Explain: By the end of this lesson, you will be able to identify the advantages and disadvantages of credit, determine how credit is obtained, identify steps to get out of debt and understand what is included on a credit report.

Question: What is credit?

Explain: Credit is a way of using future income to buy the goods and services you want today. When used wisely, credit can be a valuable tool. But when used carelessly, credit can cause serious financial problems.

Explain: Keep in mind, borrowing money isn’t good or bad in itself. It depends on how you use it. Let’s look at the advantages and disadvantages of credit.

Question: What are some advantages of credit?

Instructor Note: Write the advantages listed by participants on the board. After discussion, highlight the advantages on Slide #3 and #4. Bullets will appear upon a second mouse click.

Interest deductions include interest on a home mortgage, home equity loans and some educational loans. Check with your tax preparer.

Question: What are some disadvantages of credit?

Instructor Note: Write the disadvantages listed by participants on the board. After discussion, highlight the disadvantages on Slide #5. Bullets will appear upon a second mouse click.

Transition Statement: It is important to know the advantages and disadvantages of credit before using it. And you need to understand what types of credit are available should you choose to use it.

Explain: There are three types of credit available to us.

Consumer loans are loans made by a person or company whose business is making loans.

Question: What would be examples of consumer loans?

Credit sales are arranged by the seller of the product. The merchandise is used as security for the loan.

Question: What would be examples of credit sales?

Credit cards (plastic money) offered by retail stores, credit unions and banks.

Transition Statement: Let’s talk a little bit more about credit cards.

Question: How many of you have at least one credit card?

Explain: Most of us have at least one card, if not several. There are actually four major types of credit cards.

• Bank Credit Cards. Can be used for almost any purchase or for cash advances (interest is charged). Some have membership fees. Examples: Visa and MasterCard
• Travel and Entertainment Cards. Charge an annual fee and balance must be paid in full. Some offer other services. Examples: American Express and Carte Blanche.
• Retail Store Cards. Issued by department stores and other companies. You receive advance notice of sales. They are revolving credit and charge finance and interest fees.
• Oil Company Cards. Companies offer their own cards but most take VISA or other credit cards, also.

Explain: All card companies generally charge an interest rate on unpaid balances, they charge late fees if you pay late, and their due dates vary according to their policies.

Explain: Don’t confuse debit cards with credit cards. Debit cards look like credit cards, but act as checks. They immediately deduct money from your checking or savings accounts when you use them.

Activity: Distribute the Shopping for a Credit Card Work Sheetand gathered information on three different credit card options.

Explain: If you plan to pay your credit card off every month, you will probably be more interested in finding a card that does not have monthly fees or possibly provides a longer grace period. For example, Card #1 might offer a low 5% interest rate, but has a $40 annual membership fee. Card #2 may have an interest rate of 19%, but no annual or monthly fees. In this case, Card #2 is probably your best option, because you are not as concerned with getting the lowest percentage rate.

However, if you are planning to use your card for large purchases and pay the balance off over a few months, you would be more concerned about the rates offered. You might be willing to pay the $40 annual membership fee in order to get the low 5% interest rate.

Let’s compare these three credit card options and determine which one would fit the needs of someone who pays the full balance each month and someone who uses the card for large purchases and pays it off over time.

Transition Statement: Now that you know a little bit about choosing the credit card that is best for you, let’s discuss what to do if you lose it.

Question: Have you or someone you know lost or had a credit card stolen?

Explain: If you ever find yourself in this situation, the most important thing to do is notify the credit card issuer immediately. You need to have your credit card information easily available and in a safe place for this reason.

As a card holder, you are liable for the first $50.00 of unauthorized charges that occur before the card company is notified of the loss.

Transition Statement: I hope you won’t lose a credit card, but should it happen, you know what to do. Let’s go back to the three types of credit we were discussing.

Explain: These three types of credit are available from a variety of sources.

Question: Let’s create a list of all the sources that offer credit. What comes to mind?

Instructor Note: Create a list of sources on the board. Discuss bulleted points on Slides #11 and #12 after participants create a list.

Explain: Many of these we may have on our list, but let’s highlight what each source of credit provides.

Credit unions are for members only, and generally offer lower interest rates.

Question: What is an example of a credit union?

Example: White Sands Federal Credit Union

Commercial banks mainly cater to customers with established credit histories.

