Debt represents spending more than we earn and our inability to save for emergencies and future needs. It is generally undesirable but sometime necessary for extremely large expenses such as a college education or home purchase. Credit is just our ability to secure a loan. Have “good credit” means that a loaning institution, e.g. a bank believes we have the ability to pay it back as scheduled.
- I know how to use credit wisely and when to avoid it.
- I can get and review my credit report and check for and correct errors.
- I know my credit score and the factors affecting it.
Key Learning Points:
- Credit is your ability to borrow money and pay it back. It is a privilege.
- Your credit rating reflects your history of borrowing (how much, from whom) and how well you repaid debts. It affects more than just obtaining new credit. It is especially important for home buying.
- Debt is best avoided by having an emergency fund and setting aside money for future needed purchases.
- “…for the Christian, learning God’s biblical principles of finances, and practicing them in order to become debt free, actually is a path to know Christ more intimately and be financially free to serve Him.” Source: Financial Freedom God’s Way by Harvey Nowland on FocusontheFamily.com
- Make a personal values-based decision on where debt fits in your life.
- Summarize a list of any current debts. Develop a repayment plan. Read the Debt Snowball article on DaveRamsey.com.
- Review your credit report a few times a year and practice the tips to improve your credit score below.
- Why Credit Is Important: In today’s society, good credit is required or brings advantages when: renting or buying a major item, borrowing money because of a lower interest rate, getting a job, leasing rental property, opening a checking account, establishing utility services in your name or obtaining insurance.
- Credit Agencies: A credit agency is a company that collects information and sells it in the form of written reports to creditors. Their score vary. The three major credit agencies are Experian (330-830), Transunion (150-934) and Equifax (300-850). Each of these agencies collects most of the same credit-related data and shares it with lenders and others.
- Free Credit Reports. You can get your credit report by requesting it in writing or requesting it on the internet. These are free (once per year per agency) at this link… https://www.annualcreditreport.com Getting you credit score costs extra.
- Types of Credit: There are two broad types of credit: installment (closed-end), e.g. a loan for furniture or car, revolving (open-end), e.g. a credit card. These may be secured or unsecured.
- What Does a Credit Score Consider?
o Your payment history (35%). Make sure you pay on-time and have no “past dues”.
o The amount of outstanding debt (30%). This part considers the total amount you owe, the number of accounts with balances and % vs. credit limits.
o The length of your credit history (15%).
o The types of credit you use (10%).
o New credit (10%).
- Tips for Improving Your Credit Score
o Correct any inaccurate information.
o Pay your bills on time.
o Minimize outstanding debt. Improve your credit utilization ratio.
o Apply for and open new credit accounts only as needed.
o Use credit cards responsibly.
o Re-establish credit if you have had problems.
- Dealing with Creditors
o Negotiate a payment plan.
o Set your own repayment priorities; don’t let creditors do it for you.
o Know your rights. The purposes of the Fair Debt Collection Practices Act are to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection, and to provide consumers with an avenue for disputing and obtaining validation of debt information in order to ensure the information’s accuracy.
o Consider professional credit counseling if you have a serious debt problem (but be careful of quick fixes).
- Misc Points
o If you subscribe to a “no credit philosophy” you will have to pursue non-traditional approaches.
o Carefully read credit disclosure information. Click here for an example.
o An average of $100 monthly interest charges over the course of your life (age 20-65) can easily add up to several hundred thousand dollars if invested.
o Your credit score is a just one financial indicator (it measures debt management). Net worth is a better overall financial indicator.
o Protect personal identification information to prevent identify theft.
o Know your rights. Equal Credit Opportunity Act, Truth in Lending Act, Fair Credit Billing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act.
Exercises for Older Teens and Adults:
- None at this time.
Exercises for Younger Teens (13-16):
- None at this time.
Questions to Encourage Critical Thinking:
- What is my total debt today? How long will it take to be completely debt free?
- Do you feel daily financial stress because money is tight? What can you do about it?
- What steps do I need to take to improve my credit score?
Tools and Templates:
- Minimum Credit Card Payment Calculator on CreditCards.com
- Debt Reduction Calculator (Excel) on Vertex42.com
- Reading Your Credit Report on Transunion.com
- Debt. Something owed: an amount of money, a service, or an item of property that is owed to somebody.
- Credit. A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date.
- Secured Loan. A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. Source: Wikipedia.
Web Sites/Short Stories/Essays:
- The Top Christian Money Web Sites and Blogs on ChristianPF.com
- CreditKarma.com is a good free site to monitor your credit score and activity.
- See list of books in Money Management – Overview.
- Looking to get out of debt? by TransUnion on YouTube (2:33)
- Breaking the Chains of Debt by Dave Ramsey on YouTube (30:08)
- “The rich rules over the poor, and the borrower becomes the lender’s slave.” – Proverbs 22:7
- “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash
- “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.” – Charles Dickens, David Copperfield
- None at this time.
Summary 2-page Lesson Examples, coming soon:
- Money Management – Credit and Debt (handout).
- Money Management – Credit and Debt (with instructor notes)