Cash and Credit Information For Teens
Cash and Credit Information For Teens
Cash and Credit Information For Teens
◆
TEEN FINANCE SERIES
Second Edition
◆
Edited by Karen Bellenir
2009012105
This book is printed on acid-free paper meeting the ANSI Z39.48 Standard. The infinity symbol that
appears above indicates that the paper in this book meets that standard.
Cash and Credit Information For Teens, Second Edition provides an up-
dated look at how teens can earn and manage money. It provides practical
information about receiving income, paying taxes, and budgeting. It also dis-
cusses choosing appropriate banking services, managing a checking account,
using credit and debit cards, making informed shopping decisions, and bor-
rowing money for education or major purchases. A section on avoiding fi-
nancial pitfalls provides facts about debt-related problems, identity theft,
and common financial scams. The book concludes with a list of online money
management tools and a directory of resources for additional information.
Part One: Earning Money begins with facts about the history, manufacturing,
and value of coins and currency. It continues with information about the
most common ways teens can acquire money, including allowances, jobs,
internships, and even starting their own businesses. Information about taxes
on income and other earnings is also included.
Part Two: Managing Your Money discusses ways to monitor the use of money,
save for specific goals, and increase personal wealth. It describes the impor-
tance of budgeting, explains different types of banks and the services they
offer, and discusses the use of insurance for risk management. The part con-
cludes with a chapter about using personal resources, including time and
money, to help others.
Part Three: Being A Savvy Consumer provides tips about shopping and spend-
ing money wisely. It discusses ways to evaluate purchase decisions and de-
scribes the benefits and risks of various payment options, including cash, checks,
credit cards, and debit cards. It offers suggestions for resolving problems when
things go wrong, especially with online, telephone, and mail-order shopping.
Several individual chapters discuss some of the purchase challenges many teens
encounter, including shopping for cell phone plans, buying computers, buying
a car, or joining a club to purchase music, books, or videos.
Part Four: Using Credit And Credit Cards explains how credit works and the
importance of building a good credit history. It discusses the factors lenders
consider when making decisions about loaning money, and it describes the
types of loans teens may encounter most frequently, including credit cards,
car loans, and loans for education.
Part Five: Avoiding Financial Pitfalls explains some of the most common
problems that threaten financial well-being, including spiraling debt, preda-
tory lending practices, and identity theft. It also offers cautions about the
risks associated with sweepstakes frauds, lottery scams, bogus fundraising
activities, fraudulent work-at-home and internet schemes, pyramid and Ponzi
schemes, modeling scams, travel offer fraud, and gambling.
Part Six: If You Need More Information includes a list of online money man-
agement tools and a directory of resources for additional information about
personal finance.
xi
Bibliographic Note
This volume contains documents and excerpts from publications issued
by the following government agencies: Federal Bureau of Investigation (FBI);
Federal Deposit Insurance Corporation (FDIC); Federal Reserve Board of
Governors; Federal Trade Commission; Internal Revenue Service (IRS);
National Network of Libraries of Medicine, South Central Region; U.S.
Department of Justice; U.S. Department of Labor; and the U.S. Small Busi-
ness Administration.
Acknowledgements
In addition to the organizations who have contributed to this book, spe-
cial thanks are due to research and permissions coordinator, Liz Collins;
permissions assistant, Cherry Edwards; editorial assistant, Nicole Salerno;
and prepress technician, Elizabeth Bellenir.
Part One
Earning Money
Chapter 1
Federal Reserve notes are printed and issued in denominations of $1, $2,
$5, $10, $20, $50, and $100. The $500, $1,000, $5,000, and $10,000 de-
nominations have not been printed since 1946.
The Federal Reserve Act requires that adequate backing be pledged for
all Federal Reserve notes in circulation. U.S. Treasury securities, acquired
through open market operations, are the most important form of collateral
About This Chapter: “Dollars and Cents,” reprinted with permission from the Federal
Reserve Bank of Atlanta, www.frbatlanga.org. © 2006.
4 Cash and Credit Information for Teens, Second Edition
Currency Features
All U.S. currency is produced by the Bureau of Engraving and Printing,
which also designs, engraves, and prints items such as postage stamps.
Since 1862 all U.S. currency had been printed in Washington, D.C., but to
help meet increasing demand, a second printing facility was opened in Fort Worth,
Texas, in 1991. Fort Worth now produces about half the nation’s currency.
Security Features
Because U.S. currency is universally accepted and trusted, it is widely
counterfeited. The U.S. Secret Service was created in 1865 to curtail counter-
feiting.
U.S. currency has traditionally had a number of features that deter counter-
feiters. One is the cotton and linen rag paper, which has a distinctive, pliable
feel and has tiny red and blue fibers embedded in it. Though a commercial
company produces the paper, it is illegal for anyone to manufacture or use a
similar type except by special authority. Inks manufactured according to se-
cret formulas by the Bureau of Engraving and Printing also help prevent
counterfeiting.
✤ It’s A Fact!!
How Currency Is Printed
U.S. currency is printed by the engraved intaglio steel plate method, a compli-
cated procedure that gives notes an embossed feel and other distinctive features
difficult to counterfeit.
A steel die is made of each feature. Rolls made from these dies are put
together into a master die of the complete note. The master die is then used in
the first of a series of operations leading to the making of press plates from
which the notes are printed.
6 Cash and Credit Information for Teens, Second Edition
The security features added to notes in the 1990s and in the 2004 redesign
were recommended by an extensive study of counterfeit deterrence methods.
Color-Shifting Ink: The ink used in the numeral in the lower right-hand
corner on the front of the bill looks copper when viewed straight on but
green when viewed at an angle.
✤ It’s A Fact!!
The Great Seal
Of The United States
The first currency note to have the Great Seal of
the United States as part of the design was the $1 Silver
Certificate, Series 1935. The seal has appeared on the reverse
(green) side of all $1 notes since then.
The face of the seal, on the right-hand side of the bill, shows the American
bald eagle with wings and claws outstretched. Above the eagle’s head is a glory,
or burst of light, containing 13 stars. (The number 13 represents the original
13 states.) The right claws hold an olive branch with 13 leaves, representing
peace, and the left, a bundle of 13 arrows, symbolizing war; the eagle’s head is
turned toward the olive branch, indicating a desire for peace. The shield (with
13 stripes) covering the eagle’s breast symbolizes a united nation. A ribbon
held in the eagle’s beak bears the Latin motto E Pluribus Unum (13 letters),
which means “out of many, one.”
The back of the Great Seal, on the left-hand side of the bill, depicts a
pyramid, a symbol of material strength and endurance. The pyramid is
unfinished, symbolizing a striving toward growth and a goal of per-
fection. Above the pyramid a glory, with an eye inside a triangle,
represents the eternal eye of God and places the spiritual above
the material. At the top edge is the 13-letter Latin motto
Annuit Coeptis, meaning “He has favored our under-
takings.” The base of the pyramid bears the roman
numerals MDCCLXXVI (1776). Below is
the motto Novus Ordo Seclorum, “a
new order of the ages.”
Facts About The Money In Your Wallet 9
Serial Number: Beginning with the 1996 series, serial numbers consist of
two prefix letters (except on $1 and $2 notes, which have one prefix letter),
eight numerals, and a one-letter suffix. The serial number appears twice on
the front of the note. No two notes of the same kind, denomination, and
series have the same serial number. This fact can be important in detecting
counterfeit notes; many counterfeiters make large batches of a particular note
with the same number.
Notes are numbered in lots of 100 million. Each lot has a different suffix
letter, beginning with A and following in alphabetical order through Z,
omitting O because of its similarity to the numeral zero.
Because serial numbers are limited to eight numerals, a “star” note is sub-
stituted for the 100 millionth note. Star notes also replace notes damaged in
the printing process. Made up with independent runs of serial numbers, star
notes are exactly like the notes they replace except that a star is substituted
for one of the serial letters.
Size: Until July 1929 U.S. currency was 7.42 inches by 3.13 inches. Cur-
rency printed since 1929 is 6.14 inches by 2.61 inches, a size easier to handle
and less expensive to produce.
Bank tellers and others who frequently handle currency use the portrait
in assembling and counting it. They assemble each denomination separately
and uniformly—face up and top up. This practice also helps handlers detect
counterfeit and altered notes. All Reserve Banks require banks to arrange
their currency for deposit in this way.
“In God We Trust”: Secretary of the Treasury Salmon P. Chase first au-
thorized use of “In God We Trust” on U.S. money—on the two-cent coin in
1864—after receiving a number of appeals from citizens urging that the deity
be recognized on U.S. coins. In 1955, Congress mandated the use of this
phrase on all currency and coins. All denominations of paper money now
being issued carry the motto.
10 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Faces And Backs Of Currency
Denomination Face Back
U.S. Coins
U.S. coins have changed many times since the Coinage Act of 1792, which
adopted the dollar as the standard monetary unit.
Silver dollars have been minted and issued at various times since 1794.
Dollar coins were discontinued in 1935, then resumed in 1971 with the intro-
duction of the silverless Eisenhower dollar. The silverless Susan B. Anthony
coin, honoring the famed women’s suffrage advocate, replaced the Eisenhower
dollar in 1979. The current dollar coin, which replaced the Susan B. Anthony
coin in 2000, depicts Sacagawea, the Native American woman whose presence
was essential to the success of the Lewis and Clark expedition. The coin has
a copper core clad in an alloy of copper, zinc, manganese, and nickel, which
gives the coin a golden color.
Other coin denominations in common use today are the 25-cent, 10-cent,
five-cent, and one-cent pieces, familiarly known as the quarter, dime, nickel,
and penny.
The composition of U.S. coins has changed considerably since the 1960s.
Because of a growing worldwide silver shortage, the Coinage Act of 1965
authorized a change in the composition of dimes, quarters, and half-dollars,
which had been 90 percent silver. Silver was eliminated from the dime and
the quarter. The half-dollar’s silver content was reduced to 40 percent and
after 1970 was eliminated altogether.
U.S. coin denominations used in the past were the half-cent, two-cent,
three-cent, and 20-cent pieces, as well as a small silver coin called a half-
dime. Gold coins in denominations of $1, $2.50 (“Quarter Eagle”), $3, $5
(“Half Eagle”), $10 (“Eagle”), and $20 (“Double Eagle”) were used from
1795 until 1933.
The Mint
The U.S. Mint, which makes all U.S. coins, was established by Congress
in 1792 and became an operating bureau of the Treasury Department in
1873.
The Philadelphia Mint has been in continuous operation since 1792. The
Denver Mint began its coinage operations in 1906. The West Point, New
York, and San Francisco Mints gained official Mint status in 1988. Originally
an assay office, the San Francisco Mint is the primary production facility for
proof coins. The West Point Mint, once used exclusively as a bullion depository,
is now the Mint’s chief producer of gold coins.
U.S. coins typically bear a mint mark showing which mint produced them.
Coins minted in Philadelphia bear a P or no mint mark; those minted in
12 Cash and Credit Information for Teens, Second Edition
portray past U.S. Presidents. They are the Lincoln one-cent piece, adopted
in 1909; the 25-cent piece portraying Washington, first minted in 1932; the
five-cent piece honoring Jefferson, adopted in 1938; the Franklin D. Roosevelt
dime, introduced in 1946; and the Kennedy half-dollar, which appeared in
1964.
The 50 States Quarters Program Act of 1997 provided for the redesign
of the reverse side of quarters to feature designs created by each of the 50
states. Each year from 1999 through 2008, coins commemorating five states
were issued in the order in which the states signed the Constitution or joined
the Union. These quarters are in general circulation, but the Mint also sells
sets of collector edition proof, uncirculated, and silver proof coins.
Two new designs for the nickel, issued only in 2004 and 2005, depict
images commemorating the Louisiana Purchase and the Lewis and Clark
expedition; the designs appear on the reverse side while the obverse still
depicts Thomas Jefferson.
✤ It’s A Fact!!
Commemorative Coins
Coins to commemorate American people, places, events, and institutions
are authorized by special acts of Congress and manufactured in limited quanti-
ties. Commemorative coins, which may be gold, silver, or clad, usually sell at a
premium, so they seldom circulate as regular coin.
The first commemorative coin was minted in 1892 to help finance the
World’s Columbian Exposition in Chicago. Since that time many other com-
memorative coins have been issued.
Recent commemorative coins include 2004 coins marking the Lewis and
Clark expedition bicentennial and the 125th anniversary of Thomas Edison’s
invention of the light bulb and 2005 coins honoring John Marshall, fourth
Chief Justice of the United States, and the Marine Corps’ 230th anniversary.
14 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Faces And Backs Of Coins
Coin Face Back
“In God We Trust”: The phrase was first used on the U.S. two-cent coin
in 1864. It appeared on the nickel, quarter, half-dollar, and silver dollar and
on the $5, $10, and $20 gold pieces in 1866, on the penny in 1909, and on
the dime in 1916. Dropped from the nickel in 1883, the phrase reappeared
on the nickel in 1938. All U.S. coins now issued bear the motto.
Circulation Of Money
The amount of U.S. currency and coin in circulation increased dramati-
cally during the 20th century (see Table 1.1. Figures are from statements
published by the Treasury Department.)
Banks send old, worn, torn, or soiled notes to a Federal Reserve Bank to
be exchanged for new bills. The Reserve Banks sort the money they receive
from commercial banks to determine if it is “fit” or “unfit.” Fit (reusable)
money is stored in their vaults until it goes out again through the commercial
banking system. Reserve Banks destroy unfit currency and return damaged
and worn coins to the Treasury.
✤ It’s A Fact!!
Redeeming Damaged Money
Paper money that has been mutilated or par-
tially destroyed may in some cases be redeemable at
full face value. Any badly soiled, defaced, torn, or worn-
out currency that is clearly more than half of the original note
can be exchanged at a commercial bank, which processes the note
through a Federal Reserve Bank. More seriously damaged notes—those
with clearly less than half of the original surface or those requiring special
examination to determine their value—must be sent to the Department of
the Treasury for redemption.
But it is in your interest always to examine any currency you receive be-
cause you must assume the loss for any counterfeit note you accept. Perhaps
the following suggestions from the U.S. Secret Service will help you spot one.
Study genuine currency. In series 1996 or later currency, the security fea-
tures described earlier will be present. In addition, look closely at the work-
manship of several features. On genuine notes, the portrait and the picture
on the back of the note stand out sharply from the background, and the eyes
in the portrait appear lifelike. Numbers are firmly, evenly printed and well
spaced, and the fine criss-crossing lines of the scrollwork borders are sharp
and unbroken.
Facts About The Money In Your Wallet 17
On counterfeit notes, the portrait and picture may merge with the back-
ground, the eyes or other features on the portrait may be dull or smudgy, or
the face may seem unnaturally white. Numbers may be out of line, poorly
spaced, and printed too light or too dark, and the lines in the scrollwork
borders may be blurred or broken.
The paper used for genuine notes is of very high quality. The tiny red and
blue fibers embedded in the paper of genuine notes may not be visible if the
bill is badly worn or dirty; on counterfeit bills, these threads may be imitated
by fine red and blue lines printed or drawn on the paper. Counterfeit cur-
rency paper may feel different or be whiter than genuine paper.
✔ Quick Tip
Visit the Federal Reserve Bank of Atlanta’s website,
http://www.frbatlanta.org, to find out more about the Federal Re-
serve Bank of Atlanta and its publications, which cover
economic and financial topics.
For more information on the rules about reproducing money, contact the
U.S. Secret Service office nearest you; office locations are available on the
internet at www.treas.gov/usss or by contacting the U.S. Secret Service, Office
of Government Liaison and Public Affairs, 950 H Street, N.W., Suite 8400,
Washington, DC 20001-4518, 202-406-5708.
Chapter 2
And to make the whole allowance strategy work, parents must hold their
ground when their child spends too much and runs short. The very worst
thing a parent can do is bail a kid out of his or her financial trouble. Parents
shouldn’t cave. If parents rescue a child, he or she doesn’t have to deal with
the impact of the mistake. It loses its punch and its lasting effect. (Bailing
About This Chapter: “Let’s Talk Allowances,” © 2007 Northwestern Mutual Founda-
tion. Reprinted with permission. For additional information, visit www.themint.org.
20 Cash and Credit Information for Teens, Second Edition
kids out is like giving them an easy “undo” button. Unfortunately, real life
doesn’t provide “undo” buttons.)
Both Sides
For allowances to work, both sides ✤ It’s A Fact!!
have to keep to their side of the play- About Chores: Many par-
ing field. The terms of the allow- ents tie allowances to doing
ance are c lear. Parents can’t chores to give kids a work-world
criticize their kid’s spending. Kids experience. But what happens when
can’t ask for help when they get the chores don’t get done? What if
this happens repeatedly? If parents
in trouble. But the beauty of this
withhold the allowance, they also re-
system is that the two sides no move the opportunity for the child to
longer argue over purchases: their learn to manage money. Parents may
cost, their necessity, or their value. want to consider imposing a dif-
Each side stays on its side of the line. ferent consequence for not do-
ing chores—no movie, no
Kids Learn To Negotiate telephone—to make
the point.
Here’s a possibly unexpected benefit of
allowances. When kids get older, they may “pe-
tition” their local allowance-giver to increase their weekly pay.
If the allowance is not tied to chores, why does the teen need more money?
Simply saying that he or she cannot live within the bounds of the allowance
won’t cut it unless expenses are really growing.
If so, why? Are they reasonable expenses? Will the teen now take on more or
total responsibility for them? If the case doesn’t persuade, parents have every
right to deny the request. It will be a great opportunity for kids to build a real-
world skill. They may have to negotiate a salary with an employer someday.
What’s Value?
Whenever anybody spends money—whether it’s an allowance or a pay-
check—they want to know they’re getting their money’s worth. In other
words, are they getting value in return for their money? What exactly does
that mean?
It means that you should understand what you’re paying for. If you’re
going to pay more than the item’s worth, you should know why.
For example, you can buy a five-pound bag of potatoes in the grocery
store for $2.50. Why, then, would you spend $2.09 on a few ounces of fries at
a fast-food restaurant? Because they taste great! you say. That’s one reason, but
you could also put some frozen fries in the oven at home. They’d crisp up in
about 20 minutes, and you have fries enough for a family of four for about
$2.00. So what gives those fast food fries value? Try another answer.
Okay. I’ve just finished sports practice. I’ve got to hustle to my music lesson. I’m
starving after practice, I don’t have time to go home and grab a sandwich, and I
didn’t pack one this morning, so I’ve got nothing to eat. If I don’t get some food
soon, I’ll never be able to concentrate during my lesson. How’s that?
Closer. You’re saying that you’re really paying for more than a box of skinny
spuds. You’re paying for convenience. The right food (something you like) in
the right place (on your way to your lesson) when you need it (you’re starving.)
What good will five pounds of raw potatoes do you at this moment?
But if you had rolled out of bed right away this morning, you would have
had time to make a sandwich and throw in a drink, an apple, and a couple of
granola bars.
22 Cash and Credit Information for Teens, Second Edition
But this is only one example of what people buy and why they buy it.
There are many ways to judge value—you can find another at themint.org.
Go to Spending, and click on What’s It Worth? It will give you a totally
different view.
How much to give? It depends. Kids with generous allowances and not
many expenses can afford to give more. Kids who must use most of their
allowance to pay expenses may have to give less. Another option is to give
time instead. Kids have lots of energy that organizations can use. Whether
you contribute money, time, or both, requiring kids to involve themselves in
the community gives them the satisfaction that comes with helping others.
It will also teach them that sometimes they might have to delay their own
desires to help someone else with a more serious need.
Giving can be a family decision: the family chooses from several causes,
listing pros and cons. Then everyone gives to the chosen organization.
Or, you can make giving more individual. What is important to you? Ask
your parents to help you find an organization that furthers this cause. Be
sure that the organization you choose is legitimate. givespot.com or
guidestar.org might be places to start.
Making Money
The most common way that most young people get money is through an
allowance. Not every teen gets one, of course, and your parents’ beliefs or
financial situation might mean you get little or nothing. According to various
surveys, the average allowance for teens is anywhere from $20 to $50 per
week. If yours is a lot lower, perhaps try negotiating a raise.
From Your Family: Your parents might pay you for getting good grades
in school, or for reading a certain number of books, or for doing various jobs
around the house. You might even earn some money from siblings, if you
offer to do some of their chores.
About This Chapter: “Ways to Save and Make Money,” © 2003 The Motley Fool. All
rights reserved. Reprinted with permission.
24 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Age Requirements For Working
The Fair Labor Standards Act (FLSA) sets wage, hours worked, and safety
requirements for minors (individuals under age 18) working in jobs covered by
the statute. The rules vary depending upon the particular age of the minor and
the particular job involved. As a general rule, the FLSA sets 14 years of age as
the minimum age for employment, and limits the number of hours worked by
minors under the age of 16.
offer to sell other people’s knickknacks, for a small fee or a percentage of the
price. Another option is selling items online, such as on eBay.
A Job: This is perhaps the most obvious way to earn money, and teens
frequently land part-time or full-time summer jobs.
longer and longer hours these days, some will pay you to visit their
pets during the day and take them for a walk.
• Working For Your Parents: If mom or dad owns a business, they might
be able to use your help. Even if they work for a company, they may be
able to hook you up with a part-time job there. (Check with your
parents’ friends, too.)
• Tutoring: Some teens report that they earn anywhere from $5 to $20
per hour tutoring. If you’re good at a subject, you may be able to earn
money by helping others to understand it.
• Lifeguard: In some parts of the country, there are shortages of life-
guards. Some have been earning $10 per hour or more. If you have the
skills needed, consider this option.
• Camps: If you look into it early enough, you can line up a job at a
summer camp—you might work with kids, tend the grounds, prepare
food, or do any of a number of things.
• Jobs Matching Your Interests: If you enjoy working with young chil-
dren, see if any daycare centers near you need help. If you like the great
outdoors, check with your local parks department. If you like movies
or recreation, look into movie theaters or amusement parks.
• Mowing Lawns, Raking Yards, Shoveling Snow, Gardening: These
can all be part of the same job. Once your customers know you and the
good work you do, they may use your services doing other jobs in other
seasons.
• Department Stores: A big perk with these jobs is that you often get to
enjoy employee discounts (which can be substantial, often 20–30%
off ) and commissions on items you sell.
• Create Websites: If you know enough about computers to create well-
designed websites, you can make some good money. Many small com-
panies and organizations pay thousands of dollars to have websites
built for them. You might charge very little at first, but once you have
a few impressive websites to show potential customers, you can hike
your rates. Some small companies might also pay you to help maintain
their sites, adding content, and solving problems that arise.
26 Cash and Credit Information for Teens, Second Edition
• Be Crafty: If you enjoy arts and crafts, you might make jewelry or
other items and sell them—perhaps on eBay, where you’ll have instant
access to a large customer base. Some painters and photographers are
making money selling their work online, too, although that can be
harder to do.
✤ It’s A Fact!!
What jobs can youth do?
When you are 13 or younger . . .
• You can deliver newspapers.
• You can work as a baby-sitter.
• You can work as an actor or performer in motion pictures, television,
theater or radio.
• You can work in a business solely owned or operated by your parents.
