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Book Study
Lesson 2
Be Free in Christ
With credit, you can be:
The costs of being enslaved include:
Never own car or home
Getting sued by creditors.
Paying hundreds in fees that could have gone towards ministry or saving.
Having creditors calling relentlessly.
Right now, how free are you from the dangers of credit cards?
1: Totally enslaved.....5: In danger.....10: Totally free
Credit Video
What stood out to you about the video?
Case study: Beverly
Beverly was excited to receive a free T-shirt from the credit card company. She quickly signed the clipboard and put on her new shirt. A few weeks later, a shiny credit card came in the mail. She realized that this was something she could use to get cash back and travel points, so she used it for every purchase. Eventually, she started to use it to buy things that she could not afford since she could afford the minimum monthly payment of $35. What is the harm?
Her credit card debt became so great that she felt trapped by it. She eventually was not able to pay her bills consistently and now she dreaded the looks from landlords, employers, or even the Apple worker when they would run her credit.
What is your first credit experience? How was your attitude during this experience different (or the same) from Beverly?
Federal Reserve Statistic:
Half of all Americans unable to come up with $400 without borrowing or selling something.
Do you have an emergency fund?
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)
If you had a $2,000 financial emergency today, where would the money come from?
Excellent Credit
Your credit is either “good” or “bad.”
Your credit is your most important asset.
Impact of bad credit impact all facets of life!
- Housing: opportunities shrink, and costs increase.
- Car insurance: premiums may go up.
- Utilities: cost may increase.
- Job prospects: employers may not hire you.
Credit Invisible
- Everyone begins life as “credit invisible” to these credit bureaus. The most common reason a person becomes “credit visible” is when they open an account where they can potentially borrow money from a credit card company or student loan provider (65%).
- You can also become credit visible by opening an account with a utility company, or even a dentist office (both services provide service before your payment, so they are extending you credit).
Denied housing
Landlords will deny you an apartment if you have bad credit. Even if you are a Congressman!
Massive mortgage savings
Just increasing your credit score from 638 to 764 saves you over $600 a month in housing costs when buy a home.
800 Credit Score
Credit is like a tree:
- It takes a long time to grow.
- You never want to chop it down (actually use it).
- Once it is fully established, it provides great benefits, like cash back and travel points.
Credit quality is measured by a credit score, which is calculated using credit report data.
If we want a top credit score of 800+, 4 keys:
- Always pay every bill, including dentist and utilities.
- Long credit history.
- Lots of credit available that is unused.
- Don’t open many new credit accounts
500 credit score
Brock has a 500 credit score, and is desperate to improve his credit.
- Did not pay a dentist bill.
- Paying minimum payment of $65 a month. Cannot afford to pay full credit card balance.
- Using 70% of $6,000 credit available.
- Victim of identity theft.
- Has 6 different credit cards.
What should Brock do first? After that?
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 credit card company’s plan to devour your money life is a diabolical plan that involves three-stages.
(1) DAZZLE
In the first stage, credit cards are simply sold as a way to buy things without having to have cash. This first stage DAZZLES us with bright, exploding points that light up the night sky every time we swipe our card.
(2) ADDICT
After dazzling us, we accept the Trojan horse into our homes as we get hooked to using it. Studies have shown that credit cards remove a critical barrier to spending as they allow us to delay the consequences of our spending since we can buy something without seeing any immediate consequences. Getting something without an immediate consequence actually sends a reward to our brain called DOPAMINE, and we get more of a thrill from shopping.
(3) CONQUER
The last stage of their plan is to overcome us and CONQUER US. They do this by taking advantage of a flaw in the human brain known as anchoring bias. Anchoring bias means that our brains anchor to numbers that they see first. Credit card companies try to make sure that the number that we see first is the minimum balance. Although most people never initially intend to use a credit card to borrow money, only a quarter of people actually pay off their full balance.
When you shop, do you pay attention to how much things cost? Or do you just swipe and hope for the best?
What can we do to not delay the consequence of spending until month-end (or much later if you are not paying off your credit card balance)?
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.
Boundaries: 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.
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.
Does this credit card boundary make sense for you, or would you modify it?
Boundaries: Always make a plan!
If you ever acquire debt, always have a repayment plan in place.
STEPS:
- Calculate your total debt outstanding and details of your debt.
- Identify your best type of repayment strategy.
- Prayerfully calculate how you will repay each month in order to “excel in the grace of giving.”
Watch this video and discuss what you agree with and do not agree with regarding credit strategies.
Activity: Grow & Fear Credit
Grow Credit
(1) Become credit visible
- Become an authorized participant.
- Open up a utility/health account in your name.
- Open up a credit card (see next step below).
- Open up a secured credit card.
- Open up a credit building savings account.
(2) Monitor your credit
- Free myFICO app
- Get alerts if anything changes in your credit report.
- Make sure you have a plan to get to an 800 score (low credit utilization, long credit history, clean payment history).
(3) Grow your available credit and never use it (paying it off same day).
- Make a plan to ask for more credit 2x per year.
- Only have 1-2 credit accounts to manage at a time.
- Cut up your credit cards if you ever pay a late fee or keep an outstanding balance.
Opening a credit card (and keeping a $0 balance) is a good way to grow credit. Shop for a credit card:
CRITERIA:
Good rewards?
- Usually, it is a choice between cash back and travel points.
- Often best to choose a credit card where you shop the most (e.g., Costco, Amazon, Walmart, etc.).
$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!
Fear Credit
If you ever acquire debt, always have a repayment plan in place.
Repayment Plan
Part 1: Find your total debt outstanding:
What is your total debt amount?
$_________________ total debt
Part 2: Find repayment strategy:
What is your repayment strategy going to be?
- Avalanche (pay off highest interest rate debt first)
- Snowball (pay off lowest balance debt first)
- Consolidate (combine all loans to one loan)
- Income-based repayment plan (only pay 10% of your income)
Compare different repayment strategies:
See what student loan debt repayment would look like under different repayment strategies:
https://www.savingforcollege.com/calculators/income-based-repayment-calculator
Get free credit counseling service:
Part 3: Repay your debt:
What is your monthly debt repayment once your repayment begins?
$_________________ per month
What year are you officially debt-free:
____________
What will you do to celebrate being debt-free (vacation, party, etc…)?
_______________________________________________
Part 4: Establish and Emergency Fund
- Start with $400 cash that is put into an online savings account.
- Work towards having 3-6 months of living expenses as cash in an online savings account.
Ideal Emergency Fund = monthly living expense of $_____ *6 = $_________
Transition
