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Debt module in a personal financial literacy series.
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FINANCIAL LITERACY
DEBT
CREDIT
Credit is your ability to borrow money or
obtain goods by paying little or no
money at the time of purchase.
Having “credit” is a good thing.
DEBT
Debt is your obligation to repay money
borrowed or pay for goods obtained
previously without paying for them in full.
Debt should always be seen in a negative
light.
Not paying your debt on time and in full
may damage your credit.
INCREASE IN SALES
Retailers and
manufacturers discovered
that they could increase
sales by making easy
credit available and giving
it appealing names that
conceal the reality of debt.
NO MATTER HOW YOU DISGUISE IT . . . .
Rent-To-Own
Automobile
Leasing
Home Equity
Loans
0% Interest
No Payments Til . .
.
Pay-Day Advance
“Credit” Cards
Debt by any other name is still
“Debt.”
WHAT THE BIBLE SAYS . . .
Being in debt is not prohibited.
But, the Bible does not have one good thing
to say about borrowing.
All references speak of debt in a negative
context and most are in the form of
warnings.
WHY PEOPLE GET BURDENED BY DEBT . . . .
THINGS UNDER OUR
CONTROL
THINGS BEYOND OUR
CONTROL
THINGS BEYOND OUR CONTROL
“Acts of Nature”
Hurricane Charlie
Wild Fires &
Earthquakes
Accidents - Terri Schiavo
Sickness
Unemployment
Recession
THINGS WITHIN OUR CONTROL
Keeping Up With The
Jones
Unrealistic Expectations
Recreational Shopping
Makes You Feel In Control
Self – Esteem
Pick-Me-Up
Impulse Spending
NO SUCH THING AS “GOOD DEBT”
There is debt that may be “Necessary” for
most people to acquire things we consider
necessary or desirable (“Necessary Debt”).
But all debt (even Necessary Debt) should
be seen in a negative light.
“GOOD DEBT”
What we consider to be “Good Debt” is
debt that returns something of long term
value (e.g., a higher education or
home).
“BAD DEBT”
“Bad Debt” is debt incurred to acquire
things of a “short-term value.”
It “feel good” for a season.
Has no long-term value.
You really can’t afford it.
Don’t really need it.
DEBT MENTALITY
The Greatest Enemy of faithful stewardship
is consumer debt.
Raising your standard of
living by incurring consumer
debt may feel good for a
period of time - but the
burden of accumulated
consumer debt eventually
becomes overwhelming.
FOR EXAMPLE . . . .
In one year you will owe about
$ 2,600
If you accumulate $200 per month on credit
cards with a 15% interest rate,
In two years you will owe
about
$ 5,600
In three years you will owe
about
$ 9,000
In four years you will owe
about
$13,000
PLASTIC MONEY
TYPES OF PLASTIC MONEY
SMART
CARDS
CHARGE
CARDS
DEBIT CARDS
CREDIT
CARDS
SMART CARDS
A smart card, chip card or integrated circuit
card (ICC) has embedded integrated circuits
which can process data.
They store personal information and are used
for identification, authentication and data
storage.
They are a flexible and secure way to transact
business with minimal human involvement. May be “loaded” with a
certain dollar value that
can then be spent at Point
Of Sale terminals.
CHARGE CARDS
Must be paid in full every month
(AMEX).
Provide the convenience of not having
to pay cash for purchases, but balance
may not be carried over month-to-month
and must be paid in full each month.
Most store cards were originally Charge
Cards.
DEBIT CARDS
Allow access to your checking account at
automated teller machines (ATMs) and
point of sale (POS) terminals.
Amounts are
deducted directly from
your checking
account.
Unlike a charge card,
you must have the
funds on deposit in
your account.
The ones that causes problems are “Credit Cards.”
REVOLVING LOANS
Credit Cards offer a “revolving loan
account” with a credit limit.
If not paid-in-full
within a “grace
period,” interest is
charged on the
unpaid balance
and “rolled over” to
the next month.
TRAP FOR THE UNWARY
Undisciplined users are apt to
accumulate debts which they can’t
pay.
Young users (with limited credit
history and income) are charged
higher interest rates.
They are expensive if not paid-in-full
monthly.