• You can work on a farm owned or operated by your parents.
However, parents are prohibited from employing their children in manu-
facturing, mining, or any other occupation declared hazardous (listed below) by
the Secretary of Labor.
When you turn 14, you can also work in an office, grocery store, retail store,
restaurant, movie theater, baseball park, amusement park, or gasoline service station.
You generally may not work in communications or public utilities jobs, con-
struction or repair jobs, driving a motor vehicle or helping a driver, manufacturing
and mining occupations, power-driven machinery or hoisting apparatus other than
typical office machines, processing occupations, public messenger jobs, transport-
ing of persons or property, workrooms where products are manufactured, mined or
processed, or warehousing and storage. In addition, you may not work any other job
or occupation declared hazardous (listed below) by the Secretary of Labor.
When you turn 16, you can work in any job or occupation that has not been
declared hazardous by the Secretary of Labor.
Hazardous Occupations
You generally may not work in any of the following hazardous occupations:
• Manufacturing and storing of explosives
• Driving a motor vehicle and being an outside helper on a motor vehicle
Jobs For Teens 27
• Serve The Elderly: Not only might you find work in a nursing home
or retirement community, but you might also serve older people in
your neighborhood. Many older people can’t get around much. They
may welcome your services delivering groceries, running errands, or
doing odd jobs around their home.
• Coal mining
• Logging and sawmilling
• Power-driven woodworking machines
• Exposure to radioactive substances
• Power-driven hoisting apparatus
• Power-driven metal-forming, punching, and shearing machines
• Mining, other than coal mining
• Meat packing or processing (including the use of power-driven meat
slicing machines)
• Power-driven bakery machines
• Power-driven paper-product machines
• Manufacturing brick, tile, and related products
• Power-driven circular saws, band saws, and guillotine shears
• Wrecking, demolition, and shipbreaking operations
• Roofing operations and all work on or about a roof
• Excavation operations
Note: Different rules apply to farms, and individual states may have stricter rules.
Source: “What Jobs Can Youth Do?” U.S. Department of Labor (youthrules.dol.gov),
2008.
28 Cash and Credit Information for Teens, Second Edition
• Negotiate With Your Parents: This may or may not work for you, but
it’s worth a shot. See if they’ll “match” your savings, in order to en-
courage good saving habits. If they match your savings dollar-for-dollar,
for example, that would mean that for every $25 you plunk into sav-
ings, they’d plunk an additional $25.
• Consider The “Opportunity Cost” Of Purchases: Opportunity cost is
an economic term that applies to many parts of our lives. It essentially
refers to the cost of giving up one alternative in order to act on an-
other. Imagine that you can either buy concert tickets for $50 or you
can invest the money. If you invest for 10 years, and your investment
grows by an average of 11% per year, your original $50 will become
$142. So your decision can be framed like this: “Would I rather have
these tickets now, or $142 in 10 years?” If you’re thinking of buying a
pair of shoes for $75, consider whether it’s worth the opportunity cost
of $600 in 20 years. Perhaps it is. If so, then by all means, buy the
shoes.
Chapter 4
About This Chapter: “Finding A Summer Job Or Internship” March 2008, reprinted
with permission from www.kidshealth.org. Copyright © 2008 The Nemours Founda-
tion. This information was provided by KidsHealth, one of the largest resources online
for medically reviewed health information written for parents, kids, and teens. For more
articles like this one, visit www.KidsHealth.org, or www.TeensHealth.org.
32 Cash and Credit Information for Teens, Second Edition
money, want to build your work experience, or want a job that looks good on
your résumé or will help you get into college? Knowing what you want will
help bring job satisfaction.
Next, make a list of your interests and strengths, as well as your weak-
nesses, and keep them in mind as you look for a job. For example, you may be
in love with books or gifted when it comes to animals—a job in a bookstore
or pet store would be perfect for you. On the other hand, if looking after
little kids drives you crazy or if you burn in
the sun, then you’ ll know to avoid
babysitting or lifeguard jobs. ✔ Quick Tip
A job or internship should not Start Early
only be enjoyable, it should be a In the past few years the tight
job market has meant fewer jobs
learning experience too. Because
available for high school students.
working demands so much of your
Start your job search early to
time, try to find a job or internship beat the competition and
that may help guide you toward your land the job you want.
long-term goals. For example, if you
want to study veterinary science in col-
lege, finding a job in a vet’s office, animal
shelter, or even a pet store may be better choices for you than working in a
restaurant.
The most common way to find a job opening is by reading the classified
ads section of your local newspaper. Of course, some of the jobs listed—
usually those that appear under “sales” and claim you can work for yourself
and make thousands of dollars a week—may be too good to be true. So make
Finding A Summer Job Or Internship 33
sure the job ad mentions what the work entails (e.g., “server, evenings and
weekends” or “day camp counselor”).
Some people also get job leads from their school counselors, whereas others
fill out applications or drop off résumés at prospective employers and tempo-
rary employment agencies. If you’re interested in working at a restaurant, book-
store, garden center, or other service business in your area, the best approach is
to go there and fill out an application form.
Your school counselor may be able to help open other doors of opportu-
nity via internships. Some companies and businesses offer bright students
short-term, hands-on training (and sometimes even a modest rate of pay) in
exchange for a willingness to learn and work hard. If you perform well at
your internship, you may be offered a full-time job next summer or even an
ongoing part-time job. Internships can also provide you with valuable refer-
ences that can help you to land future jobs.
Know The Law: Federal and state laws limit the number of hours teens can
work. For summer employment (when school is not in session), the federal
government does not allow 14- and 15-year-olds to work before 7 a.m. or after
9 p.m., and they cannot work more than 8 hours a day or 40 hours a week. You
can find out your state’s laws and curfews (times when teens are not allowed to
work) by calling your state department of labor. If you know your curfews and
mention them when interviewing for or starting a job, your boss can keep
them in mind when he or she schedules your start or quitting time.
The Interview
It’s not just previous job history or unique skills that matter at the inter-
view. Both your attitude and your appearance affect your chances of getting
the job you want. You’ve probably heard your parents talk about making a
good first impression with what you wear (it may sound like a lecture, but in
this case they’re right!). Here are some other strategies to help make your
interview a success:
Appear Confident: Look your potential employer in the eye, shake his or
her hand, and remember another parental mantra: good manners.
Be Prepared: Find out what you can about the position or company in
advance and show your knowledge during the interview. Doing a little re-
search on the job or field in which you’re applying—so easy to do on the
internet—shows the interviewer that you’re smart and eager to learn. Know-
ing what a position involves also allows you to think in advance about which
specific skills you have that fit well with the job.
☞ Remember!!
Looking for a job, preparing for a job interview, and
even getting to work are all areas in which a parent or older
sibling can offer good advice. So don’t hesitate to ask for help on
everything from putting together your résumé to choosing an inter-
view outfit. Chances are, you’ll be interviewing and working
for people their age anyway so a little insight can’t
hurt.
36 Cash and Credit Information for Teens, Second Edition
Follow Up: Send your interviewer a brief e-mail or letter thanking him
or her for spending time with you. Repeat your interest in the position. This
is a particularly good strategy if you’re interviewing for an internship or office
position. Your future employer will be impressed by your determination.
Chapter 5
Learn everything you can about the business you want to start and the
marketplace in which you’ll be operating. That means getting work experi-
ence in and collecting information about your marketplace so that you know
About This Chapter: This chapter includes the following documents produced by the
U.S. Small Business Administration (www.sba.gov) in 2005: “Frequently Asked Ques-
tions,” “Ideas for Your Business,” “Putting It in Writing,” “$$$ Cha-Ching: Money
Matters,” “Avoiding Legal Business Hassles,” and “Your Business Buddy List.”
38 Cash and Credit Information for Teens, Second Edition
it inside and out. Make sure that your idea is so focused that you can express
it clearly in fifty words or less.
There is a world of ideas that you can turn into a business. You’re the best
judge of what most appeals to you however. Businesses include: starting a
production company for visual arts or music; starting a paper or journal to be
circulated within your town, creating web pages for companies, after-school
writing workshops, editing papers, tutoring services, and pet sitting services.
Once you determine what product or service interests you, identify a specific
niche within the market that may arouse customers’ interest in purchasing
your product or service.
✤ It’s A Fact!!
What is a business plan and why do I need one?
A business plan is a written document which precisely defines your busi-
ness, identifies your goals, and serves as your road map for your business. Its
basic components include a current and pro forma balance sheet, an income
statement, and a cash flow analysis. It helps you make the right decisions. Be-
cause it provides specific information about your company and how you will
repay borrowed money, a good business plan is crucial if you need to borrow
money. If you manage your business processes well, with a bit of luck you will
be able to convert your product or service into a profit large enough to repay
you for all the time, energy, and money you will have put into your business
venture.
Your answers will help you create a focused, well-researched business plan
that will serve as a blueprint. The plan will detail how the business will be
operated, managed, and financed.
Put It In Writing
Developing your business plan is your road map to success in the business
world. A business plan is a written document that outlines measures and
actions to define where you want to go and how you will get there. Without
a business plan, you have no written goals or objectives to measure your
success. Starting a business is a full of uncertainties. Developing a thorough
business plan helps minimize those uncertainties.
Before you begin writing your business plan, consider these questions:
• What service or product does your business provide, and what need
does it fill?
• Who are the potential customers for your product or service, and why
will they purchase it from you?
• How will you reach your potential customers?
44 Cash and Credit Information for Teens, Second Edition
• Where will you get the financial resources to start your business?
• Do you really want to give up baseball, hockey, soccer, basketball, foot-
ball, dance, piano and voice, or hanging out with or going to the mall
with your friends to run this business?
• Will you have to run your business every day or just sometimes?
• Will running your business have an effect on school?
• Will your family help you out?
The business plan is your guide. You can adapt it to your specific busi-
ness. Dividing the plan into several components helps make drafting it a
more manageable task.
Introduction
• Give a detailed description of the business and its goals.
• Discuss the ownership of the business and the legal structure.
• List the skills and experience you bring to the business.
• Discuss the advantages you and your business have over your com-
petitors.
Marketing
• Discuss the products/services offered.
• Identify the customer demand for your product/service.
• Identify your market, its size, and locations.
• Explain how your product/service will be advertised and mar-
keted.
• Explain the pricing strategy.
Financial Management
• Explain your source and discuss the amount of initial equity capital
you’ll need.
• Develop a monthly operating budget for the first year.
Want To Be Your Own Boss? 45
Operations
• Explain how the business will be managed on a day-to-day basis.
• Discuss hiring and personnel procedures.
• Discuss insurance, lease, or rent agreements, and issues pertinent to
your business.
• Account for the equipment necessary to produce your products or ser-
vices.
• Account for production and delivery of products and services.
Concluding Statement
Summarize your business goals and objectives and express your commit-
ment to the success of your business.
Here are some questions you should answer as you consider starting or growing
your business.
• How much do I need to either get started or grow my business?
Before asking for a loan, you need to establish a savings or checking ac-
count. Banks generally prefer to lend to their existing clients who will bring
the bank additional business—other new clients or establish a number of
accounts both personal and business. Once you have demonstrated that your
business is successful, a bank may consider a line of credit or possibly a small
commercial loan if you and/or your parents bank there.
Want To Be Your Own Boss? 47
✤ It’s A Fact!!
Free Credit Reports Available
The Fair Credit Reporting Act requires each of the nation-
wide consumer reporting companies to provide you with a free copy
of your credit report, at your request, once every 12 months, from
http://www.annualcreditreport.com.
Wages And Salaries: The amount of wages (including tips) or salaries you
received during the year is shown in box 1 of Form W-2, Wage and Tax State-
ment. Your employer will give you Form W-2 soon after the end of the year.
Tips: All tips you receive are income, and subject to income tax. This in-
cludes tips customers give you directly, tips customers charge on credit cards that
your employer gives you, and your share of tips split with other employees.
About This Chapter: “Taxable Income for Students,” Internal Revenue Service (IRS),
December 3, 2007.
52 Cash and Credit Information for Teens, Second Edition
Figure 6.1. A Sample W-2 form. (Source: From “Tax Tutorial: Module 2—Wage
and Tip Income,” Internal Revenue Service (IRS), December 12, 2007.)
Keep a daily record or other proof of your tips. You can use Form 4070A,
Employee’s Daily Record of Tips. Your daily record must show your name
and address, your employer’s name, and the establishment’s name. For each
day worked, you must show the amount of cash and charge tips you received
from customers or other employees, a list of the names and amounts you
paid to other employees through tip splitting, and the value of any noncash
tips you get, such as tickets, passes, or other items of value. Record this in-
formation on or near the date you receive the tip income.
To report your tips, you can use Form 4070, Employee’s Report of Tips
to Employer. To get a year’s supply of this form, ask your employer or call the
IRS for Publication 1244, Employee’s Daily Record of Tips and Report to
Employer. Fill in the information asked for on the form, sign and date the
form, and give it to your employer. If you do not use Form 4070, give your
employer a statement with the following information:
• Your name, address, and social security number
• Your employer’s name, address, and business name (if it is different
from the employer’s name)
• The month (or the dates of any
shorter period) in which you re-
✤ It’s A Fact!! ceived tips
Employers withhold taxes from
• The total tips required to be re-
employees’ pay.
ported for the period
• Gross pay is the amount the
employee earns. Withholding On Tips: Your em-
• Net pay, or take-home pay, ployer must withhold social security
is the amount the employee tax and Medicare taxes or railroad re-
receives after deductions. tirement tax, and any income tax due
The difference between gross pay on the tips you report. Your employer
and net pay is accounted for by the usually deducts the withholding due
following: on tips from your wages. If your wages
• Social Security taxes are too small for your employer to
• Medicare taxes withhold taxes, you may give him or
her extra money to pay the taxes up
• Income tax withheld
to the close of the calendar year. Your
• Other amounts withheld
employer should tell you how much
Employers send the withheld taxes is needed.
to the taxing authorities.
Any taxes that remain unpaid may
Source: Excerpted from “Tax Tuto- be collected by your employer from
rial: Module 1—Payroll Taxes and
your next paycheck. If withholding
Federal Income Tax Withholding.”
Internal Revenue Service (IRS),
taxes remain uncollected at the end
December 12, 2007. of the year, you may be subject to a
penalty for underpayment of estimated
54 Cash and Credit Information for Teens, Second Edition
✎ What’s It Mean?
Medicare Tax: Used to provide medical benefits for certain individuals when
they reach age 65. Workers, retired workers, and the spouses of workers and
retired workers are eligible to receive Medicare benefits upon reaching age 65.
Social Security Tax: Provides benefits for retired workers and their depen-
dents as well as for the disabled and their dependents. Also known as the
Federal Insurance Contributions Act (FICA) tax.
Source: Excerpted from “Tax Tutorial: Module 1—Payroll Taxes and Federal
Income Tax Withholding.” Internal Revenue Service (IRS), December 12,
2007.
✤ It’s A Fact!!
Payroll Tax Rates
• Social Security tax rate: 6.20%
• Medicare tax rate: 1.45%
• Total payroll taxes: 7.65%
If an employee earns $1,000, the payroll taxes are:
Tax Tip: There is a maximum annual amount of Social Security tax with-
held per employee. Social Security taxes are not withheld on amounts over the
earnings limit. In 2008, the earnings limit was $97,500, and the maximum
Social Security tax was $6,045 ($97,500 x 6.2%).
Source: Excerpted from “Tax Tutorial: Module 1—Payroll Taxes and Federal
Income Tax Withholding.” Internal Revenue Service (IRS), December 12, 2007.
Tax Information For Students 55
taxes. See IRS Publication 505, Tax Withholding and Estimated Tax, for
more information.
Form W-2: The tips you reported to your employer will be included with
your wages in box 1 of Form W-2. Federal income tax, social security tax,
and Medicare tax withheld on your wages and tips will be shown in boxes 2,
4, and 6, respectively.
Figure 6.2. A sample Form W-4 for Alicia Myers. Note that Alicia is single and
claims one withholding allowance. (Source: Excerpted from “Tax Tutorial: Mod-
ule 1—Payroll Taxes and Federal Income Tax Withholding.” Internal Revenue
Service (IRS), December 12, 2007.)
taxable. For example, Jim Hunter is a member of the ROTC who is partici-
pating in the advanced course. He received a subsistence allowance of $100
each month for 10 months and $600 of active duty pay during summer ad-
vanced camp. He must include only the $600 active duty pay in his gross
income.
Self-Employment Income
Earnings you received from self-employment are subject to income tax.
These earnings include income from baby-sitting and lawn mowing. These
earnings are not self-employment income if you provided these services as
an employee.
You are taxed on your net earnings (income you received minus any busi-
ness expenses you are allowed to deduct). For information on what expenses
can be deducted, see IRS Publication 535, Business Expenses. As a self-
employed person, you are responsible for keeping records to show how much
income you received and how many expenses you had. Your income and
expenses are reported on Schedule C or C-EZ (Form 1040).
Tax Information For Students 57
Carriers And Vendors Under Age 18: Carriers or distributors (not in-
cluding those who deliver or distribute to any point for subsequent delivery
or distribution) and vendors (working under a buy-sell arrangement) under
age 18 are not subject to self-employment tax.
Investment Income
This section explains whether you have to report income from bank ac-
counts and certain other investments. Various types of investment income
are treated differently. Some of the more common ones are discussed here.
Interest: Interest you get from checking and savings accounts and most
other sources is taxable.
58 Cash and Credit Information for Teens, Second Edition
Bank Accounts: Some credit unions, building and loan associations, savings
and loan associations, mutual savings banks, and cooperative banks call what
they pay you on your deposits “dividends.” However, for tax purposes, these pay-
ments are considered interest, and you should report them as interest.
U.S. Savings Bonds: Interest on U.S. savings bonds is taxable for federal
income tax purposes, but exempt from all state and local income taxes. The
most common bonds are series EE and series I bonds. Series EE bonds are
issued in several different denominations and cost one-half the amount shown
on the face of the bond. For example, a $100 bond costs $50. The face value
of the bond is paid only when the bond matures. The difference between
what you paid for the bond and the amount you get when you cash it is
taxable interest.
Series I bonds are inflation-indexed bonds issued at their face value. The
face value plus accrued interest is payable to you at the bond’s maturity.
You can report all interest on these bonds when you cash them, or you can
choose to report their increase in value as interest each year. IRS Publication
550, Investment Income and Expenses, explains how to make this choice.
Interest Statements: Your bank, savings and loan, or other payer of inter-
est will send you a statement if you earned at least $10 in interest for the year.
You should receive these statements sometime in January for the previous
tax year. Banks may use Form 1099-INT, Interest Income. However, they
may include your total interest on the statement they send you at the end of
the year. Do not throw these statements away.
Tax Information For Students 59
that part of the grant used for tuition and fees required for enrollment or
attendance, or fees, books, supplies, and equipment required for your courses.
You cannot exclude from income any part of the grant used for other pur-
poses, such as room and board.
Payment For Services: All payments you receive for past, present, or future
services must be included in income. This is true even if the services are a
condition of receiving the grant or are required of all candidates for the degree.
• Example: Gary Thomas receives a scholarship of $2,500 for the spring
semester. As a condition of receiving the scholarship, he must serve as
a part-time teaching assistant. Of the $2,500 scholarship, $1,000 rep-
resents payment for his services. Gary is a degree candidate, and his
tuition is $1,600. He can exclude $1,500 from income as a qualified
scholarship. The remaining $1,000, representing payment for his ser-
vices, is taxable.
Other Grants Or Assistance: If you are not sure whether your grant quali-
fies as a scholarship or fellowship, ask the person who made the grant.
62 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
Keeping Good Records
You can avoid headaches at tax time by keeping track of your receipts and
other records throughout the year. Good recordkeeping will help you remember
the various transactions you made during the year, which in turn may make
filing your return a less taxing experience.
Records help you document the deductions you’ve claimed on your return.
You’ll need this documentation should the IRS select your return for examina-
tion. Normally, tax records should be kept for three years, but some documents—
such as records relating to a home purchase or sale, stock transactions, IRA and
business or rental property—should be kept longer.
In most cases, the IRS does not require you to keep records in any special
manner. Generally speaking, however, you should keep any and all documents
that may have an impact on your federal tax return:
• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return
Good recordkeeping throughout the year saves you time and effort at tax
time when organizing and completing your return. If you hire a paid profes-
sional to complete your return, the records you have kept will assist the preparer
in quickly and accurately completing your return.
For more information on what kinds of records to keep, see IRS Publica-
tion 552, Recordkeeping for Individuals, which is available on IRS.gov or by
calling 800-TAX-FORM (800-829-3676).
Remember that for the genuine IRS website be sure to use .gov. Don’t be
confused by internet sites that end in .com, .net, .org or other designations in-
stead of .gov. The address of the official IRS governmental website is www.irs.gov.
Additional Information: See IRS Publication 970, Tax Benefits for Edu-
cation, for more information on how much of your scholarship or fellowship
is taxable.
How To Report
If you file Form 1040EZ, include the taxable amount of your scholarship
or fellowship on line 1. Print “SCH” and any taxable amount not reported on
a W-2 form in the space to the right of the words “W-2 form(s)” on line 1.
If you file Form 1040A or Form 1040, include the taxable amount on line
7. Print “SCH” and any taxable amount not reported on a W-2 form in the
space to the left of line 7 on Form 1040A or on the dotted line next to line 7
on Form 1040.
Other Income
If you are not sure whether to include any item of income on your return,
see IRS Publication 525.
Part Two
If you have $1,000 stashed away under your mattress for a year, it will still
be $1,000 at the end of the year, providing that it has not been lost or stolen.
Your mattress is not paying you interest for keeping your money under it.
About This Chapter: Excerpted from “Module 4: Pay Yourself First,” Money Smart for
Young Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
68 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
How To Calculate Annual Percentage Yield (APY)
APY = 100 [(1 + Interest/Principal)(365/Days in term) – 1]
When the days in term is 365, the annual percentage yield can be calculated by
use of the following simple formula:
For example, if a bank pays $61.68 in interest for a 365-day year on $1,000
deposited into an account, using the general formula above, the annual per-
centage yield is 6.17%:
APY = 6.17%
Or, using the simple formula above since, as an account without a stated
term, the term is deemed to be 365 days:
APY = 100(61.68/1,000)
APY = 6.17%
Making Your Money Grow 69
If you are planning on opening a savings account or want to get more out
of the one you already have, ask your bank’s customer service representative
for the “Truth in Savings” disclosures. These disclosures list the APY and
other important information that you should know about the accounts you
are interested in.
The FDIC has an online tool called Electronic Deposit Insurance Esti-
mator (EDIE) available at www.fdic.gov/EDIE. EDIE lets you calculate
the insurance coverage of your accounts at each FDIC insured institution.
Buy An Investment: You’ve probably heard a lot about investing and how
sometimes it can be good or bad. It is important to be well-informed before
making an investment. You probably do not have the extra money to begin
investing now, but you will soon and this information is very important for
your financial success and stability.
Investment Products
Some more popular types of investment products that you can buy in-
clude bonds, stocks, mutual funds, and retirement investments. Most finan-
cial advisors recommend that, before you buy any of these investment products,
you should have a savings cushion
that will allow you to pay your ex-
✔ Quick Tip penses for two to six months.
