city_L03 – Credit – Delightful Dollar

City

Lesson 3

Credit

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With credit, you can be:

The risks of being exposed include:

Slide 1

Never own car or home

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Getting sued by creditors.

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Paying hundreds in fees that could have gone towards ministry or saving.

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Having creditors calling relentlessly.

Credit Video

Dangerous payday loans

Federal Reserve:

Half of all Americans unable to come up with $400 without borrowing or selling something.

How they work

Payday loans are advertised as short-term credit lines, typically extended for two weeks to help consumers get through to their next paycheck.

Each year, 12 million borrowers take out payday loans averaging $375 each.

Typical payday loan example:

Borrow $200 for 14 days. Pay between $23 and $76 in interest. This equates to almost a 1,000% annual interest rate (APR).

DANGER

More than 80% of payday loans are rolled over within a month — borrowers borrow more money to pay off the principle, circling deeper into debt.
The median payday loan borrower is in debt for more than six months, and 15 percent of new loans will be followed by a series of at least 10 additional loans.
A typical borrower takes out eight loans during one year, paying an average of $520 in interest on a $375 loan. In many cases, the cost may be much higher.
- In 2008, Naya Burks—a single mother living in St. Louis—had a $1,000 loan turn into $40,000 debt, as the 240% interest accrued.
One out of every five borrowers who offer their car as collateral lose their car.

Top Reasons Listed for Payday Loans

Highly convenient – there are more payday stores than McDonalds stores!
86% Essentials, Food, & Utilities
24% Fuel & Auto
42% Extras, such as holidays, clothes, luxuries, & travel.

Alternatives to Payday Loans

#1 Emergency Fund

Having 3-6 months of cash savings will eliminate almost all short-term cash crises. You are the lender – and you are a good lender!

Negotiation

Call your utility company or creditor to ask for extended payment terms.

Pawn loans

If you can’t pay the lender back, they simply keep the pawned item and you owe nothing further.

Credit union loan

Often work with consumers with poor credit histories to borrow up to $1,000 each on a six-month loan at very low rates.

Credit cards

Much cheaper interest rates than payday loans.

Pay advance from employer

Some employers offer short term loans to bridge the gap.

401(k) loan

Low rates, but only use if absolutely necessary.

Loan from family or friends

Offer to pay interest (just not 1,000%!)

Best Lender: Yourself

The emergency fund is a pool of money that you draw from during emergencies. You essentially “lend yourself” money. You decide when to pay yourself back. No interest. No collections. No hassle. You are a great lender!

EXAMPLE: You have an unexpected car repair of $350.

Emergency Fund

You pay the $350 right away with no interest,
You decide when to pay yourself back.
No deadline.
No interest or fees.

TOTAL COST: $350

Credit Card

Assuming a good interest rate of 15.99% APR, you will pay $25 per month for 16 months.
If you fail to pay a payment: lots of fees, hassle from collectors, the loss of your credit score, and possible bankruptcy/legal fights.

TOTAL COST: $390

Payday Loan

$15 for every $100 borrowed for 14 days. 391% annual interest rate (APR).
Must pay back in 14 days.

TOTAL COST: $403 (since 80% do not pay back right away, it is likely total cost will be much more than this)

Cunning Credit Card

FEARFUL

It is something to be feared because it can literally destroy your life.

USEFUL

It is not necessarily bad because it can serve a useful purpose – within certain limits.

At its core, a credit card is a product.

But it is 2 products in-one, with one of its products being highly hidden, which makes it cunning and dangerous.

A Very Bad Lender

If you do not pay your credit card balance at the end of the month, you are now officially using your credit card as lender. Credit card companies are very bad lenders.

APR

The Annual Percentage Rate (APR) is the interest charge that will be assessed on your outstanding credit balance. It is insanely high, ranging from 12-35%. To put that in perspective, I recently borrowed $500,000 to buy my home, and was assessed a fixed APR rate of 2.99% over 30 years.
Most APR rates are variable rates, which means they can change anytime, and love to go up.
If you have $6,000 credit card balance, APR of 15%, and paying $76 minimum monthly payment, it will take 29 years to pay off loan with

$20,000+ of interest paid.