FEES, FEES AND MORE FEES
“Interest rate” -- what you pay for using the
money - often 17% - 21% (after introductory
“teaser rate”).
“Over-the-Limit” fees, charged whenever you
exceed your credit limit.
“Late payment” fees.
“Transaction” fees – Cash Advances.
Other miscellaneous fees - read the fine
print!!!
CREDIT CARD POINTERS
DO’S . . .
Consider a debit card or pre-paid card.
Look for a card with no annual fee and
low interest rates.
Know your card’s hidden fees.
Pay on time - all the time!
Look for cards that offer premiums.
Pay-In-Full Monthly.
If you can’t pay in full, always pay more
than the minimum each month.
Minimum Repayment Schedule on a $2,000 Credit Card Loan at 19 Percent Monthly minimum payment amount
Number of months to repay
Total interest payment
$40 100 $1,994
$50 64 $1,193
$75 35 $619
$100 25 $424
Source: Credit Card Minimum Payment Interest Calculator, Daniel C. Peterson, www.webwinder.com
Interest savings between lowest/highest payment = $1,570;
time saved = 75 months or 6.25 years!
DON’TS . . .
Don’t get many credit cards.
Don’t use them for cash advances.
Don’t use them to pay for basics (rent,
groceries, etc) unless paid in full
monthly.
Don’t let issuer increase you credit limit.
Don’t charge more than you can pay off
in a month. If you do, have and stick to
a plan to pay it off quickly.
PAYING A CREDIT CARD BILL
Credit card bills are not considered paid
until the company credits payment to
your account.
To ensure payment is credited to the
account before it is due and that there
are no late fees:
Mail payments 7-10 days before the due
date.
Make electronic payment 2-3 days before
the due date
CREDIT CARD REGISTERS
Make a credit card register by cutting a
receipt to wrap around your credit card.
Record each purchase or cash advance
to the credit card, just as you would a
check in a check register.
Keep a running balance of what is
charged on your credit card each month.
Do not over spend your budget.
Check your record against your
statement.
SELECTING AND USING A CREDIT CARD
Shop-around! Study the details of the
application before signing. Look for the
fees charged including annual fee.
Understand the details of the introductory
offers and how long they last.
Know what constitutes a late payment
and the amount of penalties charged.
EXPOSING
EXEMPT ASSETS
TO UNSECURED DEBT
SECURING UNSECURED DEBT
If you have sufficient equity in your home,
it may be tempting to refinance high
interest consumer debt with a second
mortgage, to take advantage of a lower
interest rate and spread payment over a
longer period of time.
Think twice before doing so!
MEMORIES ARE SHORT
Instead of learning a lesson, many people
who do so begin to accumulate new credit
card debt almost immediately after
refinancing their old balance.
Without even realizing it is happening, in no
time, they have replaced their old credit card
balances with new ones, plus the second
mortgage.
EXPOSES EXEMPT ASSET
Credit card companies can’t collect yourcredit card debt out of your homestead.
In Florida, your homestead is exempt fromthe claims of most creditors – other that themortgage holder.
Refinancing has the effect of exposing yourotherwise exempt homestead to satisfydebts otherwise not be able to be satisfiedout of your homestead.
FLORIDA EXEMPTIONS
Assets That Are Exempt From Forced
Sale Vary From State-To-State
FLORIDA EXEMPTIONS
Homestead
Life Insurance (including cash values)
Alimony and Child Support Needed For Support
Damages for hazardous occupation Employee
injuries
Property of Business Partnerships
ERISA Qualified and Government Pensions
Certain Public Benefits
Up To $1,000 in Personal Property & Health Aids
Motor Vehicle up to $1,000.
Wages of Head of Household
EXEMPT HOMESTEAD
In Florida, the homestead is exempt from
forced sale without regard to value.
Homestead includes real or personal
property including mobile or modular home
(without limit of value).
The land cannot exceed ½ acre in
municipality or 160 contiguous acres
elsewhere.
EXEMPT INSURANCE
Annuity contract proceeds (not
including lottery winnings).
Death benefits payable to specific
beneficiary (not the bankrupt
deceased’s estate).
Disability or illness benefits.
Life insurance cash surrender value.
POWER POINT
If your out-go is more than
your in-come, your up-keep
will lead to your down-fall!