How To Choose Any money you have saved
The Best Investments beyond this amount can be
Investments can benefit you financially, but used for investing. Be-
you need to be well prepared and ready to take cause of this, you will
on the responsibility. Do not rush into want to wait until you are
any investment. Make sure you know
financially stable before in-
all things to consider when
choosing an investment.
vesting. In case of an emer-
gency, sudden illness, or job loss,
you always want to be able to sup-
port yourself.
Other Investments
Owning a home or business are two additional ways to invest. Why do
you think owning a home is an investment?
When your home increases in value and your debt decreases as you pay
the mortgage, your equity increases. Equity is the difference between how
much the house is worth and how much you owe on the house. For example:
Equity = $ 50,000
72 Cash and Credit Information for Teens, Second Edition
✎ What’s It Mean?
Annual Percentage Yield (APY ): APY is the amount of interest you will earn
on a yearly basis expressed as a percentage. The APY includes the effect of
compounding. When comparing different accounts, you should compare the
APYs of the savings products, not the interest rates. The higher the APY, the
higher the interest you will receive.
Bonds: When you purchase a bond, you are essentially loaning money to a
corporation or to the government for a certain period of time, called a “term.”
The bond certificate promises the corporation or government will repay you
on a specific date with a fixed rate of interest.
Certificates Of Deposit (CDs): CDs are accounts where you leave your money
for a set period of time called a term, such as six months or one, two, or five
years. You usually earn a higher rate of interest than in a regular savings ac-
count. The longer you promise to keep your money in a CD, the higher the
interest rate. Be sure to think about your cash needs before opening a CD
because you will pay a penalty if you withdraw your money early.
Club Account: A club account is a type of savings account you join to save
money for a special reason, such as holidays or family vacations. Club ac-
counts usually require you to make regular deposits.
401(k) And 403(b) Retirement Plans: 401(k) plans are retirement plans that
some private corporations offer their employees. A 403(b) plan is similar to a
401(k), but is offered to employees of some non-profit organizations. In both
types of plans, you choose to deduct part of your paycheck and place it into
the investment strategy you design. The plans allow you to choose different
types of investments, depending on how much risk you want to take. The
money you place into the account lowers your taxable income. The employer
usually matches a portion of your contribution, sometimes up to 50 percent.
The funds grow tax-free until the money is withdrawn during retirement.
Liquidity: Liquidity refers to the ease with which an asset (a thing of value)
can be turned into cash without losing its value. For example, cash is the
most liquid; a certificate of deposit (CD) may be liquidated, but you pay an
early withdrawal penalty; a house might be your least liquid asset because it
takes time to sell.
Money Market Accounts: A money market account is one that usually pays a
higher rate of interest than a regular savings account. Money market accounts
usually require a higher minimum balance to earn interest, but they also pay
higher rates for higher balances.
Risk versus Return: This means that the more risk you take in your invest-
ment, the higher the expected return on that investment. However, there is
also a higher risk that you might lose the entire amount you invested.
Stocks: When you buy stocks (shares), you become part owner of the com-
pany. If the company does well, you might receive periodic dividends. Divi-
dends are part of a company’s profits given back to you when you own stock
in the company. If the company does poorly, you might lose your money.
74 Cash and Credit Information for Teens, Second Edition
☞ Remember!!
Pay Yourself First: Paying yourself first means that when you get a
paycheck, you put some of that money in a savings account before you pay
your bills or buy things that you want. There are many reasons to pay yourself
first. You can learn to manage money better, save money toward identified
goals, improve your standard of living, and have money for emer-
gencies.
• How long can you leave your money invested? If you have some money
you will not need for several years, you might consider investment
options such as stocks, bonds, or mutual funds. On the other hand, if
you think you might need access to your money right away, it might be
best for you to keep it in a savings account where you have immediate
access to it.
• How do you feel about risking your money? As we have seen, if you
are not comfortable with risk and cannot afford to lose the money, you
might consider depositing your money in an insured financial institu-
tion. You will need to shop around for the account that best meets
your needs.
Chapter 8
Preparing A Budget
Why Budget?
A good way to start taking control of your financial situation is to de-
velop a budget or personal spending plan. A budget is a step-by-step plan for
meeting expenses in a given period of time.
Preparing A Budget
Knowing what your income and expenses are every month will help you
take control of your financial situation. Then you’ll be able to meet some
financial goals you might set for yourself. There are four steps to preparing a
budget. They are as follows:
1. Keep track of your daily spending.
2. Determine what your monthly income and expenses are the month be-
fore they are due.
About This Chapter: Excerpted from “Module 3: Setting Financial Goals,” Money Smart
for Young Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
78 Cash and Credit Information for Teens, Second Edition
Setting financial goals helps you plan a budget. If you know what you
want to do with your money in the future, it will help you spend wisely now
and save where you can.
Consider your goals when planning a budget. If you want to save for a
car, consider reducing your cell phone bill and using the extra to put in sav-
ings. If you want to buy a new outfit for
the prom, you might be able to work
an extra hour or two at your job.
☞ Remember!!
Budgeting is about choices—
No matter what goals you
choosing how to use your
have for your money, they should money.
have these characteristics:
Gross Income Vs. Net Income: When planning a budget, remember that
your employer has to subtract certain taxes from your paycheck. The time it
takes to meet goals for saving may increase.
✎ What’s It Mean?
Gross Income: Gross income is your total income without deductions.
Net Income: Net income is gross income minus deductions such as Social
Security and other taxes.
Deductions usually include federal and state taxes. Social Security taxes
are also deducted. But why is so much money taken out for Social Security?
80 Cash and Credit Information for Teens, Second Edition
If you are 25 or older and are not already receiving Social Security ben-
efits, you will receive a Social Security statement just before your birthday
every year. This tells how much you’ve earned and the Social Security taxes
you have paid during your working years. The statement provides estimates
of the monthly Social Security retirement, disability, and survivors’ benefits
you and your family could be eligible to receive.
Add up your expenses. Compare the income and expenses totals. Is there
enough money to pay bills each month? How would you modify expenses to
meet your personal needs?
Preparing A Budget 81
Budgeting Tools
Listed are some budgeting tools. They will help you keep spending and
savings records that will make it easier for you to carry out your budget.
These budgeting tools include the following:
• The monthly payment schedule
• The computer system
• The budged box system
• The spending diary
• The monthly payment calendar
The Computer
Another way to track your budget is the computer.
If you don’t want to use paper or you pay bills in cash instead of with a
checking account, you can use a computer to keep track of expenses.
You may also want to purchase a personal finance program. They are
available for less than $75. Using one of these programs to manage your
finances is relatively simple. Once you set it up, updating information is
quick and easy. You should enter transactions frequently so that you always
have a good grasp on your financial position.
There are many different ways to track your budget. You can find one
that works for you.
• When you receive a bill, check the due date and place it behind the
divider that represents the bill’s due date.
• Make an envelope for each expense category, such as rent, gas, elec-
tricity, and food.
• Label the envelope with the name of the category, the amount, and
the due date.
• When you receive income, divide it into the amounts to cover the
expenses listed on the envelope.
Preparing A Budget 83
• Pay bills right away so you will not be tempted to spend the money on
something else.
Figure 8.1. Daily Spending Diary. Use this to track your daily spending. Be sure
to write down everything you spend money on, no matter now small the amount.
84 Cash and Credit Information for Teens, Second Edition
1. Transfer your income sources and amounts from your Income and Ex-
penses Worksheet to the dates income is paid on the Monthly Payment
Calendar worksheet.
2. Transfer your expenses to the dates they are due on the Monthly Pay-
ment Calendar worksheet.
Banking Basics
Convenience: You can get money quickly and easily. Using direct de-
posit, for example, saves you time and allows you quicker access to your money.
Funds that are electronically deposited in your account are available sooner
than if you deposited a check.
About This Chapter: Excerpted from “Module 1: Bank On It,” Money Smart for Young
Adults, a CD-based curriculum developed by the Federal Deposit Insurance Corpora-
tion (FDIC), March 2008.
86 Cash and Credit Information for Teens, Second Edition
some reason a bank closes and cannot give its customers the money they had
in the bank, the FDIC will return the money to the customers.
✤ It’s A Fact!!
What Are Banks?
Banks are private, for-profit businesses that offer a variety of services to the
public. They provide a place to safely store your money in checking and savings
accounts insured by the Federal Deposit Insurance Corporation (FDIC) until
you need to take the money out. Banks enable customers to write checks, pay
bills, or send money to other people. They also make loans to people and busi-
nesses.
Lending money is one of the ways that a bank earns money. And where
does the bank get the money to make loans? Mostly, it uses the money that
customers have deposited into checking and savings accounts, while ensuring
that those depositors can still get their money back when they want it.
Most but not all banks and thrifts in the U.S. are insured by the FDIC. One
way to check whether an institution is FDIC-insured is to call the FDIC toll-
free at 877-275-3342.
In addition, you may have heard about credit unions. These are not-for-
profit financial institutions that are owned and operated by their members,
who are usually people who have something in common, such as the same
employer or occupation. You have to become a member of the credit union to
keep your money there. Deposits at credit unions are insured by another federal
government agency called the National Credit Union Administration.
Source: “What Do Banks Do?” FDIC Consumer News, Federal Deposit Insur-
ance Corporation, Summer 2006.
Banking Basics 87
Bank: A financial institution that is run under federal and state laws and
regulations. Banks make loans, pay checks, accept deposits, and provide other
financial services.
Terms To Know
When you open an account, the bank representative may use some terms
you will need to know. They are as follows:
Deposit Slip: A deposit slip tells the bank how much money you are
adding to your account.
Withdrawal: When you make a withdrawal, you are taking money out of
your bank account. You do this by writing a check, giving a teller a withdrawal
slip, or using an ATM, or automated teller machine, with your debit card.
Balance: Your balance is the amount of money you have in the bank at
any given time. Your balance will change whenever you make a deposit or a
88 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
You can tell if the Federal Deposit Insurance Corpora-
tion (FDIC) insures a bank by the FDIC logo. Most credit unions
are insured by the National Credit Union Administration (NCUA). The
deposit insurance rules are the same at NCUA-insured credit unions as they
are at FDIC-insured banks.
The FDIC has an online tool called the Electronic Deposit Insurance Esti-
mator (EDIE). It lets you calculate the insurance coverage of your ac-
counts at each FDIC-insured institution. You can find EDIE online
at http://www.fdic.gov/EDIE.
Fees: Financial institutions charge you fees for different services. For ex-
ample, you might be charged a monthly maintenance fee for keeping your
account open. You might also be charged a penalty fee if you misuse your
account, for example, by bouncing a check or taking out more money than
you have in it. When this happens, you have overdrawn your account.
Account Verification
The first thing you need to do to open a bank account is go through a
process called account verification. The bank wants to make sure that you
will be a responsible bank account customer. If you did not handle a bank
account you had in the past responsibly, they may not want to risk allowing
you to open an account now. The bank also needs to make sure that you are
who you say you are.
The bank will request your name, address, date of birth, and Social Secu-
rity number (SSN) or individual taxpayer identification number (ITIN). It
will then verify your identity, such as by requesting your state-issued identi-
fication card, driver’s license, passport, or perhaps even your student ID card.
It may ask to see more than one piece of ID—this is for the protection of
both you and the bank. Since practices vary, ask your bank what type of
identification you need.
Depositing Money
When you open a bank account, you put money into your account. That
is called a deposit. Whenever you add money to your account, you must fill
out a deposit slip. A deposit slip tells the bank how much money you are
adding to your account.
You may ask the bank when you can use the money you deposited. Also,
even though the bank gives you access to the funds you deposited doesn’t
mean the check cleared the other bank. If the check you deposited bounces,
the bank will deduct the money it made available from your account.
90 Cash and Credit Information for Teens, Second Edition
Savings Accounts
You can often open a savings account with a few dollars, but you might
pay a monthly fee if the balance is below a certain amount.
The bank will generally help you keep track of your account by sending
you a statement.
It is a good idea to compare the rules of the different accounts. For ex-
ample, banks might require you to have a certain balance to open an account,
earn interest, or avoid fees. This is usually called a minimum balance.
statements, and transfer funds between accounts. Some ATM cards can be
used in stores that accept ATMs in your bank’s network. It works just
like a debit card, but is not as widely available. When you choose an
ATM card to make a purchase, the retailer may ask you to sign a receipt
instead of inputting your PIN (personal identification number). Ask your
bank if there are additional fees for signing a receipt instead of using a
PIN number.
Understanding the jobs of these bank workers will allow you to know
who you should talk to when you go to the bank.
The primary people in the bank who you should know are the customer
service representative, teller, loan officer; and branch manager.
If you do not know who to talk to, ask for help. Someone will take you to
the right person. Always ask questions until you are clear on all the information
and do not sign anything you do not understand. Ask for written informa-
tion to take home to review.
Chapter 10
Electronic Banking
On his way home last Friday night, John Jones realized that he had no
cash for the weekend. The bank was closed, but John had his bank debit card
and the code to use it. He inserted the card into an automated teller machine
outside the front door of the bank; then, using a number keypad, he entered
his code and pressed the buttons for a withdrawal of $50. John’s cash was
dispensed automatically from the machine, and his bank account was elec-
tronically debited for the $50 cash withdrawal.
John’s debit card is just one way to use electronic fund transfer (EFT)
systems that allow payment between parties by substituting an electronic
signal for cash or checks.
Are we heading for a checkless society? Probably not. But making a dent
in the large number of paper checks in the country’s banking system is clearly
one advantage to electronic banking.
About This Chapter: Text in this chapter is from “Electronic Fund Transfers,” Federal
Reserve Board (www.federalreserve.gov), August 16, 2007.
94 Cash and Credit Information for Teens, Second Edition
On lost or stolen credit cards, your loss is limited to $50 per card. On an
EFT card, your liability for an unauthorized withdrawal can vary:
96 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
How do I correct errors?
The way to report errors is somewhat different with EFT services than it is
with credit cards. But as with credit cards, financial institutions must investi-
gate and promptly correct any EFT errors that you report.
If you believe there has been an error in an electronic fund transfer relating
to your account:
3. The financial institution must notify you of the results of its investigation.
If there was an error, the institution must correct it promptly, for example,
by making a recredit final.
• Your loss is limited to $50 if you notify the financial institution within
two business days after learning of loss or theft of your card or code.
• But you could lose as much as $500 if you do not tell the card issuer
within two business days after learning of loss or theft.
• If you do not report an unauthorized transfer that appears on your
statement within 60 days after the statement is mailed to you, you risk
unlimited loss on transfers made after the 60-day period. That means
you could lose all the money in your account plus your maximum over-
draft line of credit, if any.
Example: On Monday, John’s debit card and PIN were stolen. On Tuesday,
the thief withdrew $250, all the money John had in his checking account.
Five days later, the thief withdrew another $500, triggering John’s overdraft
line of credit. John did not realize his card was stolen until he received his
bank statement, showing withdrawals of $750 he did not make. He called
the bank right away. John’s liability is $50.
Now suppose that when John got his bank statement he didn’t look at it and
didn’t call the bank. Seventy days after the statement was mailed to John, the
thief withdrew another $1,000, reaching the limit on John’s line of credit. In this
case, John would be liable for $1,050 ($50 for transfers before the end of the 60
days; $1,000 for transfers made more than 60 days after the statement was mailed).
Generally, you must also get advance notice of any change in the account
that would increase your costs or liability, or would limit transfers. A finan-
cial institution may send you a card that you did not request only if the card
is not valid for use. An unsolicited card can be validated only at your request
and only after the institution makes sure that you are the person whose name
is on the card. It must also be sent with instructions on how to dispose of an
unwanted card.
✤ It’s A Fact!!
How do I stop a
preauthorized payment?
You may stop any preauthorized payment
by calling or writing the financial institution,
but your order must be received at least three busi-
ness days before the payment date. Written con-
firmation of a telephone notice to stop
payment may be required. You should
also contact the merchant or organi-
zation you authorized to debit
your account.
Chapter 11
To err is human... and sometimes it can be expensive. That’s the case for
many consumers who have to pay fees and penalties because of mistakes
they’ve made when using their checking account, credit card, or other banking
services.
About This Chapter: Text in this chapter is from “Avoiding Costly Banking Mistakes:
No Trivial Pursuit,” FDIC Consumer News, Federal Deposit Insurance Corporation,
Fall 2006.
102 Cash and Credit Information for Teens, Second Edition
your account using your debit card at the ATM. There may also be fees if
your checking account goes below a required minimum balance. And, if you
fail to spot fraudulent transactions, fixing those can be costly and time con-
suming.
Your lack of attention could make a bad situation worse if fees are as-
sessed for several days or even months. “Account holders can get very frus-
trated when they suddenly find out that multiple checks and payments have
been returned, and a fee has been assessed for each one,” says Eloy Villafranca,
a Community Affairs Officer with the FDIC.
✔ Quick Tip
How To Sidestep A Misstep
Comparison shop for the best deals that fit your needs.
Look at different types of accounts offered by your bank and a
few competitors, and be sure to factor in the fees you’re most likely to
incur.
Read all the disclosures, from the highlighted details to the fine print.
Before you open the account, know the features, fees, and limitations so you
can prevent misunderstandings and costly mistakes.
Monitor your accounts. Promptly review bank statements and other mail-
ings. Consider reviewing your account activity online or by phone instead of
waiting for statements to arrive in the mail. Look for what can—or did—
trigger fees and penalties, so you can avoid unnecessary costs in the fu-
ture. Contact your financial institution immediately if there’s a
problem.
Unfortunately for her, a recurring, electronic payment she thought had been
stopped continued to be charged against her account, and her account bal-
ance was lower than she thought. “As she wrote checks month after month,”
Villafranca explains, “she was being hit with charges for insufficient funds.”
Be aware that if bounced checks are not repaid in a timely fashion they
may become part of your record. That could make it difficult to get a mer-
chant to accept your checks. And if your account is closed by the bank be-
cause of repeated problems with insufficient funds that you do not repay, you
may have difficulty opening a new account elsewhere.
Promptly compare your check register with your bank statement to look
for errors or unauthorized transactions. Open and review your monthly state-
ment as soon as it arrives in the mail or check your account information
more frequently online or by telephone.
“Once I used my debit card to pay an $11 dry-cleaning bill and I was
inadvertently charged $1,100,” Villafranca says. “This could have caused a
number of problems had I not gone online to check my account activity later
in the day to pay a bill and noticed the error. I had the funds credited back to
my account the next day.” (Note: The federal Electronic Fund Transfer Act
protects you against billing errors and unauthorized transactions by debit
card and other electronic payment methods, but you must notify your bank
within 60 days of the mailing of the account statement on which the trans-
action appears.)
Take additional precautions to avoid fees for insufficient funds. For in-
stance, make sure you have enough money in your account before you write
a big check, use your debit card, or arrange for an automatic payment. Also
remember that, under federal rules that allow banking institutions to put a
temporary “hold” on certain deposits, you may have to wait from one to five
104 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
How The FDIC Can Help You Avoid Costly Mistakes
• See consumer information on the FDIC website at http://www.fdic.gov/
quicklinks/consumers.html.
• Read their quarterly newsletter FDIC Consumer News. Find back issues
online at http://www.fdic.gov/consumers/consumer/news and sign up
for a free e-mail subscription service at http://www.fdic.gov/about/
subscriptions/index.html.
• Get answers to questions by phone (toll-free 877-ASK-FDIC or 877-
275-3342) or by e-mail (start at http://www2.fdic.gov/starsmail/
index.html).
business days (in most situations) before you can withdraw funds deposited
into your account, and longer in other circumstances (such as deposits over
$5,000 or if your account has been repeatedly overdrawn).
For example, a $2,000 IRA with an APY of five percent and a $20 annual
service fee “will earn $100 interest after a year but, after deducting the ser-
vice fee, your actual return is four percent, not five percent,” Herman says.
“Under federal law, fees are not factored into APY calculations, so consum-
ers are on their own when it comes to determining whether fees will have a
negative impact.”
Avoiding Costly Banking Mistakes 105
To get the best deal possible, first think about how you plan to use the
account and how much you expect to keep on deposit, then compare differ-
ent accounts at a few different institutions. Do the math as best you can,
figuring your interest earnings after a year and then subtract the estimated
fees for services or a low balance based on your expected use of the account.
Sometimes an account that pays no interest can be a better deal than an
interest-bearing account that’s heavy with fees you are likely to pay.
You can expect a late-payment fee of about $30 or more. You may also
face a major hike in your interest rate—often to between 29 and 35 per-
cent—on this credit card and possibly other cards or loans, especially if your
credit record shows other signs of risk. And if you’re late paying by about a
month or more, you might find your credit score reduced, which can make it
harder or more expensive to get a new loan or even a new job or insurance
(because prospective employers and insurers can review credit histories when
deciding on applications).
Also, if you haven’t yet missed the deadline but you can’t mail the pay-
ment on time, consider either making an online payment at your card issuer’s
website at least a day or two before the due date, or paying by phone by
providing bank account information to authorize an electronic fund transfer
106 Cash and Credit Information for Teens, Second Edition
from your checking account. “Even though there may be a small service charge
for these options, it will likely be less than a late-payment fee,” Daniels notes.
✔ Quick Tip
Words of advice: If you’re short on cash, it’s bet-
ter to pay at least the minimum amount due on your credit
card on time, rather than withhold payment entirely. And if you
do pay late but it’s a first-time or rare occurrence that was caused by
unusual circumstances, call your card issuer immediately and
ask what, if anything, they may be willing to do as a
courtesy to a good customer.
“If you use a credit card to make a major purchase and each month you
pay back only the minimum amount you owe, not only will it take you a very
long time to pay off the balance but the total interest and fees can sometimes
double the cost of what you purchased,” says Janet Kincaid, FDIC Senior
Consumer Affairs Officer.
For example, suppose you buy a computer for $1,000 and you only pay
back the minimum required, which we’ll say is $20 a month. At an Annual
Percentage Rate (APR) of 18 percent, that $1,000 computer will cost you
$2,931 and take more than 19 years to pay off, which is about 15 years longer
than you’ll probably own the computer.
To minimize your costs, pay as much as you can on your credit card each
month—pay the entire balance, if possible—to avoid interest charges. If you
can’t pay most or all of your credit card bill, try to pay as much above the
Avoiding Costly Banking Mistakes 107
minimum as possible. “Finding a way to pay a little more each month can
make a noticeable difference in reducing your interest costs,” Kincaid says.
Using our previous example, raising your monthly payment from $20 to $50
will bring the total cost of a $1,000 purchase (including the finance charges)
to $1,198, allowing you to pay off the debt in just two years.
However, if all you can afford to pay back each month is the minimum
amount, pay that—and pay it on time—to avoid late fees and a bad mark on
your credit record, which in itself can be costly.
“While there are good deals out there on new credit cards, it pays to shop
around for a card that best fits your circumstances,” says Kincaid. “Also be
sure to read the highlighted disclosures as well as the fine print because an
uninformed decision can be costly.”