Question: What is an example of a commercial bank?

Example: Access Bank or First National Bank

Savings and loans are similar to banks and credit unions, but loan depositors’ money.

Question: What is an example of a savings and loan?

Example: Alamogordo Federal Savings and Loan

Consumer finance companies will lend to some individuals who do not meet credit standards of other lenders. Interest rates will be higher.

Example: Beneficial New Mexico or Coronado Finance

Life insurance companies lend the cash value of life insurance policies to policy holders.

Example: Campbell Insurance Company or All-State Insurance

Retail Stores charge interest on monthly revolving accounts.

Example: Dillards or JCPenny

Pawnbrokers loan money on items that are left for security.

Example: ABC Pawn Shop

Friends and Relatives may be willing to make loans. Make sure you have a written agreement.

Check-cashing stores and Payday Loans are cash advance loans. The interest rate can be 250% or more.

Rent to Own * establishments usually don’t require a down payment to rent furniture, appliances and electronics. Interest cost can sometimes be as much as 275%. Not governed by most state laws. Can lose furniture if you miss a payment.

* Technically, rent-to-own financing is not a loan.

Explain: This table helps you understand who to go to for a specific type of loan.

Question: Let’s consider that you are going to buy a washer and dryer. Which source of credit could you use?

Explain: The correct answer is that most of the sources of credit could be used to purchase a washer and dryer. The interest rates can vary from 0% from a friend to more than 250% per year from a rent-to-own store. The total interest cost of borrowing money varies greatly according to the interest charges.

Question: Which sources of credit could you use for a home loan?

Explain: Participants discuss different credit sources that could be used for the purchase.

Question: Which sources would be used for purchasing a pair of shoes?

Explain: Participants discuss different credit sources that could be used for the purchase.

Transition Statement: Let’s talk about what it will cost if you choose to use these credit sources.

Explain: When you get a loan, there are generally two costs you must pay, 1) Fees and 2) Interest.

An example of a fee might be the annual maintenance fee for the use of a credit card.

Interest charges are determined by the Annual Percentage Rate (APR) which is based on finance charges, amount borrowed and repayment schedule. The federal Truth-in-Lending Act requires lenders to state their interest charges as an annual percentage rate (APR)

Explain: To understand APR, consider this example:

Instructor Note: Highlight the difference in total interest when considering APR rates.

Activity: Distribute the Decision, Decision Work Sheet. Read scenario to participants. Using the filled-out work sheet as an example, discuss the various amounts and how they were determined. Discuss the comparison, pointing out the extreme differences in total cost.

Explain: The Decision, Decision Work Sheet can be used to compare the costs of rent-to-own, using credit or paying cash. This work sheet is an easy way to see the true cost of credit for rent-to-own, buying on credit or saving first to buy later.

Explain: To determine if you should use credit, consider these three guidelines:

• 15-20% Rule - Total debt load (except mortgage payment) should not exceed 15-20% of your monthly after-tax income. This still may be too high for some families.

Instructor Note: Distribute the Credit Signal Light Work Sheet. Walk through the work sheet using the figures below:

• Take-Home Pay: $27,500
• Total Monthly Non-Mortgage Debt: $3,200
• 10% Take-Home Pay: $2,750
• 20% Take-Home Pay: $5,500

This example is a Yellow Light! Caution!

Transition Statement: Some of you already may have made a decision to purchase items using credit and now you are in debt. In this case, it may be wise to spend your money and efforts paying off your bills before accumulating more credit debt.

Explain: The best way to handle debts is to avoid them in the first place. This is very difficult to do. If you are in debt, the first thing you need to do is figure out how much you owe.

Activity: Distribute How Much Do I Owe? Work Sheet. First, list each creditor (loan company, bank, department store or family member), the total balance owed, the date the monthly payment is due, the number of payments left, the amount of the monthly payment, the Annual Percentage Rate (APR) and any amount that is past due.

Second, total the balance owed and write this amount in the provided area.

The bottom of this work sheet will be discussed at a later time. For now, you only need to complete the top portion and determine how much you owe, which is the first step in getting out of debt.

Explain: Once you know how much you owe, you need to look for ways to increase your income or decrease your spending. Consider selling something, having a garage sale or limiting your entertainment and vacation budgets.

