Debt: Good Debt Myth

• Commercials for credit cards don't show people making payments for months or years.
• Using a credit card means buying now, living with debt, and paying later.
• The credit industry works to convince people that they're simply offering a service that allows them to have all the things they want.
• Debt results in financial insecurity, stress, and relationship problems.
• One of the key money principles is to stay out of debt to live a debt-free life.
• Debt is described as a dream killer and a nightmare maker.

Good Debt Myth

• The idea that student loans are "good debt" because they lead to a good-paying career is a myth.
• It's unwise to start life after college with tens of thousands of dollars in student loan debt.
• There's no such thing as good debt; all debt is bad, including credit cards, student loans, and car loans/leases.
• Debt is defined as owing money to anyone for any reason.
• It is a financial burden that hinders financial peace and security.

Credit as a Consumer Product

• Credit is not a tool to make your life better.
• Credit is a big business for credit card companies, banks, and lenders; you are their target.
• These companies offer opportunities to borrow money through credit cards, car loans, or student loans.
• Credit card companies profit most when people carry a balance from month to month, paying only a part of their debt and accruing interest.

Credit Card Marketing Tactics

• Once you turn 18, you become a target for credit card marketing, as companies recognize loyalty to the first credit card.
• Using debt at an early age increases the likelihood of paying with plastic.
• Credit card companies use various marketing tactics:
  • Offering low- or zero-interest introductory rates
  • Requiring only the minimum monthly payment
  • Offering cash back and other rewards.
• Low/zero interest rates are temporary, leading to higher interest rates, hidden fees, and rules.
• Minimum monthly payments barely dent the actual debt, keeping you in debt for years.
• Rewards like cash back or airline miles are not free and require careful math.

Avoiding Debt and Building Wealth

• To avoid debt, stick with cash and avoid interest, risk, and credit payments.
• True rewards come with building wealth.
• The country wasn't founded on easy financing and 90-days-same-as-cash.
• A Ramsey Solutions study revealed that 80% of Americans have a credit card
• Credit cards function as revolving credit accounts with a credit limit for multiple purchases.
• With credit cards, the more you spend, the harder it is to pay off.

Secured and Unsecured Loans

• Secured loans require collateral, such as a car or house, which the lender can take if payments are not made.
• Unsecured debts do not require collateral (like credit cards).
• Personal loans from banks or credit unions are used to pay for smaller things.
• Home Mortgage typically lasts for 15-30 years and is used to buy a house.
• Mortgage defined - A financial lien against a property
• Since the house is used as collateral, the lender owns the house until the debt is paid.
• The primary difference between the amount owed and current market value of your home is referred to as equity

Home Equity and Car Loans

• Increase in home value over time as the mortgage is paid off leads to equity, that owners can utilize to borrow.
• Borrowing against home equity with a home equity loan or HELOC is risky because the bank could take the home if the loan isn't repaid.
• Home equity loans are like the credit card of the mortgage world.
• Student loans are taken out from the federal government or lenders to pay for college and are paid back over 10-20+ years.
• Financial crisis occurs when students don't understand what they're signing up for.
• It's a huge mistake to go into debt to get an education, and The "borrow money or skip college" dilemma is a myth.
• Auto loans are installment credit, requiring monthly payments until the loan is paid off.
• Almost 90% of new cars are purchased with borrowed money.
• Average new car loan is over $32,000 with $550 monthly payments for 69 months, with cars as a depreciating asset.
• People often get another car after years of payments, dedicating a chunk of income to car payments.

Predatory Lending

• Payday loans, title loans, and pawn shops are predatory lenders that prey on desperate people, charging high interest rates and fees.
• Unbanked Americans who can't or choose not to have a bank account often rely on these, but it's best to avoid them.

Credit Scores

• Credit scores are a three-digit number telling lenders how likely someone is to repay debt, calculated from a formula using credit report information.
• FICO scores calculated with software from Fair Isaac Corporation and used by most lenders.
• Credit bureaus like Experian, TransUnion, and Equifax gather credit history and sell it to creditors.
• Credit scores do not gauge how well you handle money, how wealthy you are, or how successful you are, It says how good you are at making payments to lenders.
• FICO scores are all about debt such as how much you have, what kind it is, how long you've had it, and how well you pay it off; income, savings, or other financial assets aren't even considered.
• Checking your credit report regularly can help you spot signs of fraud or identity theft, even when living debt-free.
• After turning 18, you can request a free copy of your credit report from each of the three main credit bureaus yearly; its good to check all three as each Bureau tracks your credit history slightly different.
• It is completely ridiculous to build up your credit score by racking up debt.