For example, let’s say you choose a card with a “grace period” (a certain
number of days you have to pay the balance before incurring interest or fees)
but, after a few months, you decide not to pay your bill in full. With some
cards, the issuer might retroactively charge interest on the balance from the
previous month, thus eliminating the earlier grace period.
If you get a new credit card promoting zero-percent interest on new pur-
chases and you don’t pay off the entire balance by the due date (typically
after six to 18 months), you may be charged interest on all your original
purchase amounts—not just on your remaining balance—retroactive to the
original purchase date. The resulting costs could be more than if you had
used a card without a zero-percent offer.
108 Cash and Credit Information for Teens, Second Edition
Example: The home of your dreams just went on the market, so you ap-
ply for a mortgage. You’re sure your credit record is in great shape so there’s
no need to worry about getting a good deal on a loan. But then you’re quoted
a rate on a mortgage loan that is much higher than you expected or, worse
yet, you are denied a loan! What went wrong? It could be that your credit
report contained incorrect information. By the time you can get your report
corrected and your credit score increased, it’s possible that your dream house
was sold to someone else.
Solve this problem by taking advantage of your right under federal law
to obtain one free copy of your credit report each year from each of the
three nationwide credit bureaus (Equifax, Experian, and TransUnion). Pe-
riodically review your report and correct any omissions or errors, especially
before you apply for a home loan or seek some other benefit where your
credit report could affect the outcome. Doing so can boost your credit
score enough to save you hundreds of dollars each year in interest or other
charges.
“Some people who get ‘subprime’ loans, which cost a lot more than most
loans, would qualify for lower-cost prime-rate loans if errors in their credit
reports were corrected,” says Mira Marshall, an FDIC Senior Policy Analyst
on consumer protection issues.
Kincaid added that if you apply for insurance or a job, the insurance com-
pany or future employer can review your credit report as part of its consider-
ation of your financial responsibility. “You wouldn’t want to lose a good job
opportunity or a low premium on an insurance policy because of some erro-
neous information on your credit report,” she adds.
What are the biggest concerns with these types of loans? “Borrowers may
experience payment shock if they aren’t prepared for increased payments
after an initial or promotional period,” says Marshall.
For example, let’s say a family borrows $200,000 using a 30-year, payment-
option mortgage, with a five-year promotional period. For the first five years,
they pay only the minimum amount due of $650 a month. That payment isn’t
enough to cover the interest actually being charged. The unpaid interest dur-
ing those five years—figure about $16,000—is added to the loan balance. “At
the end of the five years, the borrower will be paying the loan at a higher
interest rate and on a larger loan amount,” Marshall says. In this example,
starting in the sixth year, the family’s minimum monthly payment will surge to
about $1,600, more than double what they were paying before.
About This Chapter: Reprinted with permission from “Managing Your Savings Ac-
count,” © 2008 ultimatemoneyskills.com, sponsored by Bank of America and powered
by Making It Count.
114 Cash and Credit Information for Teens, Second Edition
Types Of Savings
✤ It’s A Fact!!
Accounts
Savings accounts are one of
While many banks might the most common bank accounts,
offer a variety of different and for many people, their first bank
savings options, most will account is a savings account.
offer three basic kinds. As Source: © 2008 ultimatemoneyskills.com,
you are deciding which kind sponsored by Bank of America and
of account you want, ask your- powered by Making It Count.
self how much money you want
to save and how often you want
access to that money. Then do some
comparison shopping, paying special
attention to the fees and interest rates associated with each account.
They will typically have no minimum balance requirement, or a low one, and
they will provide you with easy access to your money, though you might be
limited to how many withdrawals you can make per month without being
charged a fee. This type of savings account often offers a low interest rate, so
if you’re looking for a higher return on your money, you might want to inves-
tigate another type of savings account or look into investing.
✤ It’s A Fact!!
It’s Amazing:
How A Small Savings Account Can Get Big Over Time
People who put even a small amount of money into a savings account as
often as they can and leave it untouched for years may be amazed at how big
the account grows. The reason? A combination of saving as much as possible
on a regular basis and the impact of interest payments (what the financial world
calls “the miracle of compounding”).
Here’s how you can slowly build a large savings account and experience the
miracle of compounding. Let’s say you put money into a savings account that
pays you interest every month. After the first month, the interest payment will
be calculated based on the money you put in. But the next time the bank pays
you interest, it will calculate the amount based on your original deposit plus the
interest you received the previous month. Later, that larger, combined amount
will earn more interest, and after many years it becomes a much larger sum of
money. The earnings are called compound interest. You can earn even more in
compound interest if you make deposits regularly and stretch to put in as much
as you can and leave it untouched. An example would be a savings account
started with $50 and earning interest at a rate of 3.5 percent each month. If you
add just $10 each month, the account can grow nicely to $714 after five years.
If you instead put in a slightly higher amount—$15 each month—you’d have a
balance of $1,042 after five years. But if you had increased your deposits to $50
a month, those extra dollars plus the compounding of interest would give you a
balance of $3,333 after five years.
Source: From “It’s Amazing: How a Small Savings Account Can Get Big Over
Time,” FDIC Consumer News, Federal Deposit Insurance Corporation (FDIC),
Summer 2006.
116 Cash and Credit Information for Teens, Second Edition
☞ Remember!!
Remember that the more money you deposit, and the longer you keep
it in your account, the more you’ll earn from interest.
Interest Rates
One of the most important factors you’ll want to consider when open-
ing a savings account is the interest rate you’ll receive and how that inter-
est is paid. Interest rates can vary greatly, depending on the bank and type
of account, so research rates at several banks before making your final de-
cision.
Managing Your Savings Account 117
So, how does this work? Let’s say you open a savings account that has a
2% interest rate with $500, and you deposit $50 each month. After six months,
you’ll have earned $6.75 in interest. After a year, you’ll have earned $16.50,
and after a year and a half, you’ll have earned $29.25.
Deposit/Withdrawal Slip
Usually when you open a savings account, no matter the kind, the bank
will give you a book of deposit/withdrawal slips. These forms can be used to
move money in and out of your account and will most often be used when
you’re doing in-person banking at your local branch. Depending on your
bank, the slips may look different.
If you’re making a withdrawal, the form you use may look a lot like a check.
ATM/Debit Card
An ATM card allows you to deposit and remove money from your ac-
count through an ATM machine. Unlike the debit card you might receive
with a checking account, which can be used like a credit card, ATM cards
usually don’t give you the ability to make store purchases directly. Most banks
will offer you a free ATM card with a basic savings account. Just ask yourself
whether you’ll be tempted to take money out of the account needlessly if it’s
too convenient to get it.
If you open a money market account, you might also receive a debit card.
Debit cards look like credit cards (they will have a Visa or MasterCard logo
on them), and they are accepted anywhere credit cards are accepted. You can
use debit cards to withdraw money or make purchases without accumulating
interest because the money comes directly from your account.
Because of the convenience of using your ATM or Debit card, it’s very
important that you keep track of how much money you deposit to and with-
draw from your account.
You can also choose to have funds from one account, like your checking
account, transferred into your savings account. Of course, the accounts all
need to be at the same bank. This is also helpful if you choose to use your
Managing Your Savings Account 119
Checks
Checks are basically documents that tell a bank to use money from your
account to pay a designated business or person. If you open a money market
account, you will be able to write a limited number of checks each month.
Many banks will provide you with a free book of checks when you open your
account, and some will even give you free checks for the life of your account.
When you write a check, you’ll want to make sure to write down the
check number, the amount, and who you wrote the check to so you can keep
track of how much you’ve spent.
will list every transaction, along with any fees charged to your account and
interest your money has earned. Make sure you compare the entries in your
register with your bank statement to ensure you didn’t forget to write down
any deposits or withdrawals and to make sure the bank didn’t make any
mistakes.
Chapter 13
What are some benefits of a checking account? There are four key ben-
efits of a checking account:
About This Chapter: Excerpted from “Module 2: Check It Out,” Money Smart for
Young Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
122 Cash and Credit Information for Teens, Second Edition
• Convenience
• Cost ✤ It’s A Fact!!
• Better money management Keeping a checking account can
help you build a relationship with the
• Safety bank. How well you manage your check-
ing account may be a factor the bank con-
Convenience: Checking ac- siders when deciding whether to grant
counts are convenient because you a loan. Having a checking ac-
they provide you with quick and count also helps prove you pay
easy access to your money. Using your bills on time.
checks and debit cards can take the
place of carrying cash. Also, having a check-
ing account allows you to direct-deposit money that comes to you from a
job, the government, or other source of income. You have immediate access
to money that is direct-deposited.
Cost: Using a checking account is usually less expensive than using other
services to cash checks or buy money orders. If you have a checking ac-
count, you can usually cash a check for free. Check cashing services charge
a fee.
Better Money Management: Using a checking account can also help you
manage your money. When you write a check, deposit or withdraw money,
use your debit card, or have checks direct-deposited into your account, the
bank calls this a “transaction.” You record every transaction you or the bank
makes in your “check register.” The check register shows how you are spend-
ing your money and how much money is currently in your account.
Safety: Using a checking account can help you keep your cash safe. It is
safer to use checks and debit cards than to carry large amounts of cash be-
cause you do not have to worry about your cash being stolen or lost. How-
ever, if your checkbook or debit card is lost or stolen, report it as soon as
possible to your bank. The bank will protect you so that you are not respon-
sible for any purchases you do not make.
institution closes, you will receive your insured deposits. The Federal De-
posit Insurance Corporation (FDIC) is the government agency that insures
deposits at banks and thrifts. The FDIC has an online tool called Electronic
Deposit Insurance Estimator (EDIE). It lets you calculate the insurance cov-
erage of your accounts at each FDIC-insured institution. You can find EDIE
online at http://www.fdic.gov/EDIE.
Some banks offer special checking and savings account products for stu-
dents. These may include a waiver of fees, lower minimum balance require-
ments, and free checks. When shopping for an account, ask the institution if
it offers a student account. If it does, be sure to find out what happens when
you turn 18 or are no longer a student—specifically, what kind of account
the bank will assign to you.
Fee Schedule
Ask for a fee schedule that lists all the fees related to the account. Use the
fee schedule to compare the costs of each account.
A fee schedule lists the fees you may be charged for certain activities.
Some of the most common fees include the following:
• Monthly Service Fee: The monthly service fee is also called a mainte-
nance fee. The bank may charge a fee each month just for having the
account. You might also be charged a fee if your balance drops below
the required minimum.
• Minimum Balance Fee: Some accounts may require that a certain
amount of money be in the account. If the account goes below that
amount, the bank automatically charges a fee.
• ATM User Fee: You will likely be charged fees each time you use an
ATM at a bank other than your own. Many ATMs at other locations
such as shopping malls, gas stations, or convenience stores also charge
a fee unless they are affiliated with your bank.
• Overdraft Fee: Overdraft fees are also called non-sufficient funds
(NSF) fees. The bank will notify you if a check is returned to the per-
son or company to whom it was issued because there wasn’t enough
What You Should Know About Checking Accounts 125
money in your account. Your bank will charge you a processing fee for
returned checks. Merchants might also charge a fee if a bounced check
is used to purchase goods or services.
• Stop-Payment Fee: If you lose a check or need to make sure a check is
not paid by the bank for some other reason, you can request a “stop
payment.” There is a fee for this service, and the bank may not be able
to catch the check before it is paid.
✔ Quick Tip
Determine Your Checking Account Needs
When you consider opening a checking account, remember that banks of-
fer different types of checking accounts. To determine what you need, think
about how you plan to use your checking account. The following questions will
help you determine what you need to look for in a checking account.
Consider Convenience
• How many checks do you think you will write every month?
• Do you want a bank that is close to your home or work?
• What are the bank’s hours of operation?
• Will you use the ATM often?
• Does the bank have ATMs close to where you live or work?
• How often do you plan to visit the bank to use teller services?
• What other bank services are important to you?
Determine Costs
• How much money will you keep in your account?
• Will you be charged for writing extra checks?
• Are you willing to pay a monthly fee?
• If so, how much?
• Will you be charged to use your bank’s ATM?
• Will you be charged for using other banks’ ATMs?
• Will you be charged for using teller services?
• Are there ways to avoid paying fees?
126 Cash and Credit Information for Teens, Second Edition
Opening A Checking
What’s Needed To Open A Checking Account
To open your checking account, you will generally be asked for the fol-
lowing:
• Photo Identification (ID), usually a state-issued identification card,
driver’s license, passport, or perhaps even your student ID card: Some
banks may accept an alternative form of identification such as a
Matri´cula Consular card. You might need more than one picture ID
to open your account—this is for the protection of both you and the
bank. Since practices vary, ask the bank what type of identification you
need. Banks need to be sure you are the person you say you are.
• Your Social Security Number (SSN): Some banks may accept an alter-
native such as an individual taxpayer identification number (ITIN). This
is generally used to help identify you and to look up your credit history.
• The Opening Deposit: This amount could range from $1 on up, de-
pending on which checking account you choose. Some banks will pay
for your first box of checks, while other banks will charge you.
The bank may also offer you an ATM card or debit card. The bank will
ask you to sign a document that is traditionally called a “signature card.” This
document identifies you as the owner of the account.
Account Verification
The bank or credit union performs account verification because it wants
to make sure that you will be a responsible bank account customer and that
no one is trying to steal your identity to open an account. If you have mis-
handled a checking account or have not been a good banking customer in
the past, the bank may not want to risk accepting you as a customer now.
The bank may access a system such as ChexSystems to help assess your risk
as a potential customer.
Check Register
You use a check register to keep track of the money you put into and take
out of your checking account. Before computers and the internet, the paper
check register was the only way an account holder could keep track of the
money in the account between monthly statements. Today many banks al-
low users to see their accounts online, and account information can be down-
loaded to a financial management software program. To understand how a
check register works, we are going to use a paper version for an example.
Your check register is a tool that will help you to know how much money
you have in your account at all times. Each time you put money into your
account, write a check, or take money out, you should record key pieces of
information in your check register. The following numbered descriptions
refer to the sample check register shown in Figure 13.1 (on page 128).
1. Check Number: If you are writing a check, record the check number in
this column. If not, leave it blank.
2. Date: Write the date on which you wrote a check, made a deposit, or
took money out (made a withdrawal) or were charged a service fee.
7. Balance: Add any deposits or credits and subtract any fees, payments, or
other debits to your account to get the new balance.
Checkbook
The checkbook contains checks and deposit slips for a particular ac-
count. The numbers across the bottom of the check contain the routing
number of the bank (the bank’s number), the account number, and the
number of the check. These numbers are printed so that machines can
easily read them.
What You Should Know About Checking Accounts 129
Step 1: Make Sure You Have Enough Money In Your Checking Account
It is important to record every deposit and withdrawal you make in your
check register. When you do this, you can be sure that the amount in the
balance column accurately reflects what you have in your account. Banks can
use electronic images to transfer checks. This means that a check you present
to pay for a good or service may be immediately withdrawn from your account.
2. Pay To The Order Of (who is receiving your money): This is where you
write the name of the person or company to whom you will give the
check. After writing the name, draw a line from the end of the name to
the end of the space. This prevents anyone from adding an additional
name on your check.
4. Dollars: Write the amount of the check in words, such as nineteen and
75/100. After writing out the amount of the check, draw a line to the
end. This prevents anyone from adding an additional amount after what
you have written.
130 Cash and Credit Information for Teens, Second Edition
5. Memo Section: Writing in this area is optional. You can use it to remind
yourself of the reason you wrote the check or to record the account num-
ber of the bill you are paying.
✤ It’s A Fact!!
How To Correct A Mistake On A Check
If you make a small mistake when writing a check, such as starting to write
the dollar amount in the “Pay to the Order of ” area, cross out the incorrect infor-
mation and write your initials above what you crossed out. Then write the correct
information. Some stores will not accept checks with crossed-out information.
If you make a large mistake, write “VOID” across the check and/or tear it
up. A check with VOID across it is no longer usable. Ideally, you should always
tear up your check to prevent thieves from stealing your confidential informa-
tion off the check. Thieves can use the numbers printed along the lower end of
the check to steal money from your account.
You can also use a check to get cash out of your account at your bank.
should look for a sign on the ATM machine or on the screen before you
approve the transaction that discloses the fee charged by the ATM’s owner.
Remember, your bank may also charge an additional fee for using the ATM
as well.
Printed Receipts: It is important to get receipts for your records and also
to record all ATM and debit card transactions in your check register.
When you withdraw money from your account through the ATM ma-
chine, the money is immediately deducted from your account. If you lose
track of what you’ve taken out of your account, you can overdraw your ac-
count and the bank will charge you the overdraft fee. This can be expensive
and wasteful. If it results in checks “bouncing,” you can ruin your reputation
and relationships with the people to whom you wrote the checks.
The ATM will ask you if you want a receipt. Be sure to answer “Yes,” and
then retain the receipt until you reconcile your monthly account statement.
Printed receipts usually include the following information:
Shopping: When using your debit card while shopping, you may be given
the choice of either signing your name or using your personal identification
number (PIN). You should ask your financial institution whether it charges
any fees or offers special incentives if you sign for transactions rather than
input your PIN.
Unlike credit cards, which allow you to make purchases now and pay for
them later, debit cards deduct the amount from your checking account as
soon as you make the purchase.
134 Cash and Credit Information for Teens, Second Edition
Protection From Someone Else Using Your Card: If someone uses your
card without your permission, federal law protects you. But the protection
differs depending on whether you used your debit or credit card.
• If you used your credit card, you do not have to pay the disputed trans-
action while the company that issued the credit card is investigating
the matter. Your liability for unauthorized transactions is generally
capped at $50, although sometimes the credit card company may waive
your liability.
• With a debit card, the disputed transaction will have already been with-
drawn from your account. The financial institution will re-credit the
amount in dispute (less $50) to your account if it is unable to resolve
the matter within 10 business days of your filing the complaint. If you
do not notify your bank within two days of discovering the loss or
other problem, you could potentially be responsible for more than $50
of the unauthorized purchases.
• It is absolutely critical that you let your financial institution know im-
mediately if someone has used your ATM card, debit card, or credit
card without your permission.
Some benefits of electronic bill pay are you do not have to pay for postage
and for automatic payments, you also do not have to worry about late payments.
However, you should make sure you have enough money in your account to
cover these bills, and make sure you record the payments in your check register.
What You Should Know About Checking Accounts 135
Cash: When making a cash deposit with a deposit slip, here are the steps
you need to follow:
• Make sure the deposit slip has your correct account and address infor-
mation
• Write in the transaction date
136 Cash and Credit Information for Teens, Second Edition
• Add up the total of paper money and write the amount in the box
marked “Cash” or “Currency”
• Add up the coins you wish to deposit and write the amount in the box
marked “Coin”
• Add up the “Cash” and “Coin” boxes to get the “Net Deposit”
You then give the teller your deposit slip and your cash. The teller will
also count the money before depositing it into your account.
If you run out of deposit slips, you can get blank ones at your bank. Make
sure to write your name and account number on the slip so your money does
not go into someone else’s account.
Checks: The first thing you need to do to deposit your check is sign the
back of it.
If you want to deposit the entire ✎ What’s It Mean?
check into your account, write Endorsement: When you
“For Deposit Only,” your ac- sign the back of a check, you are
count number, and your sig- “endorsing” it. This means that
nature. By writing “For Deposit the check can be cashed.
Only,” you prevent others from
cashing your check. It also prevents you
from receiving cash back when you make the deposit.
You will need to fill out a deposit slip when depositing checks into your
checking account.
• If you deposit more than one check, make sure to correctly endorse
each one and write the amount of each check on your deposit slip. Use
a separate line on the deposit slip to list the amount of each check.
• If you have more than a few checks, you can use the back of the de-
posit slip to list them. You need to add up the amounts of the checks
on the back of the deposit slip and transfer this total to the front.
• Enter this amount in the box labeled “Or Total From Reverse.”
• When you deposit your check(s), you can also receive cash back if
there is enough money in your account to cover the check(s).
What You Should Know About Checking Accounts 137
• Net deposit is the amount that will go into your account after you
subtract any cash that you are receiving.
Please note that the bank may not always allow you to immediately with-
draw all the money from a check that you deposited. Ask the bank when the
deposited funds will be available for withdrawal.
Every deposit should be recorded in your check register. When you de-
posit a check and receive cash back, you can record it one of two ways. You
can enter it as two entries or as one entry.
For instance, the following shows how the information can be entered as
two entries:
• Date: March 23, 20XX Or you can do it as one entry:
• Deposit/Credit (+): $50.00 • Date: March 23, 20XX
• New Balance: $215.00 • Deposit/Credit (+): $50.00
Keep in mind that when you deposit a check, it might take a few days
before you can use your money. This is because it takes a few days to process
the check.
When you make a check deposit, ask the teller when your money will be
available.
Be careful not to take out cash or write checks until the money you de-
posited is available.
ATM Deposits
The second way to make a deposit is to use your bank’s ATM. Making an
ATM deposit is similar to making an ATM withdrawal. The ATM will prompt
you through the steps needed to deposit money into your checking account.
138 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
How To Get Cash Back From Your Deposit
You can generally get cash back from any deposit you make, as long as it is
less than the deposit amount.
1. Write the amount of cash you want back in the box marked “Less Cash
Received” on your deposit slip.
3. Then, write the total of your deposit in the “Net Deposit” box. (“Net De-
posit” means the amount that is going into your account. To get this amount,
subtract the cash you want back from the total amount of the check.
ATMs have special envelopes that you use to make deposits. The enve-
lopes are found on or near the ATM.
You do not always have to use a deposit slip when making ATM deposits.
But you need to fill in the information listed on the envelope if your bank
requests it. This information could include the following:
• Your name
• Phone number
• Account number
• Deposit amount
• Type of account
With some ATM machines, you may not even have to use an envelope,
since you enter this information using the machine and then feed your cash
or check deposit into the ATM.
Always remember to get a receipt so you have proof that you made the
deposit.
What You Should Know About Checking Accounts 139
Deposit By Mail
You can also make deposits by mail. You can deposit your checks by mail-
ing the checks and a deposit slip to your bank. However, you should never
send cash through the mail.
Direct Deposit
The fourth way to add money to your checking account is through direct
deposit.
With a fee-based checking account, you can ask the bank the approxi-
mate date it will withdraw the monthly fee from your account. You should
record that fee in your check register.
When you get your monthly checking account statement, there usually
will be a difference between the statement balance and your check register
balance.
Reconciling your checking account helps you find the reasons for the dif-
ferences. Many people reconcile their accounts using a software application.
✤ It’s A Fact!!
It is very important it is to keep an accurate balance in your checkbook. If
you write a check without enough money in your account to cover the check, it
is known as writing a bad check or “bouncing” a check.
Writing bad checks can have very serious consequences for you:
• Each bad check might cost you a fee of as much as $38.
• Checks you write later might not get paid.
• This negative activity can be reported to an account verification com-
pany such as ChexSystems or TeleCheck. This can make it difficult in
the future to cash or write checks and to open an account.
• Your bank can close your account and send a negative report to the credit
bureaus, and the amount of the overdraft and fees might be reported to
a collection bureau.
Writing a bad check, when you know it is a bad check, is a crime in every
state. Each state has different civil and criminal penalties, such as fines and jail
time. For this reason, if you ever do mistakenly write a bad check, you should
correct it as soon as possible.
