4a 
The next destination on our journey is a place that  causes a lot of
problems for a lot of people. Credit. Up until now, we've looked at
the role of money  in our lives, setting goals and establishing a 
spending plan to reach our goals.  We've looked at  the tools that
we need to use money well:  knowledge, courage and discipline.
Just as money  is a tool, so is credit. Credit can help you, or HURT 
you! With knowledge, and our personal goals in  mind, we can all
learn to use credit more wisely.  Very few of us live our lives
without using some  form of credit. But let's remember the
companies  offering us that credit are in the business of making 
money.  The highest interest rate creditors will make  more
money from people without enough financial  knowledge.   
Because knowledge is power. I want you to have  the knowledge
to use credit wisely so that you have  the power  to reach your
own financial goals. To get  started, let's review basic credit terms. 
What is credit? Credit just means borrowing money.  There are
three basic terms in credit: principal,  interest, and term. The
principal is the amount of  money that you borrow. Interest is the
price you  pay for borrowing that money. The Term is the  length
of time you have to repay the loan. So if I  loaned you $100 for a
year and at the end of the  year you had to pay me $110, $100
would be the  principal, $10 would be the interest, and the term
would be one year. There are different types  of credit: short-term
and long term credit, revolving  credit and installment loans,
secured and unsecured  loans, just to name a few.  When
borrowing money, people tend to focus on  interest rates, but we
should also look closely at the term or length of the loan. We
must consider  whether the length is appropriate for the purchase 
that is being financed. It's extremely important to  consider what
you're buying on credit in relation  to the time you have to repay
it.   For example if someone bought a home and a car  15 years
ago, chances are the house would still be  worth a lot at the end
of the loan, it would most likely  have gone up in value. But a 15
year old car wouldn't  be worth very much.  After 15 years, the car
may not  even be running.  Good thing you never hear about a 
15-year car loan.  Unfortunately 5, 6 and 7 year car loans  are
common but not in your best interest.   When you're thinking of
using credit to purchase  something, you should ask yourself
whether the  thing you're buying on credit will have value once 
you've finished paying for it.  And I'm not just talking about cars
and houses,  I mean everything you buy on credit! Some things
have almost no resale value the  minute you buy them. Buying
food with credit  is a bad idea, since it'll be gone before the bill for 
the credit is paid. So if you don't have the cash for a  fancy dinner,
don’t go or eat at a more reasonable  place.  I love new  . But I
know the minute I walk  out of the store, the clothes have lost
their value.  Think of what you pay for used clothes at a yard  sale
maybe a dollar for a shirt?  Electronics and  TV’s? You know they
come out with new models  and technologies every year. So what
you buy now is going to go down in value as time passes.  The
bottom line is to save your credit for things  you really need, AND
that will have value and use  after you pay off the credit for them!
One example  of a good use of credit is a student loan because it 
gives you an education and you’ll have that forever.  And your
education will allow you to earn more  money! Before you use
credit, ask yourself these questions:  Can I wait and save enough
to buy this item without  credit? Will using credit for this item
help me reach  my personal financial goals? And when I pay off
this  loan, what resale value or useful life will the thing  I'm buying
have left? You don't want to be paying  for the bill, including
interest, on something that  may have little value or no value to
you. Think of  continuing to pay for a trip you took two years ago! 
Or imagine making payments every month on a car  that won't
run! That's when your purchase ends up  owning YOU!  Let’s talk
about those 5, 6, and 7-year car loans now.   If your car loan is
longer than 3, or MAYBE 4 years,  you'll owe more on it than it is
worth once you hit  years 5, 6, or--heaven forbid 7 of your loan.  
