Chapter 4: Debt

1. Chapter 4: Debt Unit 2: Credit and Debt

2. Explore • Examine the charts, graphics, and reading excerpts in Chapter 4: Debt. • Make a list of questions you would like to have answered as we go through the chapter.

3. Introduction • WB: Before You Begin, pgs. 74-75 • Review the Learning Outcome objectives and Key Terms • Complete the “Before” column on the “Measure Your Progress” chart • Journal: • What have you heard about “building your credit score?”

4. Public Service Announcement Activity • Get into groups of three, research case studies about the negative effects of debt on young adults. • Create a public service announcement about the dangers of debt. (The goal is to call your audience to action). • Create a movie • Movie Maker • Animoto.com • Goanimate.com • Film a video • Commercial • Website • Blog • Write a song • Act out a skit BE CREATIVE! HAVE FUN! WORK TOGETHER!

5. Debt: Product, Not Privilege Section 1

6. Debt is Everywhere • Video 1.1 (13 minutes): Debt is Everywhere • Journal: • Explain how debt is actually a product that is bought and sold. • Read:The Devastating Effects of Credit, p. 77

7. Discussion Questions • Does viewing debt as a product instead of a service, reward, or privilege, change your perspective on credit cards? • Describe some of the powerful marketing tactics used by the credit card industry. • Marketing to youth; marketing credit as a privilege, reward, etc.

8. Financial Myths Young Adults Fall For • Video 1.2 (12 minutes): Financial myths young adults fall for. • Journal: • Explain what Dave means when he says, “The borrower is slave to the lender.”

9. Discussion Questions • Have you ever been told that you need to “build your credit?” • This is a myth. You do not need credit to navigate the financial world. • What do credit card companies and other lenders have to gain by consumers falling for these myths? • Huge profits through interest and fees. • What are other financial myths that young adults often fall for? • Spend as much money as they want on college and pay for it later, they need a new car.

10. Activity • Activity: Hidden Costs of Credit (25 minutes)

11. Debunking the Credit Myths Section 2

12. Debunking the Credit Myths • Video 2.1 (12 minutes): Debunking Credit Myths • Journal: • Explain why co-signing a loan is never a good idea.

13. Discussion Questions • Explain why cosigning a loan for a friend or relative is never a good idea. • You will probably end up paying back the loan yourself and ruining the relationship. • What is predatory lending? • Money lending companies that take advantage of lower income people with extremely high interest rates, fees, and unethical debt collection practices. • Why are people drawn to predatory lending companies? • They offer fast cash

14. Activity • Activity: • Making the Minimum

15. The Truth About Car Loans • Video 2.2 (8 minutes): The truth about car loans • Journal: • Explain how the “drive free” method of buying a car works.

16. Discussion Questions • How does having a car payment stand in the way of building wealth? • Having a car payment means that, every month for 5-6 years, a portion of your income goes to the bank or finance company. That’s money that can’t be saved! • Besides payments, describe two additional ways you lose when buying a new car. • Interest – you pay more than the sticker price • Depreciation – your car will immediately lose value when you drive it off the car lot.

17. Activity • Activity: Drive Free (60 minutes)

18. The Truth About Car Loans • Video 2.3 (13 minutes): The truth about car loans • Journal: • Explain why leasing a car is a bad idea.

19. Discussion Questions • What does it mean to be upside down on a credit purchase? • You owe more than the product is worth. • What are some of the myths regarding car leasing? • Myth 1: Leasing your car is what sophisticated financial people do. • Myth 2: You should always lease things that go down in value • Myth 3: There are tax advantages.

20. Activity • Activity: The True Cost of Ownership (20 minutes) • Google: Total cost to own _______ • Edmunds.com is a good site.

21. Buying a House • Video 2.4 (9 minutes): Buying a House • Journal: • Explain why it is better to take out a 15 year mortgage instead of a 30 year mortgage.

22. Discussion Questions • List some wise decisions you should make when buying a house? • Get no longer than a 15-year fixed rate mortgage. • Limit your monthly payment to no more than 25% of your monthly take-home pay • Save at least a 10% down payment • Why are teens such a huge target for credit card companies? • The adult market is saturated • There is a strong brand loyalty to your first credit card

23. Calculating Down Payments • Principal is the money you have to borrow from a bank or mortgage company. • You will have to make a down payment – usually 3 to 20% of the home’s price – and then make monthly mortgage payments.