Minimum Payments

This is the lowest amount of money that is needed to keep your credit card product working.
DO NOT BE FOOLED: IT’S A TRAP!
- Once we anchor our minds to the small minimum payment, say $15 a month, it is too shocking for our brains to then adjust to the larger full balance, like $2,000. So, we naturally avoid thinking about our full balance. This is why only quarter to a third of people actually pay off their full balance.

Default Rate

If you miss your monthly payment, you are considered in breach of your contract, and a new, much higher default interest rate (30%+) will be assessed on your outstanding balance.

Fees

In addition, if you miss your monthly balance, even for just one day, you will be charged a fee (usually $40-$60) on top of the higher default rate interest charge.

Spending Addiction

Credit cards may addict you to spending money:
- Allow you to delay payment, which is a critical barrier to making a purchase.
- Produce a reward sensation in your brain, which does not exist when using cash, and is a highly addicting feeling.
Studies show that you will spend 30% more when using cards vs. cash.

When to Cut Em' Up

I use my credit card as a medium of exchange.

I also like getting a few hundred dollars cash back every year.

However, I will cut up my credit card if: I am assessed a fee or interest charge MORE THAN 2 TIMES A YEAR.

If that happens, I am no longer responsible enough to have a credit card. The snake has bitten me too many times.

Every monthly credit card statement will have a ‘Interest Charged’ table showing whether you have paid interest. If it is not $0, then you are using your credit card as a lender.

Make all interest and fees charged is $0

If not, it is likely best to cut up your credit cards and switch to a debit card.

Activity: Choose Card

Complete Activity on PDF Worksheet (High School)

Shop for a credit card:

CRITERIA:

Good rewards?

Usually, it is a choice between cash back and travel points.

$0 Fraud Liability?

Most card have this: it ensures that you will not pay any money on unauthorized charges.

Purchase Protection?

Short-term insurance protection from theft or damage on recently purchased items (usually 90 days from purchase).

Favorable APR?

Lower is better, but this does not matter if you are not going to use it to borrow money.

Annual Fee?

The better the rewards, the more likely you will pay an annual fee.

Foreign Transaction Fee?

Much better to choose a card that will not charge this fee every time you use it outside of the U.S.

DENIED

If you are unable to receive a credit card, consider the following 3 alternatives in order to qualify for a credit card:

Open a SECURED CARD where you put money down and receive limited rewards while you show you are trustworthy with credit (i.e., pay your full balance each month).
Become an authorized user of your parent’s credit card.
Sign up for a credit builder loan. You pay back a loan into a savings account. Once loan is paid back, you have access to savings amount, which you can parlay into a secured credit card deposit.

CASH BACK

Getting cash back from a credit card is a delightful experience. The money is often unexpected and unbudgeted.

It is usually fun to buy something fun with the money. But how fun it could be to be used by God to pass along this money to another person in need.

I personally have many stories of God placing someone in my path who needed the exact amount of money that I was prayerfully considering giving. It is a magical experience!

INSTRUCTIONS

The next time you get cash back from your credit card, consider this as something that is meant for another person.
If you know that you will receive cash back sometime within the next couple of months, began to pray that the Holy Spirit will put someone in your path who needs that money.
Be attentive to who may need the money and give as the Spirit leads!

Credit Report Video

Not "If" But "When"

Currently, 33% of U.S. adults have suffered from identity theft. It is the fastest growing crime in the U.S.

The consequences are devastating.

Surprise! You are in trouble

“I was in college and I heard a friend discuss his credit report. I asked what that was, and he explained it. We then downloaded my credit report. I joked that I probably don’t have one since I have never borrowed any money before. To our surprise, my credit report was 50 pages long! More than one person had been using my identity for over 10 years. After 5 years of painful work – I finally have expunged my record of all the deceit and I have clean credit.”