You also need to stop using your credit cards or other forms of credit. If you cannot make all your payments, contact your creditor and ask him if he can work with you. If you think you can't figure out how to manage your debt on your own, you may consider contacting a credit counseling service.

Explain: Also, as you are trying to get out of debt, use these three suggestions to guide you in making your payments.

Instructor Note: Highlight the three bullets on Slide #18.

Explain: If you are just beginning to learn about financial management, you should evaluate yourself and determine if you are at risk for credit problems.

Let's take a few minutes and consider these 10 statements. On your own, consider whether these statements reflect your management techniques.

Instructor Note: Read aloud each of the 10 Danger Signals listed on Slides #19, #20 and #21.

Explain: If you noticed one signal, you should be cautious. Two suggest trouble is brewing. Three or more indicate you should be very concerned and take some steps to help correct the problem.

Explain: It is all too easy to make purchases when you just have to pull out the "plastic." However, at the end of the month, it may be hard or impossible to make your payments, leading to the Credit Card Blues. To avoid the blues:

Instructor Note: Highlight the suggestions on Slide #22

Question Do any of you have other suggestions?

Transition Statement: One other important aspect of credit is learning about your credit report.

Question: What is a credit report and what things can be found on one?

Instructor Note: Create a list of everything the participants know about credit reports. Bullet point will appear on a second mouse click.

Explain: Credit bureaus collect information from the companies who have granted credit to you and from public records in state and county offices and courts.

One way lenders can decide the amount they will loan you and the interest rate they will charge is to look at your credit report. Lenders can choose to use any of the three reports. You may find that most lenders have a primary report they use regularly, rather than checking all three.

Instructor Note: Highlight the items found on a credit report (Slide #24).

Explain: Your description of bill paying history will include late payments and the amount of the payments on things such as credit cards and previous loans. Your ability to borrow money depends on:

Instructor Note: Highlight points on Slide #25.

Question: How might these things affect your ability to borrow?

Explain: If you have established several credit accounts, you can determine how your credit looks. Federal and state laws give you the right to know what your credit report says about you.

Question: Have any of you checked your credit report?

Explain: It's a good idea to check these records at least once a year because mistakes can be caught. You can receive a free credit report on line at www.annualcreditreport.com

There are three credit bureaus and they do not all necessarily have the same information. It is a good idea to get all three reports and compare their data.

Activity: Hand out copies of the Credit File Request Work Sheet and the contact information list for credit bureaus. Use this Request Form to contact credit bureaus. There may be a processing fee of about $8 each if you do not use the free records available on-line. Also distribute the How To Read Your Credit Report Work Sheet.

Explain: What happens if you have incorrect information on your credit report? Sometimes it can mean the difference between qualifying for a loan or not. An example of wrong information would be your name or Social Security number being the same as someone else. You have the right to dispute any reported information. You can call or write to the credit bureau. The credit bureau's information is listed on your credit report.

Question: Does anyone know what a credit score is or what it is based on?

Instructor Note: Highlight what credit scores are based on (Slide #27). Bullets will appear on a second mouse click.

Explain: Credit scores are computed by lenders using a formula to determine if you are a good credit risk. The scoring system was developed by Fair, Isaac & Company (FICO).

Lenders base the interest rate for loans and mortgages on your credit score which, until recently, you were not able to see.

Instructor Note: Encourage participants to write down the two internet sites that provide credit scores.

Explain: The scores run from 375 (worst) to above 925. Scores in the 620 to 660 range are generally desirable. There is a fee to get your credit score.

Question: Who besides yourself might need your credit files?

Instructor Note: Make a list of those the participants share. Highlight any persons/businesses on Slide #29 and #30 that are not mentioned. Bulleted points will come in on a second mouse click.

Explain: Persons or businesses who need to find out information about you for various reasons can request your files. A good credit history is positive when you want it and essential when you need it. Build a respectable credit history. It always will be with you.

Question: What are some specific things you can do to build good credit?

Instructor Note: Create a list of tips for good credit discussed by the participants. Highlight any of the tips on Slide #31 that were not mentioned by participants. Tips will appear upon a second mouse click.

Lesson Summary:
Congratulations! You have completed "Using Credit" in this Money Management series of classes.

We've covered a lot of information about credit reports including identifying advantages and disadvantages of credit, determining how credit is obtained, identifying steps for getting out of debt and understanding what is included on a credit report.

Question: Are there any questions?