144 Cash and Credit Information for Teens, Second Edition
The bank must receive notice of the error no later than 60 days after the
date of the statement. But be sure to contact the bank as soon as possible to
minimize your potential losses in the event your account information was
stolen.
If your address changes, you can complete and return the “change of ad-
dress” form on the back of your checking account statement or you can call
your bank.
If you decide to close your checking account, make sure that all the checks
you have written have been cashed before you close it.
Overdraft Protection
Many financial institutions offer “courtesy overdraft protection” or “bounce
protection” plans so that your checks do not bounce and you do not over-
draw your account. With these plans, you will avoid the merchant’s returned
check fee, but you still will have to pay the financial institution a fee for each
item. These fees can be costly. Also remember that, unlike an overdraft line
of credit, with bounce protection there is no guarantee that your bank will
cover your checks, ATM withdrawals, and debit card and other electronic
transactions that overdraw your account.
You may also be able to have your checking account linked to a credit
card or your savings account. When you do not have enough money in your
account to cover an item, money is taken from the credit card or savings
account to cover it.
The bank may charge a small fee for each transfer from your savings
account, but you will not pay interest since you are essentially borrowing
from yourself. You can expect to pay a cash advance fee and interest on funds
transferred to your checking account from your credit card. Ask your bank’s
customer service representative for more information.
Chapter 14
But some accidents or unexpected events are more serious and can cost
you money. You skid on wet pavement and wreck your bike. You leave your
backpack on the bus, and no one turns it in.
These events are called “losses.” You no longer have a backpack or a bike.
Who replaces these items? What if your parents say that you must replace the
lost backpack because you were careless? Do you have enough money saved up?
About Losses
Losses occur in the adult world too, and sometimes losses happen with-
out anyone being careless or making a mistake. A rainstorm floods your base-
ment and ruins everything in it. Your grandmother needs an expensive
operation. Someone steals your dad’s car.
About This Chapter: This chapter includes “Safeguarding Your Money,” “Health In-
surance: Protecting Health and Paying for Treatment,” “Protecting Property: Replac-
ing and Repairing the Things You Own,” “Protecting Autos: The Vehicles and the
People in Them,” “Life Insurance: Protecting the Family Income,” and “Protecting
Your Income: When You Cannot Work and Earn,” © 2007 Northwestern Mutual Foun-
dation. Reprinted with permission. For additional information, visit www.themint.org.
146 Cash and Credit Information for Teens, Second Edition
All these problems cost money. If they all happened at once, they might
wipe out the family savings. Adults try to protect themselves by buying in-
surance, a kind of protection
that helps people pay for
losses that occur in life.
✎ What’s It Mean?
This chapter ex- Coverage: An insurance term, coverage means
plains a few of the what and how much your insurance pays for.
different kinds of Premiums: Another word for insurance payments.
insurance and how
they work. Source: “Health Insurance: Protecting Health and
Paying for Treatment, © 2007 Northwestern
Mutual Foundation.
Protecting
Health And
Paying For Treatment
Going to the doctor, filling prescriptions, or going to the hospital can be
really expensive. Most people buy health insurance to help them pay these
bills. Some bills are smaller, like getting a regular checkup or a booster shot.
But there are bigger costs, too, like surgeries or hospital stays. These can be
huge. So everyone needs health insurance.
As with other kinds of insurance, you can choose from many kinds of
help, called insurance coverage. People buy insurance coverage that fits their
needs. Let’s use two examples to make this point.
The more health insurance you buy, the more your insurance will help
you pay for medical care. But the more insurance you buy, the more you also
spend on premiums.
How It Works
If your home caught fire, how would your parents replace the building
and all the things in it? The “things” took years to buy. Such a loss would be
more than most people could afford. That’s why people buy insurance be-
cause it will help them pay to repair or rebuild their house or apartment and
replace or repair their belongings.
Insurance also costs more if people own very valuable property, like jew-
els, a rare violin, or a collection of antique clocks.
Most people buy homeowners insurance and then hope they never need
to use it. But if something bad does happen, they will have help putting their
home back together without losing all of their savings.
When you get your driver’s license, you can be added to your parents’
auto insurance. Your parents may even ask you to help pay for your part of
the insurance as well as the gas you use when you drive. When you are no
longer a student, you will have to buy your own auto insurance.
Just as with other kinds of insurance, you can buy lots of insurance (that
will pay for lots of damage or medical bills) or less insurance. If you buy less
insurance and you get into an accident, you will have to use more of your
own money to pay for damage or medical bills.
✤ It’s A Fact!!
Auto insurance payments for
teens are high because as inex-
perienced drivers, teens get into many
more accidents than most adults.
Source: “Protecting Autos: The Ve-
hicles And The People In
Them,” © 2007 Northwest-
ern Mutual Foundation.
150 Cash and Credit Information for Teens, Second Edition
Driving can be dangerous, and the damage can be serious and costly.
That’s why many people buy as much insurance as they can afford.
Different Circumstances
Think about this. How the family is financially affected by the death of a
parent depends on when a parent dies.
If a parent dies with three children in elementary school, the living par-
ent must face years of expenses for these children: clothes, tuition, braces,
music lessons, sports, and college. There are lots of bills to be paid.
If a parent dies after the family’s children are adults, the living parent may
be the only person left at home. The many bills that a family pays while
children are growing up probably have been taken care of.
Yet the living parent may still need money for daily life: staying in the
same house and buying food, clothes, a new car, etc. Without life insur-
ance, the remaining parent might not be able to afford his or her old way of
life.
Can you see how parents think about life insurance? Parents hope they
will not need to use life insurance anytime soon. But they buy it just in
case—if a parent dies, the family will have enough money to go on living the
way they always have.
Insurance: Protecting Your Assets 151
As with all insurance, there are many kinds of life insurance. People can
choose how much to buy, depending on their circumstances and their finan-
cial needs.
What if you are a professional football player who has injured his leg? A
brain surgeon who has developed arthritis and can no longer use her hands?
What if you are a construction worker who injured your back? What if you
got in an auto accident and became paralyzed? No matter what the job, people
still need an income to live.
People buy disability insurance because it helps replace their lost pay-
check—either while they recover from a short or long illness—or for the rest
of their life. Because this is a work-related kind of insurance, many people
buy this insurance through their employer.
Chapter 15
It is possible to give from your heart while still using your head. Before
committing to volunteer time or donate goods or services to a local charity,
or responding to pleas for financial support in the wake of a disaster, con-
sider the following questions:
About This Chapter: “More About... Giving Wisely,” © 2008 Securities Industry and
Financial Markets Association Foundation for Investor Education (www.sifma.org).
Reprinted with permission.
154 Cash and Credit Information for Teens, Second Edition
Even though many people give cash, it is better to keep a record of your
donations and proof that you gave to a particular organization, such as a
canceled check, e-mail, or credit card receipt. Keep your own record of the
name of the organization you donated to, the amount of the donation, and
Another Good Use Of Your Money: Helping Others 159
the date of the contribution. You should also receive a receipt from the chari-
table organization if the donation is over $250. The IRS does not require
receipts for cash donations under $250.
• If you get a phone solicitation for funds, ask for the exact name of the
organization, the caller’s title and/or relation-
ship to the organization, and contact in-
formation where you can learn more
about the organization (that is, a ✤ It’s A Fact!!
website address, office address, Don’t be fooled into feel-
ing like you have to pay for
name of other staff, etc.) before
unsolicited items sent to you in
you make any donation. If the the mail such as keychains, address
person is aggressive or obnox- labels, or notecards. Likewise you
ious, thank them politely and should make sure you’re not being
hang up. Do not be rushed into asked to “pay” for unsolicited appeals
making a donation before you disguised as bills or invoices.
are ready. Beware of any orga- Source: © 2008 Securities Indus-
nization that offers to send a try and Financial Markets As-
“runner” to collect your contribu- sociation Foundation for
tion. Investor Education.
☞ Remember!!
Giving to charitable organizations is an act of car-
ing and kindness. By doing a little bit of homework and
giving from your heart while using your head, you can enjoy
knowing that your resources are supporting proven, trusted charities
that are working hard to advance the causes you believe in and care for
people in need.
Buy It Or Not?
We live in a world where the pressure to spend money is constant. You are
surrounded by ads. And advertisers are now placing products in movies and
inserting messages on TV. They’re even in online blogs and message boards.
Resist impulse buying. Advertisers study buyers and buying habits all the
time. So these people have got some pretty clever ways to convince you that
you must have something. Advertisers don’t want you to think about what
you’re doing. They want you to buy right now—if you stop to think, you
might not buy.
How do you hang on to your cash so you don’t just buy impulsively? Ask
yourself these questions:
• Do I really need this item?
• If I don’t need it, why do I really want it?
• Am I sure that I’ll use it? Wear it?
• If I buy it now, will I have enough money for other things I might
need later on—this week, this month, next month?
About This Chapter: This chapter includes “Buy It Or Not?” “What’s It Worth?” and
“Smart Shopping,” © 2007 Northwestern Mutual Foundation. Reprinted with permis-
sion. For additional information, visit www.themint.org.
166 Cash and Credit Information for Teens, Second Edition
• Will this purchase take money away from paying off any debts I owe?
• Is there any risk in delaying this purchase in order to think about it
longer?
• What are the chances this item might go on sale soon?
• Could I find this item somewhere else cheaper?
• Could I find an item like this, but without a brand name? It will prob-
ably cost less.
But think about this: How long does it take you to earn $79.99? What do
you have to do to get that money? Let’s say you stock shelves at a discount
store, and you’re making $7.00 an hour. The little item that’s only $79.99 is
worth almost 12 hours of your work! And if you are making less than this,
how long will it take to earn that much money?
So as you stand in a store, telling yourself you have to buy an item, think
of how long you must work to earn the money to pay for it. Is that $85
designer shirt really worth the time and effort it takes you to earn $85? You
could probably find a similar shirt at another store for under $35, right?
Even if your parents are still buying your clothes, there’s only so much
money to go around. If you spend money on one item, you don’t have it to
Shopping And Impulse Buying 167
spend on anything else. So if you spend the $85 on those jeans, what other
opportunities might you be missing out on? You cannot put it in savings.
You cannot go snowboarding or to the movies with friends—you won’t have
the money to go. That is what is called opportunity cost.
Smart Shopping
There are ways of getting what you want without paying top dollar. Here
are some of them:
• Don’t shop as entertainment. When you hang out at the mall on a
Saturday afternoon, you see things you don’t need. But because you
see them, you want them.
• Shop the sales. If you shop the big sales to buy needed items, your
shopping stays focused, and you get more for your money. But don’t
buy just because something is on sale. Do you really need it?
• Wait for the sale. When you see something you like, approach a sales-
person to ask if the item will go on sale anytime soon.
• For gifts, shop in advance instead of the last minute. You may be able
to get something on sale. Don’t wait until the last minute. If you cannot
find just the right thing, you may blow your budget on something else
out of desperation.
• Shop places other than the mall. There are plenty of them.
Clothing
• Shop outlet stores. They offer good deals on popular designer
names.
• Try discount stores. They can help you cut corners on less important
wardrobe items, like underwear, belts, socks, etc. Not everything you
own has to have a designer logo. Buy the basics here, and shop spe-
cialty stores for accessories.
• Look in consignment or second-hand stores. These stores are usually
choosy about accepting only clothes in good condition. You can get
some real buys.
168 Cash and Credit Information for Teens, Second Edition
Entertainment
• Go to matinees and discount theaters. You know that movie you’ve
been dying to see? Sure, you can go to a full-price theater and pay full
price. Or you can look in the newspaper for a discount theater and get
a couple bucks off the ticket price. Go to a matinee (tickets are always
cheaper).
• Don’t spend all that money on drinks and popcorn. Without too much
trouble, you can spend more on snacks than on the price of admission.
Eat before you go to the movie, buy a beverage during the movie, and
✔ Quick Tip
5 Ways To Cut Spending...
And Still Get To Do And Buy Cool Things
Do you want to find ways to stretch your money, so it goes farther and is
there when you really need it? Here are some suggestions for knowing how
much money you have, how much you need for expenditures, and how to reach
your goals by cutting back on what you spend.
2. Research Before You Buy: To be sure you are getting a good value, espe-
cially with a big purchase, look into the quality and the reputation of the prod-
uct or service you’re considering. Read “reviews” in magazines or respected
websites. Talk to knowledgeable people you trust. Check other stores or go
online and compare prices. Look at similar items. This is known as “comparison
shopping,” and it can lead to tremendous savings and better quality purchases.
Shopping And Impulse Buying 169
And if you’re sure you know what you want, take advantage of store coupons
and mail-in “rebates.”
3. Keep Track Of Your Spending: This helps you set and stick to limits—
what many people refer to as budgeting. “Maintaining a budget may sound
scary or complicated, but it can be as simple as having a notebook and writing
down what you buy each month,” says Janet Kincaid, Federal Deposit Insur-
ance Corporation (FDIC) Senior Consumer Affairs Officer. “Any system that
helps you know how much you are spending each month is a good thing.”
Also pay attention to small amounts of money you spend. “A snack here and
a magazine there can quickly add up,” says Paul Horwitz, an FDIC Commu-
nity Affairs Specialist. He suggests that, for a few weeks, you write down every
purchase in a small notebook. “You’ll probably be amazed at how much you
spend without even thinking.”
5. Take Good Care Of What You Buy: It’s expensive to replace things. Think
about it: Do you really want to buy the same thing twice?
Source: “5 Ways to Cut Spending... and Still Get to Do and Buy Cool Things,”
FDIC Consumer News, Federal Deposit Insurance Corporation (FDIC), Sum-
mer 2006.
170 Cash and Credit Information for Teens, Second Edition
learn about brands, models, and features. Not all store clerks really
know much about what they sell. The internet can help you compare
prices, too, before you visit a store. Getting all this information before
you buy helps you find the right camera for your needs. Collecting
information makes you a smart shopper—and can save you money.
BACK-TO-SCHOOL BONANZA!
Sometimes it seems like life is one big, long sale, doesn’t it? It can get really
confusing. How do you know you’re really getting something for a reduced
price? How do you make smart spending choices when there’s so much pres-
sure to buy, buy, buy? Here are some important things to think about:
About This Chapter: This chapter includes “Spending Smarts: Surfing the Sales” and
“Spending Smarts: Ten Super Shopping Tips,” reprinted with permission from http://
pbskids.org/itsmylife. © 2005 CastleWorks, Inc. All rights reserved.
172 Cash and Credit Information for Teens, Second Edition
here’s how: When you’re going to buy something anyway, it’s better to get it
at a sale price rather than full price.
Say you’ve been dying for a new bathing suit. The one you wore last year
is now a little too small and besides, you want to make a splash with some-
thing new! Now that you’ve got to go shopping, why pay full price? Look for
a deal this way:
1. Be Skeptical
• This means that you shouldn’t believe everything you see or hear.
• If something is “on sale,” take a close look and make sure that the new
price is really a good deal.
• If something is promoted as “the best thing ever,” don’t just blindly
buy it—make sure it’s something you want or need.
• Don’t always trust what you see in ads, and don’t believe everyone who
says something is “rare” or “collectible.”
174 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
Taking The “Bait” Out Of Rebates
Rebate offers can be irresistible to consumers, slashing the price of con-
sumer goods at the time of purchase or promising partial or full reimburse-
ments after the purchase.
Some manufacturers and retailers entice shoppers with instant cash rebates
that can be redeemed immediately at the checkout counter. But most rebates
are of the mail-in variety. They require consumers to pay the full cost of an item
at the time purchase, then to send documentation to the manufacturer or re-
tailer to receive a rebate by mail.
But the Federal Trade Commission cautions consumers against being “baited”
by rebates that never arrive or arrive far later than promised. By law, companies
are required to send rebates within the time frame promised, or if no time is
specified, within a “reasonable” time. “Reasonable” in this case often is inter-
preted as within 30 days.
When purchasing a product that offers a rebate, the FTC encourages con-
sumers to take these steps:
• Follow the instructions on the rebate form and enclose all required docu-
mentation in the envelope when filing for a rebate.
• Make a copy of all paperwork to be mailed when applying for a rebate.
It’s the only record a consumer will have of the transaction if anything
goes wrong.
• Contact the company if the rebate doesn’t arrive within the time promised.
• If the rebate never arrives or arrives late, file a complaint with the Fed-
eral Trade Commission, the state Attorney General or the local Better
Business Bureau.
2. Be Choosy
• Don’t just spend your money on any old stuff! Make sure that you
really like it, that you’re going to use it a lot, and that it offers good
quality for a good price.
• Compare prices of different items in a store, or the same item in dif-
ferent stores.
3. Be Patient
• Don’t be the first person to buy into something new, because it might
turn out to be a dud.
• Instead of making quick impulse buys, take the time to think about
everything you spend money on.
• Wait for prices to come down on the things you want.
4. Be Firm
• Don’t let salespeople talk you into buying something you don’t want.
• Don’t fall for the “upsell,” which is when an employee tries to make
you buy more than you asked for, especially in restaurants.
5. Be Yourself
• Following the crowd can be expensive. Instead, invent your own style.
• You don’t always have to own the same things or the same clothes as
everybody else.
6. Be Informed
• Know exactly what you’re getting for your money.
• Do some research before you buy any big-ticket items such as electronics.
• Look for “hidden costs,” like extra charges or extra things you have to
buy in order for something to work.
7. Be Realistic
• Understand that most things you spend your money on—from a new
shirt to a bag of candy—cannot make your life magically better.
176 Cash and Credit Information for Teens, Second Edition
• Sellers and advertisers try to make you think that all your problems
will disappear if you just spend money on their products, but this is
not true.
8. Be Resourceful
• Try to have fun without spending a lot of money.
• Borrow a book or movie from a friend or from the library.
✔ Quick Tip
Pricing Accuracy Concerns
When you buy something and a cashier passes the Universal Product Code
(UPC) symbol over an electronic scanner, a computer decodes the symbol and
sends the price to the register.
Electronic scanning is not foolproof. The reasons: human error, pricing dif-
ficulties, and management problems. As a result, consumer advocates and regu-
lators are concerned about inconsistencies between advertised or posted prices
and prices stored in the computer, inaccurate prices throughout a chain of stores
because of an error in the central computer, and problems for shoppers who
may not remember posted prices or special promotions when they check out.
Although the UPC symbol has replaced the traditional readable price tag,
it’s still possible for consumers to spot pricing errors at the register. Here’s how:
• Watch the display screen for prices. If you think you’re being overcharged,
speak up. Ask about the store’s policy on pricing errors, and ask the cashier
to make the adjustment before you pay. Although some stores simply
adjust the price, others deduct an additional amount. Still others offer
the mispriced item for free.
• Bring a copy of the store’s flyer or newspaper ad to the checkout counter.
Some advertised specials—15 percent off an item for two hours, for ex-
ample, or a two-for-one promotion—may not be in the computer and
must be entered manually by the cashier.
• Consider jotting down prices or special sales as you wend your way
through the store. In grocery stores, you may want to note the product
prices on the packages.
It’s On Sale, But Is It A Good Deal? 177
9. Be In Control
• You have the power to say yes or no when it comes to spending money.
• Avoid the temptation to spend everything you have in your pocket or
purse.
• Check your receipt before you walk away. If you notice an error, ask the
cashier to adjust the total. If you’ve already left the cashier’s lane, see the
store or department manager or the customer service department to cor-
rect any mistakes.
You also may report recurring problems to your state Attorney General’s
office, state or local consumer protection office, or your state or local office of
weights and measures.
Source: Excerpted from “Making Sure the Scanned Price Is Right, Federal
Trade Commission (www.ftc.gov), December 1998. Despite the older date of
this document, the suggestions are still pertinent to today’s shoppers. Indi-
vidual state laws may govern your rights concerning the correction of electronic
scanning errors.
178 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Do You Really Need
Those $125 Designer Sneakers?
A “need” is something you cannot live without.
A “want” is something that would be nice to have but
isn’t necessary.
When you can control your spending on life’s wants, you’ll have more
money available to save for what you need in the future.
Janet Kincaid of the FDIC offers this tip: “Take a day or two to
think about any purchase that will cost a significant portion of
your savings,” she said. “If you really need to buy the item, it
will probably still be there for you. If you don’t need it but
you still want it, perhaps you can buy something similar
that’s a lot less expensive and save the remaining money
for other things.”
• Try saying no—and then take the money you don’t spend and put it in
the bank.
• The more you resist the urge to spend on a whim, the more money
you’ll have for the stuff that’s really important to you.
• Ask the seller about when delivery can be expected and if there is a
problem with the merchandise is it covered by a warranty or can you
exchange it.
• Find out if shipping and delivery are included in the auction price or
are additional costs so there are no unexpected costs.
• There should be no reason to give out your social security number or
drivers license number to the seller.
✤ It’s A Fact!!
The Internet Crime Complaint Center, or IC3, a part-
nership of the Federal Bureau of Investigation (FBI) and the
National White Collar Crime Center, in 2007 released its latest an-
nual report on victims’ complaints received and referred to law enforce-
ment. Among the results:
• Internet auction fraud was by far the most reported offense, comprising
44.9% of referred complaints. Non-delivered merchandise and/or pay-
ment accounted for 19.0% of complaints. Check fraud made up 4.9% of
complaints. Credit/debit card fraud, computer fraud, confidence fraud,
and financial institutions fraud round out the top seven categories
of complaints referred to law enforcement during the year.
• Consider not purchasing from sellers who won’t provide you with this
type of information.
• Check with the Better Business Bureau from the seller’s area.
• Check out other websites regarding this person/company.
• Don’t judge a person/company by their website.
• Be cautious when responding to special offers (especially through un-
solicited e-mail).
• Be cautious when dealing with individuals/companies from outside
your own country.
• Inquire about returns and warranties.
• The safest way to purchase items via the internet is by credit card
because you can often dispute the charges if something is wrong.
• Make sure the transaction is secure when you electronically send your
credit card numbers.
• Consider utilizing an escrow or alternate payment service.
✔ Quick Tip
A Checklist For Online International Shopping
• Is the business you’re buying from “consumer-friendly” for international
e-commerce?
• Does its website clearly disclose information about the company:
• What kind of business it is and what it sells?
• Where it is located, including the country?
• How you can contact the business?
• Does its website clearly disclose information about the product or service:
• What is being sold, with enough details for you to know exactly what
you’re buying?
• The cost of the product or service, and the currency used?
• Does its website clearly disclose information about the sale:
• The costs, in addition to the price of the product or service, if any, like
costs for shipping and handling, taxes and duties?
• Any restrictions or limitations on the sale?
• Any warranties or guarantees?
• The availability of convenient and safe payment options?
• An estimation of when you will receive the order?
• Does its website clearly disclose information about its consumer protections:
• The opportunity for you to print or save a record of the transaction?
• Safeguards for protecting your payment information when it is trans-
mitted online?
• Policies on what personal identifying information is being collected
about you, what the company does with it and whom it shares it with?
• An opportunity for you to “opt out” of having information about your-
self collected?
• Policies on sending unsolicited e-mail, including an option for you to
decline these offers?
