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What is debt? Debt is when you owe someone money. The someone can be a bank (like a house loan—also known as a mortgage, or a car loan), OR the someone can be a credit card company. If you do not pay back your debt (all of it—ON TIME) then you will hurt your credit score (your credit score will decrease).
What happens when you run out of money on your credit card? You have what is known as a “credit limit.” It is the maximum amount of money you can charge on your credit card to buy stuff. If your credit limit is $1000, and you spend $1001 (or more), they can do one of two things: deny the charge (the salesperson will tell you your card is denied) OR allow the charge to go through and then charge you a fine for going over your credit limit. Both are bad…so make sure you don’t go over your limit!
How do you get a credit card and how old do you have to be? You have to apply (it’s kind of like a job application, but with questions about how much you make at your current job). You send it in, and they will look at your credit report and see how well you have paid back your debt in the past. They will then decide whether they will give you a card and if they do, what your credit limit is going to be. Most credit cards will only accept applications from people who are 18 and older.
Why do credit cards have limits? Depending on how well you have paid back your bills and what your current salary is, credit cards use a mathematical formula to decide what your credit limit is. They think that if they give you a credit limit that is too high, that they might not get paid back.
Why do you need to build up credit? What does your credit score do for you? Your credit score (and building up your credit) will help you to get loans and other credit cards. For example, in order for me to buy my house, I had to have a good credit score or else they would not loan me the money to buy my house. Same thing with a car loan. If you don’t have good credit, they may not loan you the money for a car.
How do you renew a credit card? You don’t have to. They renew automatically. They will only stop if you call them and tell them you would like to close your account. If you close your account, you will no longer be able to use that credit card.
Is there a limit on how many credit cards you can have? No, not really, but the more credit cards and car loans and house loans and debt that you have, the less likely someone is going to loan you more money. Taking out more loans and credit cards lowers your credit score, so eventually your score will lower so much that no one will want to give you any more cards or loans. (My suggestion is to have 1 or 2 credit cards only.)
How do you know the balance on your credit card? You will get a monthly bill telling you how much you’ve borrowed, how much you owe for your monthly payment, how much remaining credit you have (how much you could still borrow or charge) and what you used your credit card for this month. It also shows how much you are paying in interest and fees. Some credit cards have a website that you can use to check whenever you want.
Do I have to pay back a loan? Yes! However, in EXTREME circumstances, you could declare bankruptcy and most of your debt (loans and credit cards) will be forgiven (meaning, you won’t have to pay them back). HOWEVER, if you declare bankruptcy, this looks REALLY BAD on your credit score and you may not be able to take out any loans or credit cards for 7 to 10 years!!! Bankruptcy should only be a last resort, when something really bad has happened to your income (like you lost your job), or someone got really sick in your family and you have a lot of medical bills, for example.
How long do I have to pay back a loan? It depends on what the loan is for and how much. With a house loan, you are usually given 30 years to pay it off. And if you sell your house, your loan gets paid off first and any left over money can go in your pocket or be used to buy another house. A car loan for a new car may have a 7 year loan payoff. Or a cheaper used car may only have a 3 year payoff. In some cases, you can discuss that with the salesperson (more about that on the next slide).
Do you choose how much money you pay a month to pay off a loan? Sometimes yes, sometimes no. With a house loan, generally, you are given 30 years and they tell you what the payment will be. With a car loan, sometimes you can tell the salesperson that you need the monthly payment to be under a certain amount, and they will “play around with” the amount of years you have to pay off the loan, and get your payment to be under that amount that you told them about. But be careful---the longer you take to pay someone, the more money you are paying them in interest, so that is less money going into your pocket to buy other cool stuff.
How do you take out a loan? Like a credit card, usually it starts with an application. They ask you where you work, how much you make, etc. Then they will go to their computer and look at your credit report. If your credit score is good, then they may give you the loan. If your credit score is less than good, they may deny you or only tell you that you can take out only a certain amount.
What is the maximum amount of money that you may get for a loan? Depends on what you are buying, how good your job is (how much you get paid), and how good your credit score is (how well you have paid off other debts). You are more likely to get a large amount of money for a house, because if you stop paying the mortgage (bill for the house), they can foreclose (kick you out of the house and sell it to make back their money that they loaned you).
(not a question, but something I wanted to add) Collateral is something that can be taken by the bank and sold if you do not pay back your loan on time. For example, if you take out a mortgage (loan for house), if you don’t make your monthly payments, the house is collateral because the bank can take the house and sell it to get their money back. (And you just became homeless.) If you take out a car loan, the car is collateral because they can repossess it, which means they can take the car and sell it to make back their money. (And you just became car-less and have to ride the bus.) So…pay back your bills! ON TIME!!
THIS ONE IS NOT ON YOUR SHEET!! IT WAS ADDED LATER! TAKE NOTES! HOW DO YOU KNOW WHICH CREDIT CARD/LOAN IS BETTER? LOOK AT THE FINE PRINT AND FIND THE APR AND IF THERE ARE ANY FEES! APR stands for Annual Percentage Rate and it is the amount of interest that will be charged. The lower the interest rate, the less money you will have to pay to them to borrow money! An APR of 7-10% is great! An APR of 20% is bad. and Are there fees for borrowing money or for having the credit card? If you can find a loan/card without fees, that is less money you will have to pay to them.