Unfortunately, the 5 to 7 year vehicle loan has  become standard
practice in today's world.   Long vehicle loans put you in the
position of owing  more than the vehicle is worth, what many
people  call being "upside down" on your vehicle. You've 
probably heard car dealers' ads say: "Are you upside  down on
your car? No problem! We can put you in a  brand new car and
take your old car as trade in!"  Well, the way they do that is by
taking the excess  debt from your current car and rolling it into
the  new loan. So the dealer gives you the real trade-in  value of
your current car, but since you owe more  than that, the excess
debt becomes part of the  loan on the new vehicle. And, oh, just
to make  your monthly payments on that bigger debt  affordable, 
the new loan is stretched to 6 or 7  years. But now when you get
into year 4 or 5,  you are DOUBLE upside down! You have negative 
equity from BOTH your previous car and the new  vehicle. Some
people keep doing this until they  owe many times what their
vehicle is worth.  Don't let this happen to you!   Follow the 3 to 4
rule: If you can't afford the  payment on a 3-year loan, four at the
most,  don't buy that car! Do not get a loan for more  than 4
years--and its best to keep it to three.  Can't afford the payments?
Get a less expensive  car. Hey, it's human nature to want the
things we see  on TV or that others have. But having the latest 
model car, the coolest clothes and the latest  electronics may not
serve you if your goal is to  own a home, pay down your mortgage
more  quickly, save for your children's education, or  retire with
peace of mind. People who have all  the latest stuff may never
reach the goals that  you want!   Save your credit you won’t forget
it.  With any credit, we have to deal with two  variables.   These
are the interest rate and the term, or  length, of the loan.  The
lower the interest rate,  the lower the cost of the credit, and the
less  money that comes out of your pocket. Another  way to save
money on a loan is to pay it off faster.  Since interest keeps
running until the loan is paid,  paying off a 10-year loan in five
years saves you  money because by paying it off faster, you pay
less  interest. So the ways you can reduce the cost of  credit are by
repaying the loan sooner, getting a  lower interest rate, or both.
Of course your credit  score and your credit report-things that
we'll talk about soon- help determine the interest rate you  can
get.  Now, let's look at the impact that your interest has  on how
much you pay for credit. Let's say you're  buying a car, and you
want to borrow... $15,000.   Borrowing the money at 5% interest
for 3 years  means that your monthly payment will be $449.  Over
the 3-year loan, you'll pay less than twelve  hundred dollars in
interest, pretty good deal! Now look at the same 3-year loan at
15% interest.  The monthly payment is seventy dollars more a 
month and you will pay over $2,500 MORE in  interest over the 3
years than you would if you had the 5% interest rate!   Finally, if
the same loan was made at 25%,  the monthly payments are
almost $600 and  just look how your total interest over the loan 
has skyrocketed! And remember, this is the same  amount of
money borrowed over the same 3  years.  The only thing that
changes is the interest  rate!  Of course, with a rate that high, you
could  never afford monthly payments on a 3-year loan,  so the
dealer would steer you toward one of those  6 or 7 year car loans. 
That brings us to another factor in loans. We know  that higher
interest rates mean you pay more, but  what if the interest rate
and amount borrowed is  the same, and only the term, or length
of the loan  changes?   Let's look at the same $15,000 loan, but
this time  we keep the interest rate the same and look only  at the
difference between a 3-year loan and a 6  year loan.   The longer
loans can be deceiving because the monthly payment is a lot
lower on the 6-year  loan, but look at the total interest paid.  The
total interest you'll pay on the 3-year loan is about $2400 dollars.
But the interest on the 6-year  loan with those lower payments is
more than  double. But if you really want to see a big  difference,
let's look at a bigger loan, like a  mortgage.   Say you want an 80
thousand dollar mortgage  loan against your home. Should you go
with the  15-year loan, or the 30? Either way, you will  have the
same interest rate of 7%. Well, the  monthly payment for the 15
year mortgage is naturally going to be higher.  It's $720 a month
compared to only $532 a  month for the 30-year mortgage. But
which  is the better deal? Well, if you can afford the  higher
payments, you'd pay $50,000 less in  total interest with the 15
year mortgage!  The lower payment on the 30-year mortgage  can
be deceiving, but remember you're paying  interest for twice as 
long. Just look at the total  interest you'll pay over 30 years! It's
$111,607.  A lot more than the $80,000 you borrowed!!