• The return policy, including an explanation of how you can return an
item, get a refund or credit or make an exchange?
• Where you should call, write, or e-mail with complaints or problems?
Source: Excerpted from “Going Shipping? Go Global!” Federal Trade Com-
mission (www.ftc.gov), March 2000. Despite the older date of this document,
the suggestions are still pertinent to today’s internet shoppers.
Chapter 19
Each payment method has advantages and disadvantages. When you buy
something, merchants often offer several different ways to pay. Which way
is best? To make a good decision, it’s important to think about your options.
Cash
Cash is almost always accepted, but consider:
• Do you have enough cash to pay for your purchase as well as any other
things you might have to pay for in the near future, such as a quick
meal or an unexpected purchase? If not, more cash is available from an
automatic teller machine (ATM), but is there a service charge for us-
ing an ATM?
• Are you losing an opportunity to earn interest by carrying too much
cash? The more cash you carry, the less that can be deposited in a
financial institution in an interest bearing account.
About This Chapter: “Purchase Options for Consumers,” reprinted with permission
from the Federal Reserve Bank of Chicago, www.chicagofed.org; accessed in June 2008.
184 Cash and Credit Information for Teens, Second Edition
• Is there a possibility you’ll return the item you’re buying? Will you be
able to return it and get cash back, or will you be able to get only a
store credit? Will you use the store credit?
In general, it’s wise not to carry large amounts of cash because of the risk
of loss or theft. Use cash only for those items that you’ll either use immedi-
ately or take with you.
Check
Checks are another payment option. A check represents money but is not
cash. It’s a piece of paper the check writer uses to instruct his or her financial
institution to release funds. With proper identification, you can open a check-
ing account at most financial institutions. Checks are reliable and conve-
nient for most transactions. Using them frees you from the risk of carrying
large sums of cash. However, you may want to consider the following:
• Checking accounts often have fees, minimum balance requirements,
or a limit on how many checks you can write each month. Therefore,
you may not want to write checks for small amounts unless you’re
mailing a payment.
• Paying with a check through the mail provides proof of payment be-
cause the recipient must endorse the check to cash it or deposit it.
Credit Cards
Credit cards and charge cards can be a convenient, efficient and reliable
payment method. Actually, they allow the buyer to defer payment. Credit
cards are more readily acceptable than checks because the merchant’s bank
guarantees payment to the merchant. Payment is made when you write a
check to the card issuer. If you want to use a credit card to make payments
and pay bills there are a number of things you should consider:
• You may have to pay an annual fee to use a credit card.
• Credit cards are more readily acceptable than checks. Sometimes they
are the only option acceptable.
✔ Quick Tip
Report Unauthorized
Transactions Immediately
Whether you use a credit card, a debit card, a personal
computer or Automated Clearing House (ACH), the trans-
action is electronic and is governed by the Electronic Fund Trans-
fer Act, or Regulation E. The regulation includes procedures for
resolving errors and provides limited liability for unauthorized transac-
tions. Send written notices by certified mail, return receipts requested, and
keep a copy of your letter for your own files. However, be aware that
liability for credit cards is different than electronic debit transac-
tions. Your maximum liability on a credit card is $50. On an
electronic debit, unless you contact your financial institu-
tion within 60 days of receipt of your statement, there
may be no limit to your liability for unauthorized
transactions. Additionally, before you receive
your next statement, your checks may be re-
turned for nonsufficient funds.
186 Cash and Credit Information for Teens, Second Edition
Debit Cards
A debit card looks like a credit card but functions differently. It’s used to
take money out of your checking account at the time of sale. The transaction
Payment Options For Purchases 187
is similar to writing a check or using a credit card, except using a debit card
removes funds from your checking account immediately. When using a debit
card, consider the following:
• Because your checking account will be automatically debited, you have
to make sure you subtract the right amount from your checking ac-
count balance.
• Before you use the debit card, consider how much money is in your
checking account and what other expenses (rent, mortgage, utilities,
other monthly payments, etc.) you have.
• Unlike a credit card, if your debit card is stolen or used by an unauthor-
ized user, you could be held liable for the entire amount of the loss
unless you report the unauthorized transactions to your financial in-
stitutions within 60 days of receiving your statement. Also, unlike credit
cards, the money has already been deducted from your account. Your
money is gone and to get it back you must be able to prove that the
transactions were unauthorized. Additionally, your checks may be re-
turned for non- sufficient funds before you receive your next state-
ment because all the money in your account was removed by the
unauthorized user.
• Unlike a check, you can’t stop an electronic debit once it has been
authorized because funds are removed immediately from your account.
And unlike a check, there is no lag time between when funds are de-
ducted from your account. And unlike a check, there is no lag time
between when payment is made and when funds are deducted from
your account.
• If you return the item, can you get cash back or will you be able to get
only a store credit? As with cash, if only a credit is available for returns
you may want to use another means of payment if you don’t think
you’ll be able to use a store credit.
• Debit cards should not be used for pre-authorized, recurring payments
such as insurance premiums or health club dues. Doing so can lead to
problems later if you want to cancel your authorization. Safer methods
of direct payment are available via your financial institution.
188 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
• Since debit cards and credit cards look the same, be sure you know which
one you’re using when making a transaction.
• Save your receipts for transactions made with credit cards or debit cards.
Review your statement regularly and report discrepancies at once.
Personal Computer
Paying your bills using your personal computer can be fun and easy. More
and more financial institutions offer this type of “home banking” over the
internet. Using your computer to pay bills usually functions the same way as
using any electronic means to make a payment—an electronic debit is made
to your account. Using your home computer to pay bills is just like using
your debit card because the amount of the payment is deducted directly from
your account, and there is no lag time or float between when the payment is
made and when funds are deducted. When you pay bills online, it is impor-
tant that you make sure your transactions are secure, and that your personal
information is protected. Here are some precautions you may want to con-
sider when making payments online:
• Keep personal information—address, telephone number, social secu-
rity number, and account numbers or e-mail address—private. It is
not recommended that you provide this information unless you’ve ini-
tiated the transaction. Don’t disclose your personal information unless
Payment Options For Purchases 189
you know who’s collecting the information, why they’re collecting it,
and how they’ll use it.
• Give payment information only to businesses you know and trust, and
only in appropriate places like order forms.
• Never give your password to anyone online, even your internet service
provider.
• Protect your account numbers and personal information by using soft-
ware that encrypts or scrambles the purchase information you send
over the internet.
• Create and keep records of your online transactions just as you do for
your credit and debit card transactions. Review your periodic bank
and credit card statements for any billing errors or unauthorized pur-
chases. Notify your credit card issuer or bank immediately if you find
any discrepancies.
• Read the policies of websites you frequent and especially the disclo-
sures about their security, refund policies, and privacy policy on col-
lecting and using your personal information.
Automated Transactions
Direct Payment is a safe, reliable service that allows you to pay your
bills automatically. With Direct Payment, you authorize a company to de-
duct money from your checking or savings account in order to pay a monthly
bill.
Direct Payment and Direct Deposit transactions flow through the Auto-
mated Clearing House (ACH) payments network. The ACH network is
more than 25-years-old and is an established network responsible for trans-
ferring billions of dollars each day between financial institutions. You can
learn more about Direct Payment or Direct Deposit by visiting the follow-
ing site: http://www.electronicpayments.org.
Chapter 20
If the company is unable to ship within the promised time, they must
give you an “option notice.” This notice gives you the choice of agreeing to
the delay or canceling your order and receiving a prompt refund.
About This Chapter: “How to Right a Wrong,” Facts for Consumers, Federal Trade
Commission (www.ftc.gov), September 2003.
192 Cash and Credit Information for Teens, Second Edition
• Make a good faith effort first to resolve the dispute with the seller.
However, you are not required to use any special procedure to do so.
Note that the dollar and distance limitations don’t apply if the seller is
the card issuer or if a special business relationship exists between the seller
and the card issuer.
Unordered Merchandise
If you receive merchandise you didn’t order, federal law says you can con-
sider it a gift. You can’t be forced to pay for the item or return it.
If you decide to keep the merchandise, you may want to send the seller a
letter stating your intention, even though you’re not legally obligated to do
so. Your letter may discourage the seller from sending you repeated bills, or it
may clear up an error. It’s a good idea to send the letter by certified mail and
keep the return receipt and a copy of the letter. These records will help you
establish later, if necessary, that you didn’t order the merchandise.
Two types of merchandise may be sent legally without your consent: free
samples that are clearly marked as such; and merchandise mailed by charities
asking for contributions. In either case, you may keep the shipments.
Door-To-Door Sales
Shopping at home can be convenient and enjoyable. But there may be
times when you change your mind about an in-home purchase.
Some Exceptions
Some types of sales can’t be canceled even if they occur in locations nor-
mally covered by the Rule. The Rule does not cover sales that meet these
criteria:
194 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
The Federal Trade Commission, the nation’s consumer protection agency, sug-
gests that students and grads tap into these 10 tips to make the most of their money:
1. Keep your personal information to yourself: In the past five years, millions of
Americans have been victims of identity theft, including many students. Pro-
tect your passwords, guard your credit card number, shred sensitive paperwork,
and don’t leave your mail where it might tempt a potential identity thief.
2. Socialize safely online: Social networking sites can expose you to people
with less than friendly intentions. Consider restricting access to your page.
Post only information that you’re comfortable with the whole world know-
ing, because once it’s posted, you can’t take it back. Don’t post your full
name, Social Security number, address, phone number, or bank and credit
card account numbers. Be cautious about posting the name of your school,
sports team, clubs, and where you work or hang out. Trust your gut and
report any suspicions to the site and the police.
5. Don’t buy bogus weight loss products: Good health isn’t about a number on
a scale. It’s about cultivating a positive attitude, enjoying a variety of foods,
and staying fit and active. Take a pass on any product that promises easy or
effortless weight loss; instead, focus on healthy habits that will last a lifetime.
6. Understand credit: Credit is more than just a plastic card; it’s your finan-
cial future. Before you sign on the dotted line, make sure you “speak credit.”
Facts For Consumers: How To Right A Wrong 195
That “permanent record” your teachers always warned you about? It’s called
a credit report. Late payments now will come back to haunt you when you
try to buy a car, get an apartment, or even land a job. Once you’ve estab-
lished credit, get a free copy of your credit report at annualcreditreport.com.
7. P2P file-sharing can be risky: Peer-to-peer file-sharing can open the door to
unwanted content, spyware, and viruses. If you decide to use file-sharing soft-
ware, install it carefully. Otherwise, you might give strangers access not just to
the files you intended to share, but also to other information on your hard
drive, like e-mail and personal documents. Remember that sharing copyrighted
music or other entertainment via P2P can land you in legal hot water.
8. Travel scams turn spring breaks into spring busts: Who doesn’t dream of
spending spring relaxing in the sun or snowboarding on some mountain?
Be aware that scam artists target students who are looking for low-cost
vacations. Before you show up at the airport with your sunscreen, review
the tour package carefully and investigate the operator. Check out http://
www.ftc.gov/travel for more travel tips.
10. Some employment services are scams: Bona fide job placement services
can help launch you in the career of your dreams. But bogus companies can
scam you out of your money. Before paying any money to someone offer-
ing to help you land a job, check out who you’re doing business with.
• Are made as part of your request for the seller to do repairs or mainte-
nance on your personal property (purchases made beyond the mainte-
nance or repair request are covered)
Also exempt from the Rule are sales that involve these issues:
Under the Rule, the salesperson must tell you about your cancellation
rights at the time of sale. The salesperson also must give you two copies of a
cancellation form (one to keep and one to send back) and a copy of your
contract or receipt. The contract or receipt should be dated, show the name
and address of the seller, and explain your right to cancel. The contract or
receipt must be in the same language that’s used in the sales presentation.
If You Cancel
If you cancel your purchase, the seller has 10 days to cancel and return
any promissory notes or other negotiable instruments you signed; refund all
your money and tell you whether any product left with you will be picked up;
and return any trade-in.
Facts For Consumers: How To Right A Wrong 197
Within 20 days, the seller either must pick up the items left with you, or
reimburse you for mailing expenses, if you agreed to send back the items. If
you received any goods from the seller, you must make them available to the
seller in as good condition as when you received them. If you don’t make the
items available—or if you agree to return the items but don’t—you remain
obligated under the contract.
Problems
Try to resolve your dispute with the seller first. Make sure you act quickly.
Some companies may not accept responsibility if you fail to complain within
a certain period of time.
✔ Quick Tip
(Your address)
(Your City, State, Zip Code)
(Date)
On (date), I purchased (or had repaired) a (name of the product with the
serial or model number or service performed). I made this purchase at (loca-
tion, date, and other important details of the transaction).
Unfortunately, your product (or service) has not performed well (or the
service was inadequate) because (state the problem).
Therefore, to resolve the problem, I would appreciate your (state the spe-
cific action you want). Enclosed are copies (copies, NOT originals) of my records
(receipts, guarantees, warranties, canceled checks, contracts, model and serial
numbers, and any other documents).
I look forward to your reply and a resolution to my problem, and will wait
(set a time limit) before seeking third-party assistance. Please contact me at the
above address or by phone (home or office numbers with area codes).
Sincerely,
(Your name)
(Your account number)
Through mediation, you and the other party try to resolve the dispute
with the help of a neutral third party—a mediator. In the course of informal
meetings, the mediator tries to help resolve your differences. The mediator
doesn’t make a decision; it’s up to you and the other party to reach an agree-
ment. The mediator is there to help you find a solution.
In arbitration, you present your case before an arbitrator, who makes a de-
cision. Arbitration is less formal than court, though you and the other party
may appear at hearings, present evidence, or call and question each other’s
witnesses. The decision may be binding and legally enforceable in court.
The FTC works for the consumer to prevent fraudulent, deceptive, and
unfair business practices in the marketplace and to provide information to
help consumers spot, stop, and avoid them. To file a complaint or to get free
information on consumer issues, visit ftc.gov or call toll-free, 877-FTC-
HELP (877-382-4357); TTY: 866-653-4261. The FTC enters internet,
200 Cash and Credit Information for Teens, Second Edition
Warranties
When you make a major purchase, the manufacturer or seller makes an
important promise to stand behind the product. It’s called a warranty. Fed-
eral law requires that warranties be available for you to read before you buy
even when you’re shopping by catalog or on the internet. Coverage varies, so
you can compare the extent of warranty coverage just as you compare the
style, price, and other characteristics of products.
Written Warranties
Although not required by law, written warranties come with most major
purchases. When comparing written warranties, keep the following in mind:
• How long does the warranty last? Check the warranty to see when it begins
and when it expires, as well as any conditions that may void coverage.
• Who do you contact to get warranty service? It may be the seller or
the manufacturer who provides you with service.
About This Chapter: This chapter includes “Warranties,” October 2001, “Service Con-
tracts,” October 2001, and “Auto Service Contracts,” May 1997, Facts for Consumers,
Federal Trade Commission (www.ftc.gov). Despite the older dates of these documents,
the information is still pertinent to today’s consumers.
202 Cash and Credit Information for Teens, Second Edition
• What will the company do if the product fails? Read to see whether
the company will repair the item, replace it, or refund your money.
Warranty Pieces
When you buy a car, home, or major appliance, you may be offered a
service contract. Although often called “extended warranties,” service con-
tracts are not warranties. Service contracts, like warranties, provide repair
and/or maintenance for a specific time. Warranties, however, are included in
Warranties And Service Contracts 203
the price of the product; service contracts costs extra and are sold separately.
To determine whether you need a service contract, consider these issues:
• Whether the warranty already covers the repairs and the time period
of coverage that you would get under the service contract
• Whether the product is likely to need repairs and the potential costs
of such repairs
• The duration of the service contract
• The reputation of the company offering the service contract
Implied Warranties
Implied warranties are created by state law, and all states have them. Al-
most every purchase you make is covered by an implied warranty.
If your purchase does not come with a written warranty, it is still covered
by implied warranties unless the product is marked “as is,” or the seller oth-
erwise indicates in writing that no warranty is given. Several states, includ-
ing Kansas, Maine, Maryland, Massachusetts, Mississippi, Vermont, West
Virginia, and the District of Columbia, do not permit “as is” sales.
If problems arise that are not covered by the written warranty, you should
investigate the protection given by your implied warranty.
Implied warranty coverage can last as long as four years, although the
length of the coverage varies from state to state. A lawyer or a state con-
sumer protection office can provide more information about implied war-
ranty coverage in your state.
204 Cash and Credit Information for Teens, Second Edition
Preventing Problems
To minimize problems, take these steps:
• Read the warranty before you buy. When online, look for hyperlinks
to the full warranty or to an address where you can write to get a free
copy. Understand exactly what protection the warranty gives you. If a
copy of the warranty is available when shopping online, print it out
when you make your purchase and keep it with your records.
• Consider the reputation of the company offering the warranty. Look
for an address to write to or a phone number to call if you have ques-
tions or problems. If you’re not familiar with the company, ask your
local or state consumer protection office or Better Business Bureau if
they have any complaints against the company. A warranty is only as
good as the company that stands behind it.
• Save your receipt and file it with the warranty. You may need it to
document the date of your purchase or prove that you’re the original
owner in the case of a nontransferable warranty.
• Perform required maintenance and inspections.
• Use the product according to the manufacturer’s instructions. Abuse
or misuse may void your warranty coverage.
Resolving Disputes
If you have problems with a product or with getting warranty service,
take these steps:
• Read your product instructions and warranty carefully. Don’t expect
features or performance that your product wasn’t designed for, or as-
sume warranty coverage that was never promised in writing. A war-
ranty doesn’t mean that you’ll automatically get a refund if the product
is defective—the company may be entitled to try to fix it first. On the
other hand, if you reported a defect to the company during the war-
ranty period and the product wasn’t fixed properly, the company must
correct the problem, even if your warranty expires before the product
is fixed.
Warranties And Service Contracts 205
• Try to resolve the problem with the retailer. If you can’t, write to the
manufacturer. Your warranty should list the company’s mailing ad-
dress. Send all letters by certified mail, return receipt requested, and
keep copies.
• Contact your state or local consumer protection office. They can help
you if you can’t resolve the situation with the seller or manufacturer.
• Research dispute resolution programs that try to informally settle any
disagreements between you and the company. Your local consumer
protection office can suggest organizations to contact. Also, check your
warranty; it may require dispute resolution procedures before going to
court.
• Consider small claims court. If your dispute involves less than $750,
you can usually file a lawsuit in small claims court. The costs are rela-
tively low, procedures are simple, and lawyers usually aren’t needed.
The clerk of the small claims court can tell you how to file your lawsuit
and your state’s dollar limits.
• If all else fails, you may want to consider a lawsuit. You can sue for
damages or any other type of relief the court awards, including legal
fees. A lawyer can advise you how to proceed.
✤ It’s A Fact!!
For More Information
The Federal Trace Commission (FTC) works for the consumer to prevent
fraudulent, deceptive, and unfair business practices in the marketplace and to
provide information to help consumers spot, stop, and avoid them. To file a
complaint or to get free information on consumer issues, visit ftc.gov or call
toll-free, 877-FTC-HELP (877-382-4357); TTY: 866-653-4261. The FTC
enters internet, telemarketing, identity theft, and other fraud-related complaints
into Consumer Sentinel, a secure online database available to hundreds of civil
and criminal law enforcement agencies in the U.S. and abroad.
Service Contracts
If you are buying a car or major appliance, whether in a retail store, by
catalog, or online, you may be offered a service contract. To many consum-
ers, buying a service contract is like buying “peace of mind” from repair hassles.
An estimated 50% of all new car buyers, and many used-car and major appli-
ance buyers, purchase service contracts. The cost can range from $50 to $500,
depending on the length and amount of coverage provided. Some consum-
ers, however, may be paying for more protection than they need.
✤ It’s A Fact!!
What will the service contract
give you that the warranty will not?
Before considering a service contract, make sure you know
what your warranty coverage is. If these documents are avail-
able online, print them out to make it easier for you to read them.
Then, carefully compare the coverage of your warranty to the cover-
age offered by the service contract to decide if the service contract is worth
the additional expense. For more information about warranties, send for
Warranties, a free brochure from the Federal Trade Commission, by
writing to: Public Reference, Federal Trade Commission, Wash-
ington, D.C. 20580. You also may write to this address to
receive a free copy of Best Sellers, a listing of all the FTC’s
consumer publications.
or rental car expenses. In addition, you may have to pay cancellation or transfer
fees if you sell the covered product or wish to end the contract.
Before deciding whether to buy an auto service contract, ask these questions:
You may decide to buy a “demonstrator” model—a car that has never been
sold to a retail customer but has been driven for purposes other than test drives.
If so, ask when warranty coverage begins and ends. Does it date from when
you purchase the car or when the dealer first put the car into service?
Warranties And Service Contracts 209
If the administrator goes out of business, the dealership still may be obli-
gated to perform under the contract. The reverse also may be true. If the
dealer goes out of business, the administrator may be required to fulfill the
terms of the contract. Whether you have recourse depends on your contract’s
terms and/or your state’s laws.
Learn about the reputation of the dealer and the administrator. Ask for
references and check them out. You also can contact your local or state con-
sumer protection office, state Department of Motor Vehicles, local Better
Business Bureau, or local automobile dealers association to find out if they
have public information on the firms. Look for the phone numbers and ad-
dresses in your telephone directory.
Find out how long the dealer or administrator has been in business, and
try to determine whether they have the financial resources to meet their
contractual obligations. Individual car dealers or dealer associations may set
aside funds or buy insurance to cover future claims. Some independent com-
panies are insured against a sudden rush of claims.
✤ It’s A Fact!!
Used Cars: Warranty Protection
When shopping for a used car, look for a Buyer’s Guide sticker posted on
the car’s side window. This sticker is required by the Federal Trade Commis-
sion (FTC) on all used cars sold by dealers. It tells whether a service contract is
available. It also indicates whether the vehicle is being sold with a warranty,
with implied warranties only, or “as is.”
• Implied Warranties Only: There are two common types of implied war-
ranties. Both are unspoken and unwritten and based on the principle
that the seller stands behind the product. Under a “warranty of mer-
chantability,” the seller promises the product will do what it is supposed
to do. For example, a toaster will toast, a car will run. If the car doesn’t
run, implied-warranties law says that the dealer must fix it (unless it was
sold “as is”) so that the buyer gets a working car. A “warranty of fitness
for a particular purpose” applies when you buy a vehicle on a dealer’s
advice that it is suitable for a certain use, like hauling a trailer. Used cars
usually are covered by implied warranties under state law.
• As Is—No Warranty: If you buy a car “as is,” you must pay for all repairs,
even if the car breaks down on the way home from the dealership. How-
ever, if you buy a dealer-service contract within 90 days of buying the
used car, state law “implied warranties” may give you additional rights.
Some states prohibit “as is” sales on most or all used cars. Other states re-
quire the use of specific words to disclaim implied warranties. In addition, some
states have used car “lemon laws” under which a consumer can receive a refund
or replacement if the vehicle is seriously defective. To find out about your state
laws, check with your local or state consumer protection office or attorney gen-
eral.