Fake new job

“I applied to be a quality control inspector from a very respectable looking company. They had great reviews and everything seemed legit. I got the job and then started to get packages in the mail to inspect. Something seemed off, so I began contacting them and realized all of the packages were going back to a small city in Russia. After more investigation, I discovered this company completely stole my identity and was making purchases on credit in my name. After months of headache, I had to get a new tax ID from the IRS.”

No identity left

“At first I started to notice suspicious activity in my checking account for small charges of $37 or $17.98. I was very busy, so I let it slide. But then it accelerated and I had four charges, totaling $2,800 to $3,200 per day for many days in a row. I closed my existing checking account, opened a new account, and had to sign affidavits every day saying that they were not my charges. The day after I opened a new checking account, I was hit with a $1,100 charge. The bank surmised that my computer had been hacked and malware was tracking all of my new accounts. I felt naked and violated, and didn’t know how to get my identity back.”

Importance of Good Credit

You may think that identity theft is not a big deal for you since you have no money and do not plan on using credit cards, or getting into debt.

This is a big misconception!

Identity theft destroys your credit.

Your credit is something that touches every facet of your life. Regardless of whether you have money or borrow money.

Landlords and sellers choose people with good credit

“We were so excited about this amazing apartment. The landlord loved us and said it was between us and another couple, but we were a “shoo-in” to get it. ‘I just need to run your credit report,’ she said. We never heard from her again.”

No installment plans allowed with bad credit

“I was excited to buy the latest iPhone. The Apple employee ran my credit and said I had to pay cash. I was expecting to pay in monthly payments with no interest, but now I can’t get a phone. I don’t have $700 cash to buy a phone!”

Utility companies want a cosigner, or deposit, if you have bad credit

“I was excited about my first apartment after college. I had a new job and was excited to be an independent adult. That was until I called the utility company to turn on the water and electricity. They ran my credit and demanded that I have my parents co-sign on the account. So much for independence.

Employers prefer people with good credit

“I was working as an independent contractor for a wealth management company. I was being hired as a full-time employee and all HR had to do was run a background check. I got a call the next day from HR saying that they would keep me as an independent contractor since my credit was so bad.”

47% of employers obtain credit reports on applicants as a part of their screening process for some or all positions (2012 Society of Human Resources Management (SHRM) survey).

The 800 Club

700 SCORE

Solid and good.

800 SCORE

Move you to the front of line for:
- Attractive rental properties.
- Attractive homes for sale.
Dramatically lower the cost of:
- Mortgages (save $100K+ in interest).
- Any other type of loan.
Allow you to get credit cards with the best reward programs
- Earn cash back and airline miles at a faster rate (e.g., 1.5 miles vs. 1 mile per dollar).
May qualify you for perks such as access to airport lounges and free breakfast in hotels.

Having a strong credit score also shows off that you have dealt wisely when handling worldly wealth. This is a truly good endeavor. Consider the words of Jesus:

“So, if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?” Luke 16:11, NIV

How do we improve our score to get in the 800s?

Raise your score

DEFENSE

Monitor credit report monthly/quarterly.

Make sure no one steals your identity and destroys your credit.

Pay every bill on time

Including: utility, dentist, cell phone, rent, credit card, student loan, etc.

Do not open more than 1 credit account at a time.

If you do open a new credit card account, wait at least a few months before you open another credit card account

OFFENSE

Keep credit balance low.

Your credit balance should always be lower than 30% of your available credit. Keep it lower than 8% if you want to get into the 800s.

Increase available credit.

Call your credit card company once-a-year and ask them to increase your available credit. Only do this if your score is already considered good (670+).

Lengthen credit history.

If you do not have a credit card, open one and keep its balance at $0 so that you can begin to lengthen your credit history.

Activity: Monitor Your Identity