Credit Cards & Debt

• A credit card is virtually guaranteed to cost you more money and make money for the credit card companies.
• Credit card companies make money from:
  • Interest charges
  • Cash advance fees
  • Annual fees
  • Over-the-limit fees
  • Late payment fees
  • Merchant fees
• If you cant pay cash, you cant afford it
• You spend more money when you use credit because you don't feel the pain of spending; spending with a debit card is closest to using cash.
• A debit card can do anything a credit card does, including shopping online, travel, and renting a car or hotel room but you cant go into debt with one.
• Debit cards have the same fraud and security protections as credit cards.
• The CARD Act of 2009 put limits on credit card tactics, such as hiding fees or interest rate hikes
• Credit card companies cannot give credit cards to anyone under 21 (with a few exceptions) and set up tables to market to college students within 1,000 feet of campus.
• Paying interest on something worth less and less every month is a terrible idea.

How Car Loans Work

• Most people believe you cant have a car without a loan, but direct financing (a loan) and leasing both put you into years of debt.
• Buying car with credit will cost way more than the sticker price as you end up paying interest too.
• A car loan payment determined by
  • Principal - The total amount of the loan cost of the car + any taxes and fees
  • Interest - an additional cost lender charges for letting you borrow their money
  • Term- the amount of time to pay back the loan, the more amount of time you have, the lower the payment.
• The very best way to buy a car is to pay cash for it!
• Buying car with cash means you own the car without debt + worry about car loan/lease payments.

Leasing a Car

• Leasing is most expensive way to finance a car that covers depreciation of the vehicle, with rental charges, taxes, and fees that allows someone to drive a glorified rental car.
• Lease agreements comes with mileage caps, Maintenance and wear fees.
• It is better to pay cash for your first car, because you can always upgrade later.
• With 78% of Americans living paycheck to paycheck, most people look like they live the American Dream.
• Choosing to avoid debt/learning good money habits gives you the chance to build wealth that lead to financial security
• The Second Foundation to get out and stay out of debt.

Getting out of Debt

• Get a $500 emergency fund saved.
• Sell the car, use the money to pay off the debt, then save for a used car.
• The Debt Snowball method for paying off debt is:
  • Listing debts smallest to largest (regardless of interest rates)
  • Pay minimum payments on everything but little one
  • Attack smallest debt, then add payment to the next largest debt
  • Squeeze out money from the budget and pay minimum payments
• Debt steals your ability to be generous.

Laws

• FAIR CREDIT REPORTING ACT (1971): Governing the reporting of debt repayment information.
  • A credit reporting agency may give a report someone, obsolete information must be removed (7 to 10 years);
  • Consumers have the right to know what in their credit reports.
  • Both credit bureaus have an obligation correct wrong information; consumers can dispute information/add a 100-word statement.
  • It intended address concerns over consumer credit report accuracy, privacy/fairness.
• FAIR CREDIT BILLING ACT (1975): Covers credit card billing problems/applies to open-end credit.
  • States that consumers should send a billing error notice within 60 days;which the creditor must acknowledge in 30 days/investigate/prohibits them from damaging a consumer's credit rating while a dispute is pending.
• FAIR DEBT COLLECTION PRACTICES ACT (1978): Prohibits debt collectors from using unfair/abusive practice when collecting debts.
  • Collections need to send written notice with the name and the amount owed
  • Prohibits contacting the consumer if they dispute the claim
  • Collectors identify themselves on the phone/Limits calls from 8:00 am + 9:00 pm, cant call if requested
• EQUAL CREDIT OPPORTUNITY ACT (1975): Consumers are given equal chance to receive credit + prohibits discrimination based on personal status or receipt of public assistance.
• TRUTH IN LENDING ACT (1969): Mandates disclosure of information about the cost of credit + must display the charges/interest rates prominently.
• FAIR CREDIT/CHARGE CARD DISCLOSURE ACT (1989): Part of the Truth in Lending act.
  • A section in credit card applications describes key features and costs, includes annual fees, penalty fees etc