In addition to the initial charge, you may need to pay a deductible each
time your car is serviced or repaired. Under some service contracts, you pay
one charge per visit for repairs—no matter how many. Other contracts re-
quire a deductible for each unrelated repair.
You also may need to pay transfer or cancellation fees if you sell your car
or end the contract. Often, contracts limit the amount paid for towing or
related rental car expenses.
Watch out for absolute exclusions that deny coverage for any reason. Here
are some examples:
• If a covered part is damaged by a non-covered component, the claim
may be denied.
• If the contract specifies that only “mechanical breakdowns” will be
covered, problems caused by “normal wear and tear” may be excluded.
• If the engine must be taken apart to diagnose a problem and it is discov-
ered that non-covered parts need to be repaired or replaced, you may
have to pay for the labor involved in the tear-down and re-assembling of
the engine.
You may not have full protection even for parts that are covered in the
contract. Some companies use a “depreciation factor” in calculating cover-
age: the company may pay only partial repair or replacement costs if they
consider your car’s mileage.
Find out if your car will be covered if it breaks down while you’re using it
on a trip or if you take it when you move out of town. Some auto service
contract companies and dealers offer service only in specific geographical
areas.
Find out if you need prior authorization from the contract provider for
any repair work or towing services. Be sure to ask about these issues:
• How long it takes to get authorization
• Whether you can get authorization outside of normal business hours
• Whether the company has a toll-free number for authorization. Test
the toll-free number before you buy the contract to see if you can get
through easily.
You may have to pay for covered repairs and then wait for the service
company to reimburse you. If the auto service contract doesn’t specify how
long reimbursement usually takes, ask. Find out who settles claims in case
you have a dispute with the service contract provider and need to use a dis-
pute resolution program.
✔ Quick Tip
Complaints
To report contract problems with a service provider, contact your
local and state consumer protection agencies, including the state insur-
ance commissioner and state attorney general.
If you need help resolving a dispute, contact the Better Business Bureau,
the state attorney general, or the consumer protection office in your area.
Also, contact law schools in your area and ask if they have dispute reso-
lution programs.
Find out if the contract prohibits you from taking the car to an indepen-
dent station for routine maintenance or performing the work yourself. The
contract may specify that the selling dealer is the only authorized facility for
servicing the car.
Other Tips
If you’re told you must purchase an auto service contract to qualify for
financing, contact the lender yourself to find out if this is true. Some con-
sumers have had trouble canceling their service contract after discovering
the lender didn’t require one.
Contact your local or state consumer protection office if you have reason to
believe that your contract wasn’t put into effect as agreed.
• If you use more than your monthly allotment, you pay a much higher
charge for the extra minutes.
• Unused minutes may not carry over to the next month.
• Most wireless plans count the minutes for both calls you make and
receive.
• Charges are usually rounded up. For example, a call that takes one
minute and three seconds may be charged as a two-minute call.
• Unlike traditional phone service, most wireless providers start the clock
when you press the “talk” or “send” button, not when the person at the
other end of the line picks up.
• You use minutes when you call toll-free numbers.
• Some services allow you to check by telephone or online to find out
how many minutes you have left in your billing cycle. Depending on
how often that information is updated, it may not be absolutely cur-
rent.
Another alternative is a plan with a preset spending limit; when you reach
the limit, you have to pay your bill before you can continue to use the service.
You could pay roaming charges, long-distance charges, and have your
minutes assessed, all for the same call, depending on your wireless plan and
your location. When comparing plans, consider where and how you’ll be
using your phone.
✤ It’s A Fact!!
Wireless Internet Service And Messaging
Many wireless companies provide internet access, including e-mail and web
browsing. As wireless technology advances, internet services are becoming faster
and more varied.
• Some plans charge by the minute. Ask whether internet use counts against
the number of minutes in your plan or if you have a separate “bucket” of
minutes for it.
• If the charges are by the kilobyte, consider how many you are likely to
use. The average 100-word e-mail without attachments or graphics is
one kilobyte, but things like graphics and music files are much larger and
take up many more kilobytes (1,024 kilobytes equal one megabyte).
Get all promises in writing. Ask if there is a grace period within which
you can cancel for no or a small charge if the service doesn’t meet your ex-
pectations. Try it out as soon as possible to see how it works in the places you
would normally use it.
Shopping For A Cell Phone Plan 219
Some cell phones work with older analog networks. Most sold today work
with newer digital networks, and some (called dual-band) work with both. If
the phone only works with digital networks, you may not be able to “roam”—
make or receive calls outside your home area.
To accommodate people with special needs, some phones can operate with
voice-activated commands. Many have raised numbers on the keypads. All
providers must offer at least one phone that works with TTY devices. People
who use hearing aids should ask if the phones are compatible with them.
It’s also important to know that if you switch your wireless provider, you
may have to get another phone, and you won’t be able to keep the same
number (consumers will be able to retain their cell phone numbers when
they switch providers under federal rules that took effect in late 2003).
Buying A Computer
About This Chapter: This chapter begins with “Tips for Buying a Computer,” by Vince
Ory, Baton Rouge General Medical Center, Medical Library, Baton Rouge, LA, for
the National Network of Libraries of Medicine, South Central Region, July 2006.
Additional text is from “Big Print. Little Print. What’s the Deal?” Federal Trade Com-
mission (www.ftc.gov), 2007.
222 Cash and Credit Information for Teens, Second Edition
are frequently utilized without external power sources, “on board bat-
tery capacity” is an important factor in notebook selection.
• Do you prefer to buy your unit locally or mail order? This is an impor-
tant choice, for it often dictates what kind of product support you will
receive. Do you prefer to take your unit to a local dealer for service or
are you comfortable with telephone technical support? Most large
manufacturers offer factory direct orders. This allows you to choose
from a variety of component specifications rather than settle for what
a local vendor happens to have in stock.
• How much can I afford? If your computing needs outstrip your re-
sources, be aware many large manufacturers offer late model factory
refurbished machines or closed product lines with variable warranties.
Factor in the cost of any extended warranty you may desire. Again, the
operational requirements will influence power and options you need.
Most systems easily accept memory, video, sound, modem, and stor-
age space upgrades. A quality electrical surge protector is a must.
Pentium 4 Processor At 2.4 GHz With 533 Mhz System Bus And 512K
L2 Cache: Processor (AKA: central processing unit, CPU, microchip, micro-
processor, or chipset). The CPU handles the computer’s complex computa-
tions. CPU speed (clock speed) is measured in the number of cycles per second
executed measured in “hertz” (megahertz/millions or gigahertz/billions). Some
Buying A Computer 223
40 GB Ultra ATA Hard Drive (7200 RPM): Hard drive (AKA memory).
the hard drive is a magnetically sensitive disc(s) that serves as a permanent
storage area for data and programs. Like RAM memory hard drive storage
capacity is measured in bytes. Be aware of the size of the programs you will
be using and estimate your base hard drive requirements. Most system easily
allow for adding or upgrading the hard drive (20 to 70 gb).
17" (16.0" v.i.s.) Dot Pitch 0.26 mm Monitor: As with a television, screen
size and picture quality enhances viewing pleasure and reduces eyestrain.
Values for diagonal distance from corner to corner of the glass is the view-
able image size (V.I.S). V.I.S is generally smaller than stated size of the
monitor as in our example advertisement. “Notebooks tend toward smaller
screens but 15" and 17" are common. Screens up 21" are now available with
17" the most popular for desktops. Flat-panel (FP) monitors, standard on
notebooks, are now available for desktops. FP monitors have a much thinner
front to back profile and thus require less space. Additionally, FP monitors
make use of eye-saving liquid crystal display (LCD). FP monitors are much
224 Cash and Credit Information for Teens, Second Edition
more expensive than older technology, cathode ray tube (CRT) monitors
but typically last longer. If you opt for the CRT monitor you may want to
consider a model with an eye saving flat glass screen. Picture quality is a
function of several factors but typically higher resolution screens have smaller
“dot pitch” values. Dot pitch ranges from 0.18 mm to 0.39 mm (the smaller
the better) with 0.28 mm being the largest value for a CRT monitor without
undue eyestrain.
128 Mb DDR Graphics Card: The video graphics card is a separate cir-
cuit board plugged into you computers main circuit board expansion slots.
The video card has its own processing chip (coprocessor) and RAM memory
that handles video information to relieve the CPU of that duty. Most late
model computers come with a video card or easily accept installation and
upgrades.
16x Max. DVD-ROM Drive: Various types of disc drives are available.
They offer the ability to upload and download data, record and play music,
and play movies. Drive ability is measured in multiples of a base standard of
150 kilobytes per second (KBS) data transfer rate. A 16X disc drive operates
at a 16 X 150 KBS (2400 kbs) transfer rate. CD ROM drives will read text
and play music but not record. A CD RW drive will play music and allow
you to record music or text onto recordable discs. DVD ROM and DVD
RW share a similar relationship. A disc drive is a good means of backing up
you computer hard drive information in case of failure.
4 PCI Slots, 1 AGP Slot: The computers main circuit board (motherboard)
has sockets (expansion slots) for adding additional circuit boards. Currently,
several peripheral component interconnect (PCI) slots and one video dedi-
cated advanced graphics port (AGP) slot are common offerings. PCI slots
allow quick installation of new circuit devices without extensive software
reconfiguring (Plug and Play). AGP allows installation and efficient use of
the video card.
4 USB Ports: Serial ports and parallel ports are standard equipment but
an important item not to overlook is the universal service bus (USB) port.
USB offers high speed data exchange and allows several devices to be plugged
into a single hub in a process know as “daisy chaining” greatly expanding the
Buying A Computer 225
number of devices you can attach to one USB port. USB also allows devices
to be disconnected and reconnected without shutting down the computer’s
main power.
Front Audio Jack: Audio jacks allow quick access for audio appliances.
Often they indicate the presence of an audio card (also known as, sound
cards). Audio cards allow the computer to process sound incoming and out-
going from equipment like microphones and external speakers and graphical
and game devices like joysticks. The sound card enables the computer to
function much like a stereo system.
the advertising so that consumers can evaluate the merits of an offer and
make an informed purchasing decision.
✤ It’s A Fact!!
Disclosures In Internet Advertising
Information affecting the actual cost of an offer should be disclosed close to
the advertised price—that is, on the same electronic page and next to the price.
Advertisers should not use pop-up windows or hyperlinks to other electronic
pages to display key cost information. Hyperlinks may be useful to tell consum-
ers about less critical terms and conditions of an offer, especially when the
information may be extensive. For example, in rebate offers that require the
purchase of internet service, the cost of the internet service should be disclosed
on the same page as the advertised price of the computer. But hyperlinks may
be used to direct the consumer to the cancellation terms and additional internet
connection costs of many internet rebate offers.
the rebates. Only then will consumers know their actual out-of-pocket cost
and have the information they need to comparison shop.
Rebate promotions should clearly detail any additional terms and condi-
tions that consumers need to know, like the following:
• Penalties or fees for canceling the internet service contract early. Some
rebate offers require consumers to pay back all or a portion of the
rebate; others tack on an additional fee.
• Additional connection charges to access the internet service. For ex-
ample, consumers should be told that to access the internet they may
have to pay long distance phone charges, or expensive hourly surcharges
for use of an 800, 888 or 877 phone number. This charge is in addition
to the basic monthly internet service fee. Consumers also should be
told how to find out if local internet access is available.
• How long before they will receive the rebate.
Print advertisers should not attempt to hide the real cost or the critical
terms or conditions by putting them in obscure locations, such as the border
area on a print ad; burying them in numerous, densely packed lines of fine
print; or including them in small-type footnotes.
228 Cash and Credit Information for Teens, Second Edition
Buying Jewelry
Buying jewelry can be fun, exciting, and confusing. Whether you’re con-
sidering a gift of jewelry for someone special or as a treat for yourself, take
some time to learn the terms used in the industry. Here’s some information
to help you get the best quality jewelry for your money, whether you’re shop-
ping in a traditional brick and mortar store, by catalog, or online.
Gold
The word gold, used by itself, means all gold or 24 karat (24K) gold.
Because 24K gold is soft, it’s usually mixed with other metals to increase its
hardness and durability. If a piece of jewelry is not 24 karat gold, the karat
quality should accompany any claim that the item is gold.
The karat quality marking tells you what proportion of gold is mixed
with the other metals. Fourteen karat (14K) jewelry contains 14 parts of
gold, mixed in throughout with 10 parts of base metal. The higher the karat
rating, the higher the proportion of gold in the piece of jewelry.
Most jewelry is marked with its karat quality, although marking is not
required by law. Near the karat quality mark, you should see the name or the
About This Chapter: “All That Glitters... How to Buy Jewelry,” Facts for Consumers,
Federal Trade Commission (www.ftc.gov), March 2008.
230 Cash and Credit Information for Teens, Second Edition
U.S. registered trademark of the company that will stand behind the mark.
The trademark may be in the form of a name, symbol, or initials. If you don’t
see a trademark accompanying a quality mark on a piece of jewelry, look for
another piece.
Jewelr y can be
plated with gold in ✤ It’s A Fact!!
a variety of ways. Solid gold refers to an item made of any karat gold,
Gold plate refers if the inside of the item is not hollow. The propor-
to items that are ei- tion of gold in the piece of jewelry still is de-
termined by the karat mark.
ther mechanically
plated, electroplated, or
plated by any other means with gold to
a base metal. Eventually, gold plating wears away, but how soon will depend
on how often the item is worn and how thick the plating is.
Gold-filled, gold overlay, and rolled gold plate (RGP) are terms used to
describe jewelry that has a layer of at least 10 karat gold mechanically bonded
to a base metal. If the jewelry is marked with one of these terms, the term or
abbreviation should follow the karat quality of the gold used (for example,
14K Gold Overlay or 12K RGP). If the layer of karat gold is less than 1/20th
of the total weight of the item, any marking must state the actual percentage
of karat gold, such as 1/40 14K Gold Overlay.
Gold electroplate describes jewelry that has a layer (at least .175 microns
thick) of a minimum of 10 karat gold deposited on a base metal by an electrolytic
process. The terms gold flashed or gold washed describe products that have an
extremely thin electroplating of gold (less than .175 microns thick). This will
wear away more quickly than gold plate, gold-filled, or gold electroplate.
markings for platinum are based on parts per thousand. For example, the
marking 900 Platinum means that 900 parts out of 1000 are pure platinum,
or in other words, the item is 90% platinum and 10% other metals. The abbre-
viations for platinum—Plat. or Pt.—also can be used in marking jewelry.
Items that contain at least 950 parts per thousand pure platinum can be
marked simply platinum. Items that have at least 850 parts per thousand
pure platinum can be marked with the amount of pure platinum and the
word platinum or an abbreviation (for example, 950 platinum, 900 Plat., or
850 Pt.). Jewelry that contains less than 850 parts per thousand pure plati-
num, but has a total of 950 parts per thousand of platinum group metals (of
which at least 500 parts is pure platinum), may be marked with both the
amount of pure platinum and the amount of the other platinum group met-
als in the piece. For example, the marking 600 Plat. 350 Irid. means that the
item has 600 parts per thousand (60%) platinum, and 350 parts per thou-
sand (35%) iridium, totaling 950 parts per thousand of platinum group met-
als, and 50 parts per thousand (5%) other metals.
The words silver or sterling silver describe a product that contains 92.5%
silver. Silver products sometimes may be marked 925 which means that 925
parts per thousand are pure silver. Some jewelry may be described as
silverplate: a layer of silver is bonded to a base metal. The mark coin silver is
used for compounds that contain 90% silver. According to the law, quality-
marked silver also must bear the name or a U.S. registered trademark of the
company or person that will stand behind the mark.
Gemstones
Natural gemstones are found in nature. Laboratory-created stones, as
the name implies, are made in a laboratory. These stones, which also are
referred to as laboratory-grown, [name of manufacturer]-created, or syn-
thetic, have essentially the same chemical, physical, and visual properties as
232 Cash and Credit Information for Teens, Second Edition
Gemstones may be measured by weight, size, or both. The basic unit for
weighing gemstones is the carat, which is equal to one-fifth (1/5th) of a
gram. Carats are divided into 100 units, called points. For example, a half-
carat gemstone would weigh .50 carats or 50 points. When gemstones are
measured by dimensions, the size is expressed in millimeters (for example,
7x5 millimeters).
Some common treatments that you may be told about and their effects
include the following:
• Heating can lighten, darken, or change the color of some gems, or
improve a gemstone’s clarity.
• Irradiation can add more color to colored diamonds, certain other gem-
stones, and pearls.
• Impregnating some gems with colorless oils, wax, or resins makes a
variety of imperfections less visible and can improve the gemstones’
clarity and appearance.
Buying Jewelry 233
Diamonds
A diamond’s value is based on four criteria: color, cut, clarity, and carat.
The clarity and color of a diamond usually are graded. However, scales are
not uniform: a clarity grade of “slightly included” may represent a different
grade on one grading system versus another, depending on the terms used
in the scale. Make sure you know how a particular scale and grade repre-
sent the color or clarity of the diamond you’re considering. A diamond can
be described as “flawless” only if it has no visible surface or internal imper-
fections when viewed under 10-power magnification by a skilled diamond
grader.
a foreign substance. This filling may not be permanent and jewelers should
tell you if the diamond you’re considering has been fracture-filled.
Another treatment—lasering—
involves the use of a laser beam to im- ✤ It’s A Fact!!
prove the appearance of diamonds Imitation diamonds, such as cubic
that have black inclusions or spots. A Zirconia, resemble diamonds in ap-
laser beam is aimed at the inclusion. pearance but are much less costly.
Acid is then forced through a tiny Certain laboratory-created gem-
stones, such as lab-created mois-
tunnel made by the laser beam to re-
sanite, also resemble diamonds and
move the inclusion. Lasering is per- may not be adequately detected by
manent and a laser-drilled stone does the instruments originally used to
not require special care. identify cubic Zirconia. Ask your
jeweler if he has the current testing
While a laser-drilled diamond equipment to distinguish between
may appear as beautiful as a compa- diamonds and other lab-created
rable untreated stone, it may not be stones.
as valuable. That’s because an un-
treated stone of the same quality is
rarer and therefore more valuable. Jewelers should tell you whether the dia-
mond you’re considering has been laser-drilled.
Pearls
Natural pearls are made by oysters and other mollusks. Cultured pearls
also are grown by mollusks, but with human intervention; that is, an irritant
introduced into the shells causes a pearl to grow. Imitation pearls are man-
made with glass, plastic, or organic materials.
Because natural pearls are very rare, most pearls used in jewelry are either
cultured or imitation pearls. Cultured pearls, because they are made by oys-
ters or mollusks, usually are more expensive than imitation pearls. A cul-
tured pearl’s value is largely based on its size, usually stated in millimeters,
and the quality of its nacre coating, which gives it luster. Jewelers should tell
you if the pearls are cultured or imitation.
Some black, bronze, gold, purple, blue, and orange pearls, whether natu-
ral or cultured, occur that way in nature; some, however, are dyed through
Buying Jewelry 235
various processes. Jewelers should tell you whether the colored pearls are
naturally colored, dyed, or irradiated.
In addition, these tips apply when you’re shopping for jewelry online:
• Shop with companies you know or do some homework before buying
to make sure a company is legitimate before doing business with it.
• Get the details about the product, as well as the merchant’s refund and
return policies, before you buy.
• Look for an address to write to or a phone number to call if you have
a question, a problem or need help.
The Federal Trade Commission (FTC) works for the consumer to pre-
vent fraudulent, deceptive, and unfair business practices in the marketplace
and to provide information to help consumers spot, stop, and avoid them. To
file a complaint or to get free information on consumer issues, visit http://
www.ftc.gov or call toll-free, 877-FTC-HELP (877-382-4357); TTY: 866-
653-4261. The FTC enters internet, telemarketing, identity theft, and other
fraud-related complaints into Consumer Sentinel, a secure online database
available to hundreds of civil and criminal law enforcement agencies in the
U.S. and abroad.
Chapter 25
Sound familiar? Before you start shopping for a used car, do some home-
work. It may save you serious money. Consider driving habits, what the car
will be used for, and your budget. Research models, options, costs, repair
records, safety tests, and mileage through libraries, book stores, and websites.
Cash Or Credit?
Once you’ve settled on a particular car, you have two payment options:
paying in full or financing over time. Financing increases the total cost of the
car because you’re also paying for the cost of credit, including interest and
other loan costs. You also must consider how much money you can put down,
the monthly payment, the loan term, and the annual percentage rate (APR).
Rates usually are higher and loan periods shorter on used cars than on new
ones. Dealers and lenders offer a variety of loan terms. Shop around and nego-
tiate the best possible deal. Be cautious about financing offers for first-time
About This Chapter: This chapter includes text from the following documents pro-
duced by the Federal Trade Commission (FTC): “Buying A Used Car,” April 1998;
“Car Ads: Reading Between the Lines,” March 1997, and “Auction Guides: Not So
Hot Properties,” June 2000. Despite the older dates of these documents, the advice is
still pertinent to car-buyers.
238 Cash and Credit Information for Teens, Second Edition
Once you decide which dealer offers the car and financing you want, read
the invoice and the installment contract carefully. Check to see that all the
terms of the contract reflect the agreement you made with the dealer. If they
don’t, get a written explanation before you sign. Careful shopping will help
you decide what car, options, and financing are best for you.
Ads like these in newspapers and magazines, on television and the internet,
and in coupon mailings to your home may sound like the ticket to your
dream car. They offer the chance to buy a big ticket item at auction—for
well below its market value. What deals! Just call the toll-free number for
more information.
Don’t Be Mis-Guided
If you respond, you’re likely to hear pitches for guides to cars being sold
in your area at great prices. But the guides aren’t always what they’re prom-
ised to be. And if you buy one, you may end up spending more than you
planned.
242 Cash and Credit Information for Teens, Second Edition
You’ll be charged about $50 for each guide, either to your credit card or
through a withdrawal from your checking account.
You may even be billed for a guide you didn’t
order.
✤ It’s A Fact!!
Here’s how it happens: When you
Despite what you might
place an order, the salesperson might
hear about auction guides or
offer to include another guide as see in the ads, cars at auction
well. What you won’t be told is that typically sell for their fair market
you’ll be charged for the second value. These auctions attract a vari-
guide, even though you never ety of buyers, including used car deal-
agreed to buy it. ers, so the bidding can get competitive.
At many government sales, the items are
In many cases, the businesses appraised before the sale and won’t be
bill your credit card or debit your sold if the bidding runs too low. Indeed,
checking account even if you never it’s rare to find high-end or late model
vehicles for sale, especially at “bargain
agreed to buy anything. They get
basement” prices. And the truth be
your bank account or credit card told, the cars that sell for $500 or
information under false pretenses, less usually are damaged or junk
sometimes claiming that they need vehicles purchased for scrap.
the account number to verify your
Source: FTC, June
credit history or to “hold” your order. 2000.
And when auction guides arrive in
the mail, chances are that they contain far
less information than you expected. Actually, it’s information that is readily
available elsewhere for free.
The bottom line: While it’s possible to buy cars at auction, you won’t find
the “deals” advertised in auction guides sold by fraudulent promoters.
