State of Indiana is punishable by up to one (1) year in Jail

47. STUDENT LOANS

48. Government loans • Subsidized loans • Loans that do no incur interest while you are still in school • Unsubsidized loans • Loans that DO INCUR interest while you are still in school • Often times students fall into the trap of borrowing more money than they really need to pay for school • If you live like a professional while still in school, you will live like a student while a being a professional

49. PRIVATE LOANS • Borrowing money from private organizations to fund your education • Unlike Federal loans, interest rates and fees are variable and can change depending on the prevailing interest rate • Just like Federal loans, students fall into the trap of borrowing more money than they really need to pay for school

50. THINGS TO CONSIDER WHEN DECIDING ON A STUDENT LOAN • How long you will have to repay the loan. • What repayment options are available. • Whether you are entitled to defer loan payments and under what circumstances. • When payments are considered late. • The penalties for making late payments.