24. The bank owns your home until you pay off your loan. If you don’t pay your mortgage, the bank can foreclose the property – reclaim their property – and sell the home to someone else. Calculating Down Payments $220,000 Initial value x 10% Percentage for DP $ 20,000 Down payment $220,000 Initial value - 20,000 Down payment $200,000 Loan amount

25. Components of a Mortgage Payment • Interest is the percentage you pay to get the loan. • Fixed mortgage – the interest payments are the same over the course of the loan. • Variable mortgage – the interest payments go up and down with changes in interest rates.

26. Components of Mortgage Payments • Homebuyers will pay more in interest charges than principal. • Interest on mortgages are compounded – you pay interest on the principal and also pay interest on top of your previous interest!

27. Helpful Websites • Mortgage Calculators • Mortgage Payment Calculator • Total Mortgage Expense Calculator • Real Estate Websites • Zillow.com • Trulia.com

28. Activity – House Shopping • Calculate your maximum mortgage payment using the equation in the box. • Annual Gross Income • x 25% • Max. House Expense • ÷ 12 Months • Total Monthly Budget • - $300 for taxes & insurance • Maximum Monthly Mortgage • Go to Bankrate.com’smortgage calculator to determine the maximum home value you can afford. • Shop for a home, in your budget, that fits your lifestyle and needs, based on your life scenario.

29. Credit Cards • Video 2.5 (14 minutes): Credit Cards • Journal: • Explain the difference between a credit card and a debit card.

30. Debt vs. Wealth Building • Video 2.6 (13 minutes): Debt vs. Wealth Building • Journal: • Which credit myths did you believe prior to hearing this lesson? • Explain why each of those are myths and not facts. • Read: What About Credit Card Rewards (p. 88)

31. Discussion Questions • What is your largest wealth-building tool? • Your income • List the steps to get out of debt. • Quit borrowing money, save money, sell something, get a part-time job or work overtime, use the debt snowball method. • What are some of the serious consequences of not repaying a debt? • Foreclosure, repossession, bankruptcy, garnishment, surrender of collateral, delinquency

32. Activity • Activity: Rent to Own (30 minutes)

33. The Credit Score Section 3

34. What Your Credit Score Really Measures • Video 3.1 (9 minutes): What your credit score really measures. • Journal: • What does a credit score measure?

35. Discussion Questions • Why is the FICO score really an I love debt score? • It only measures your debt history with the purpose of establishing your credit worthiness. • Can you really live without a credit score? • Yes! It just takes some foresight, planning and a little patience. • What are the five components of the FICO Score? • Debt history, debt levels, duration of the debt, type of debt, new debt. • Does the FICO score measure wealth or how well you manage money? • No!

36. Activity • Activity: Debunking the Credit Myth (30 minutes)

37. Credit Bureaus and Identity Theft Section 4

38. What is a Credit Bureau? • Video 4.1 (13 minutes): Credit Bureaus and Identity Theft • Read: Consumer Credit Laws, pg. 94-95 • Journal: • Explain why the credit industry wants you to believe that you need a credit score.

39. Discussion Questions • What is a credit bureau? • 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. • What are the three main credit bureaus? • Equifax, Experion, TransUnion • How often should you check your credit report for errors? • Once per year

40. Discussion Questions • What issues was the Fair Credit Reporting Act (FCRA) intended to address? • Concerns over consumers credit report accuracy, privacy, and fairness. • A strong password should include what elements? • A combination of letters, characters, and numbers • What is the Federal Trade Commission? • The FTC is one of the many U.S. federal agencies which regulate the consumer credit system and enforce the laws related to it.

41. Activity • Saving: The Debt Snowball (30 minutes)

42. Chapter Summary • Budget Builder – foundationsU.com/4 • Complete the “After” column on the “Measure Your Progress” chart, pg. 75. • Take Action Challenge, pg. 97 • Study Guide: Money in Review, pgs. 98-99