Auto Auctions
Despite claims to the contrary, the auto auction guides these companies
sell don’t contain specific information about dates and locations of auto auc-
tions or lists of available cars. Rather, they contain general information about
auto auctions and addresses and phone numbers—all of which are available in
your phone book. You’ll still need to call for details about upcoming auctions.
Chapter 26
Joining a plan means you agree to the plan’s sales method as long as you’re
a member. As a plan member, you will receive periodic announcements de-
scribing merchandise that you can buy. These announcements are important
because the merchandise is sent to you automatically unless you return the
form rejecting the offer within the specified time.
About This Chapter: This chapter includes text from the following documents pro-
duced by the Federal Trade Commission (www.ftc.gov): “Prenotification Negative
Option Plans,” May 2001; and “Continuity Plans: Coming to You Like Clockwork,”
June 2002. Despite the older dates of these documents, the information is still perti-
nent to today’s consumers.
244 Cash and Credit Information for Teens, Second Edition
must be disclosed clearly and conspicuously. Once you’ve satisfied the mini-
mum purchase requirements, you can cancel your membership. If the club has
no minimum purchase obligation, you can cancel your membership any time.
If you want to cancel your membership, send your request in writing. The
company must cancel your membership promptly. If the company sends ad-
ditional merchandise after receiving your written cancellation notice, you
need to return the first item that is sent. You may consider any additional
shipments as unordered merchandise and keep them as a gift.
However, to avoid dunning notices, it’s best to tell the company that you’re
no longer a member each and every time you receive unordered merchandise.
You can do that by sending the company a copy of your cancellation letter.
If you don’t get at least 10 days, and you receive an unwanted shipment,
you can return the merchandise to the company for a full credit to your
account. The company must pay for the return postage.
Bonus Merchandise
To attract new members, some companies advertise special introductory of-
fers, like “5 Books for $1.” By law, a company must ship the merchandise within
30 days of receiving your order. If the merchandise can’t be shipped within that
time, the company may offer you an equivalent alternative. If you don’t want the
246 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
Is a negative option plan right for you?
A negative option plan is included in most book, video, and CD/audio club
offers. Consider the following information before subscribing to a negative
option plan.
Signing Up: After you sign and return the club’s written offer you will re-
ceive their products and mailings. They will usually offer free or inexpensive
merchandise to entice consumers into joining their club. Check the availability
of the club’s internet accessibility and options.
Buying Other Products At The Regular Price: After receiving the free or
reduced priced items consumers usually have to purchase several other prod-
ucts at the club’s regular price.
Returning The Form: You will receive frequent mailings of the club’s latest
offers. If you are not interested in the selection return the enclosed form, other-
wise the selection will be automatically sent. The club must inform the con-
sumer of at least two methods by which he or she can cancel the goods or
services, one of which has to be expense-free to the consumer.
A negative option plan may seem like a great savings because of the “free” or
“discounted” products you will receive. You need to consider the overall cost of
the plan, including the requirements to purchase regular priced items. You may
want to compare the regular priced items of several different clubs. If you do
subscribe keep dated copies of all forms you receive as well as copies of any
“negative option” forms you return to the seller. This information will prove
valuable if a problem arises.
alternative, you can cancel your membership. The company must honor your
cancellation request, as long as you return the introductory merchandise.
Protect Yourself
Before you agree to any prenotification plan, take these steps:
• Read the terms and conditions of the plan carefully so you understand
the obligations of membership before you join.
• Compare costs. The introductory merchandise may be substantially
discounted but you may be required to buy additional merchandise at
the club’s regular prices and to pay shipping and handling on those
purchases. Do the math to compare the club’s prices and the shipping
charges against those of other sellers.
• Keep copies of plan documentation that explain the terms and condi-
tions of the plan and the rejection forms you return to the seller. It’s
also a good idea to keep documentation of the date you mailed the
rejection forms.
• Check out the seller. Contact your local consumer protection agency
or the Better Business Bureau to find out if they have any complaints
on file. A record of complaints may indicate questionable practices,
but a lack of complaints doesn’t necessarily mean that the seller is with-
out problems. Unscrupulous businesses or business people often change
names and locations to hide complaint histories.
trial period” to let you check out the merchandise or service and decide
whether to join the plan. If you keep the merchandise beyond the free trial
period or fail to cancel the service within the free trial period, not only must
you pay, you automatically become a plan member.
Joining a continuity plan means you agree to the plan’s sales method as
long as you’re a member. You’ll automatically get periodic shipments of mer-
chandise or delivery of services. You won’t get any announcements or rejec-
tion forms before each shipment or service period. The shipments or services
continue until you cancel your membership.
Some continuity plans give you an “approval” period. That way, you can
check out the merchandise and decide whether to keep it and pay for it.
Many programs selling collectibles, like stamps, or coins, work this way. Other
continuity plans require you to pay for merchandise when you receive it.
• The price of the goods or services if you fail to cancel, including ship-
ping and handling, if applicable
Usually a plan will use the same billing method for future shipments that
it used for the introductory merchandise or service period. For example, if
the plan sent you a bill for the introductory merchandise, you will likely get
bills each time you get another shipment. If you used a credit or debit card to
buy the introductory merchandise, however, the plan may seek your consent,
at the time you enroll, to charge that card automatically for all future ship-
ments.
✔ Quick Tip
Where To Complain
If you have a problem with your plan, try to re-
solve it with the seller first. If you’re dissatisfied with the
response, contact your local Better Business Bureau or local
consumer protection agency.
You also may file a complaint with the FTC. The FTC works for the
consumer to prevent fraudulent, deceptive, and unfair business prac-
tices in the marketplace and to provide information to help con-
sumers spot, stop, and avoid them. To file a complaint or to
get free information on consumer issues, visit ftc.gov or
call toll-free, 877-FTC-HELP (877-382-4357);
TTY: 866-653-4261.
Protect Yourself
Continuity plans are promoted in newspapers, magazines, TV and radio
commercials, direct mail, and over the telephone and the internet. Before
you agree to any plan, take these steps:
• Read the terms and conditions of the plan carefully so you understand
the obligations of membership before you join.
250 Cash and Credit Information for Teens, Second Edition
• Keep copies of plan documentation that explain the terms and condi-
tions of the plan. Some plans may send you this information with the
introductory shipment.
• If an offer is made over the phone, listen carefully and, if you don’t
understand the terms, ask the seller to repeat them. Write down im-
portant information, such as the customer service telephone number
or address. Don’t give in to high-pressure sales tactics; if you don’t
want the offer, feel comfortable hanging up.
• Check out the seller. Contact your local consumer protection agency
or the Better Business Bureau to find out if they have any complaints
on file. A record of complaints may indicate questionable practices,
but a lack of complaints doesn’t necessarily mean that the seller doesn’t
have problems. Unscrupulous businesses or business people often
change names and locations to hide complaint histories.
Part Four
Getting Credit
The decisions you make now about how you manage your finances and
borrow money will affect you in the future—for better or worse.
Did you know that there are companies that keep track of whether you
pay your debts and if you make payments on time? Then these companies
make this information available in the form of a credit report and score.
A bad credit history can haunt you for a long time—seven years or more.
That’s why the best thing to do is learn how to maintain good credit before
there’s a problem. While this might seem complicated at first, it gets easier
once you understand the basics of credit and how it works.
Credit is more than just a plastic card you use to buy things—it is your
financial trustworthiness. Good credit means that your history of payments,
employment and salary make you a good candidate for a loan, and credi-
tors—those who lend money or services—will be more willing to work with
you. Having good credit usually translates into lower payments and more ease
in borrowing money. Bad credit, however, can be a big problem. It usually
About This Chapter: This chapter includes excerpts from “Getting Credit: What You
Need to Know about Credit,” Federal Trade Commission (FTC), July 2003; and “Your
Access to Free Credit Reports,” FTC, March 2008.
254 Cash and Credit Information for Teens, Second Edition
results from making payments late or borrowing too much money, and it
means that you might have trouble getting a car loan, a credit card, a place to
live and, sometimes, a job.
Your Credit
Most creditors use credit scoring to evaluate your credit record. This in-
volves using your credit application and report to get information about you,
such as your annual income, outstanding debt, bill-paying history, and the
number and types of accounts you have and how long you have had them.
Potential lenders use your credit score to help predict whether you are a good
risk to repay a loan and make payments on time.
Many people just starting out have no credit history and may find it tough
to get a loan or credit card, but establishing a good credit history is not as
difficult as it seems.
• You might apply for a credit card issued by a local store, because local
businesses are more willing to extend credit to someone with no credit
history. Once you establish a pattern of making your payments on time,
major credit card issuers might be more willing to extend credit to you.
✎ What’s It Mean?
Charge Card: If you use a charge card, you must pay
your balance in full when you get your regular statement.
Credit Card: You can use a credit card to buy things and pay for them
over time. But remember, buying with credit is a loan—you have to pay the
money back. What’s more, if the credit card company sends you a check, it’s
not a gift. It’s a loan you have to pay back. In addition to the cost of what you
bought, you will owe a percentage of what you spent (interest) and some-
times an annual fee.
Debit Card: This card allows you to access the money in your check-
ing or savings account electronically to make purchases.
Source: Federal Trade Commission (FTC),
July 2003.
What You Need To Know About Credit 255
• You might apply for a secured credit card. Basically, this card requires
you to put up the money first and then lets you borrow 50 to 100
percent of your account balance.
• You might ask other people who have an established credit history to
co-sign on an account. By co-signing, the person is agreeing to pay
back the loan if you don’t.
Grace Period: This is the time between the date of the credit card pur-
chase and the date the company starts charging you interest.
Annual Fees: Many credit card issuers charge an annual fee for giving
you credit, typically $15 to $55.
Transaction Fees And Other Charges: Most creditors charge a fee if you
don’t make a payment on time. Other common credit card fees include those
for cash advances and going beyond the credit limit. Some credit cards charge
a flat fee every month, whether you use your card or not.
Other Options: Creditors may offer other options for a price, including
discounts, rebates and special merchandise offers. If your card is lost or sto-
len, federal law protects you from owing more than $50 per card—but only if
256 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Credit Scores
It has become very common for lenders to make decisions on the basis of a
credit “score.”
A credit score is a number that helps creditors determine how likely you are
to pay your credit card bill when it is due. It is calculated based on information
in your credit report.
Credit card companies may use one or more credit scores. Credit scores may
either be calculated by the creditor itself; or the creditor may use a score pur-
chased from another firm.
Two of the scores that creditors may purchase from other firms include the
Fair Isaac (FICO) score and the VantageScore.
FICO Scores: Your FICO score is the main factor lenders consider when
deciding whether to grant you credit.
Because all three credit reporting agencies will be using the same scoring
system, you should have the same VantageScore from each agency.
The new VantageScore ranges from 501 to 990. It also groups scores into
letter categories covering an approximately 100-point range, just like grades
you receive on a report card. For example, if you had 501 to 600 points, your
credit grade would be “F.” If you had 901 points or more, your credit grade
would be “A.”
Source: Excerpted from Money Smart for Young Adults: A Financial Education
Program, a CD produced by the Federal Deposit Insurance Corporation (FDIC),
March 2008.
What You Need To Know About Credit 257
you report that it was lost or stolen within two days of discovering the loss or
theft. Paying for additional protection may not be a good value.
Do The Math
Keep in mind that credit card interest rates and minimum monthly pay-
ments affect how long it will take to pay off your debt and how much you’ll
pay for your purchase over time.
Suppose when you’re 22, you charge $1,000 worth of clothes and CDs on
a credit card with a 19 percent interest rate. If you pay $20 every month,
you’ll be over 30 by the time you pay off the debt. You’ll have paid an extra
$1,000 in interest. And that’s if you never charge anything else on that card!
These details should include the company’s name, address, and telephone
number; the date of your order; a copy of the order form you sent to the
company or a list of the stock codes of the items ordered; the order confir-
mation code; the ad or catalog from which you ordered (if applicable); any
applicable warranties; and the return and refund policies.
✔ Quick Tip
When To Contact Creditors
If you’re having trouble paying your bills, contact your creditors immedi-
ately. Tell them why it’s difficult for you, and try to work out a modified plan
that reduces your payments to a more manageable level. Don’t wait until your
accounts have been turned over to a debt collector. Take action immediately
and keep a detailed record of your conversations and correspondence.
to be away from home and can’t pick up your mail, call the U.S. Postal
Service toll-free at 800-275-8777, or visit http://www.usps.gov to re-
quest a vacation hold.
• When possible, put passwords on your credit card, bank, and phone
accounts. Avoid using easily available information like your mother’s
maiden name, your birth date, the last four digits of your Social Secu-
rity number or telephone number, or a series of consecutive numbers.
It’s a good idea to keep a list of your credit card issuers and their tele-
phone numbers.
• Don’t give out personal information on the telephone, through the
mail, or over the internet unless you’ve initiated the contact or you
know whom you’re dealing with.
• Protect personal information in your home. For example, tear or shred
documents like charge receipts, copies of credit offers and applications,
insurance forms, physician’s statements, discarded bank checks and state-
ments, and expired credit cards before you throw them away. Be cau-
tious about leaving personal information in plain view, especially if you
have roommates, employ outside help, or are having service work done.
• Find out who has access to your personal information at work and
verify that the records are kept in a secure location.
What You Need To Know About Credit 261
• Never carry your Social Security card; leave it in a secure place at home.
Give out your Social Security number only when absolutely necessary.
• Order your credit report from each of the three major credit reporting
agencies every year to make sure it is accurate and includes only those
activities you’ve authorized.
• Carry only the identification that you actually need.
✔ Quick Tip
Buyer Beware!
Ads Promising “Debt Relief ”
Actually May Be Offering Bankruptcy
As you try to take control of your debt, be on the lookout for
advertisements that offer quick fixes. While ads pitch the promise of debt
relief, they rarely mention that this relief comes in the form of bank-
ruptcy. Because bankruptcy stays on your credit report for 10 years
and hinders your ability to get credit, it’s important to ask
for details before agreeing to any debt-relief services.
✔ Quick Tip
What To Do If Your Request For Credit Is Denied
If your request for credit is denied, you will receive a denial notice, some-
times called an adverse action notice.
It lists the reasons for denying your application. If you do not receive this
notice or the notice does not explain why the credit was denied, ask the credit
card company.
You have the right to have the credit card company give you the reasons
that the credit was denied. While each creditor has its own reasons for denying
credit, some reasons for denial might include the following:
• You have a bad credit history
• You have not been at your current address or job long enough
• Your income does not meet the credit card company’s criteria
If you are denied credit because of information in your credit report, federal
law requires the credit card company to give you the name, address, and tele-
phone number of the credit bureau that supplied the information. If you con-
tact the credit bureau within 60 days of receiving the denial, you are entitled to
a free copy of your credit report.
You have a right to dispute, or argue, any incorrect information in your credit
report with the credit reporting agency, and also with the company that gave the
information to the credit reporting agency. It is important to review your credit
report from all three agencies to ensure that they have correct information.
Source: Excerpted from Money Smart for Young Adults: A Financial Education
Program, a CD produced by the Federal Deposit Insurance Corporation (FDIC),
March 2008.
What You Need To Know About Credit 263
If you’ve had a problem, the Federal Trade Commission (FTC) works for
the consumer to prevent fraudulent, deceptive and unfair business practices
in the marketplace and to provide information to help consumers spot, stop, and
264 Cash and Credit Information for Teens, Second Edition
It’s a good idea to contact your local consumer protection agency, state
attorney general, or Better Business Bureau, too. Many attorneys general
have toll-free consumer hotlines. To find the number for your state’s attor-
ney general, check with your local directory assistance.
Don’t Be Lost
A lost or stolen wallet or purse
is a gold mine of information for ✤ It’s A Fact!!
identity thieves. If your wallet or About Lost Or
purse is lost or stolen, follow Stolen Credit Cards
these steps: If your card is lost or stolen, fed-
• File a report with the eral law protects you from owing
more than $50 per card—but only if you
police immediately
report that the card was lost or stolen
and keep a copy.
within two days of discovering the loss or
• Cancel your credit theft. If you suspect any fraudulent purchases,
cards. Call the issuer(s) you may be asked to sign a statement under
oath that you did not make the
immediately. Many
purchase(s) in question. It’s important
companies have 24-hour to ask for details before agreeing to
toll-free numbers to deal any debt-relief services.
with such emergencies. The
Source: Federal Trade Com-
number is on your monthly
mission (FTC), July 2003.
statement.
• Get new cards with new ac-
count numbers.
• Call the fraud departments of the major credit reporting agencies, and
ask each agency to put a “fraud alert” on your account: Equifax (800-
525-6285); Experian (888-397-3742); TransUnion (800-680-7289)
What You Need To Know About Credit 265
• Report the loss to the fraud department of the bank where you have
your checking and savings accounts. Ask about the next steps regarding
your accounts, including your ATM or debit card.
• Review your credit reports regularly and have them corrected when
necessary.
• Report a missing driver’s license to your state department of motor
vehicles.
• Change your home and car locks, if your keys were taken.
A credit report includes information on where you live, how you pay your
bills, and whether you’ve been sued or arrested, or have filed for bankruptcy.
Nationwide consumer reporting companies sell the information in your report
to creditors, insurers, employers, and other businesses that use it to evaluate
your applications for credit, insurance, employment, or renting a home.
Here are the details about your rights under the FCRA and the Fair and
Accurate Credit Transactions (FACT) Act, which established the free annual
credit report program.
You may order your reports from each of the three nationwide consumer
reporting companies at the same time, or you can order your report from
each of the companies one at a time. The law allows you to order one free
copy of your report from each of the nationwide consumer reporting compa-
nies every 12 months.
✔ Quick Tip
A Warning About “Impostor” Websites
Only one website is authorized to fill orders for the free annual credit report
you are entitled to under law—http://annualcreditreport.com. Other websites
that claim to offer “free credit reports,” “free credit scores,” or “free credit moni-
toring” are not part of the legally mandated free annual credit report program.
In some cases, the “free” product comes with strings attached. For example,
some sites sign you up for a supposedly “free” service that converts to one you
have to pay for after a trial period. If you don’t cancel during the trial period,
you may be unwittingly agreeing to let the company start charging fees to your
credit card.
Some “impostor” sites use terms like “free report” in their names; others
have URLs that purposely misspell annualcreditreport.com in the hope that
you will mistype the name of the official site. Some of these “impostor” sites
direct you to other sites that try to sell you something or collect your personal
information.
Whether you order your report online, by phone, or by mail, it may take
longer to receive your report if the nationwide consumer reporting company
needs more information to verify your identity.
268 Cash and Credit Information for Teens, Second Edition
There also may be times when the nationwide consumer reporting com-
panies receive a high volume of requests for credit reports. If that happens,
you may be asked to re-submit your request. Or, you may be told that your
report will be mailed to you sometime after 15 days from your request. If
either of these events occurs, the nationwide consumer reporting companies
will let you know.
Are there any other situations where I might be eligible for a free
report?
Under federal law, you’re entitled to a free report if a company takes ad-
verse action against you, such as denying your application for credit, insur-
ance, or employment, and you ask for your report within 60 days of receiving
notice of the action. The notice will give you the name, address, and phone
number of the consumer reporting company. You’re also entitled to one free
report a year if you’re unemployed and plan to look for a job within 60 days;
if you’re on welfare; or if your report is inaccurate because of fraud, including
identity theft. Otherwise, a consumer reporting company may charge you up
to $10.50 for another copy of your report within a 12-month period.
✔ Quick Tip
Should I order my reports from
all three of the nationwide consumer
reporting companies at the same time?
You may order one, two, or all three reports at the same time, or you may
stagger your requests. It’s your choice. Some financial advisors say staggering
your requests during a 12-month period may be a good way to keep an eye
on the accuracy and completeness of the information in your reports.
Tell the creditor or other information provider in writing that you dis-
pute an item. Many providers specify an address for disputes. If the provider
reports the item to a consumer reporting company, it must include a notice
of your dispute. And if you are correct—that is, if the information is found
to be inaccurate—the information provider may not report it again.
If you tell the information provider that you dispute an item, a notice of
your dispute must be included any time the information provider reports the
item to a consumer reporting company.
unpaid judgment against you can be reported for seven years or until the
statute of limitations runs out, whichever is longer.
Borrowing Basics
Types Of Loans
At some point in your life, you will need to borrow money. If you want to
purchase a car or a house, you may need to get a loan. There are three types
of loans:
• Credit cards
• Consumer installment loans
• Home loans
Credit Cards
Credit cards give you the ongoing ability to borrow money.
With a credit card, you can buy things without actually having the money
right away. However, this can get you into big trouble if you aren’t careful.
You need to be able to pay your monthly credit card bill.
About This Chapter: Excerpted from “Module 5: Borrowing Basics,” Money Smart for
Young Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
274 Cash and Credit Information for Teens, Second Edition
Home purchase loans are made for the purpose of buying a house. They
are usually called mortgages.
Home equity loans can be used for any reason. The amount that a person
can borrow depends on the amount of “equity” they have in the house. Some-
times banks will give the borrower a checkbook to use to borrow money. It
looks like a normal check, but in fact it is a loan that the borrower has to start
paying back right away.
Fees
Fees are charged by financial institutions for activities such as servicing
the account and reviewing your loan application. Here are some examples:
• A credit card company might charge you an annual fee of $30.
• A credit card company will probably also charge fees when you get a
cash advance or when your balance exceeds your credit limit. (Your credit
limit is how much money the credit card issuer agreed to loan to you.)
• A lender might charge a $25 late fee when you do not pay your bill on
time.
Interest
Interest is the amount of money a financial institution charges for letting
you use its money. The interest rate can be either fixed or variable.
• Fixed rate means the interest rate stays the same throughout the term
of the loan.
• Variable rate means the interest rate may change during the loan term.
The loan agreement will explain how the rate may change.
✤ It’s A Fact!!
Getting A Loan: A Responsibility To Be Taken Seriously
Borrowing money can be a great way to buy something now and pay for it
over time. And yes, there are ways for a teen to borrow money. But there are
some important things to remember if you borrow money. One is that borrow-
ing usually involves a cost called “interest,” which is the fee to compensate the
bank or other lender when you use their money. This is the reverse of what
happens when the bank pays you interest to put your money in the bank.
Also, when you borrow money you are promising to repay the loan on a
schedule. If you don’t keep that promise, the results can be very costly—either
in late payments you’ll owe or in damage to your reputation, which means you
could have a tougher time borrowing money in the future.
Here are some of your options...and important considerations.
• For many teens, their first lenders are their parents. If your parents are will-
ing to lend you money, they probably will set repayment terms (how much
to pay back and when). They also may require you to pay more money than
you borrowed, as a bank would do when it lends people money and charges
interest.
• You may be able to get access to a credit card or bank loan. Under most state
laws, for example, you must be at least 18 years old to obtain your own credit
card and be held responsible for repaying the debt. If you’re under 18, though,
you can qualify for a credit card along with a parent or other adult.
Borrowing Basics 277
for a loan of $5,000 where the interest is 12% APR, the finance charge
total is $600.
• Total Payments: The amount you will have paid after you have made
all payments as scheduled.
Two terms associated with credit card APRs with which you should be
aware are “penalty APR” and “universal default.”
• Penalty APR: The terms of your credit card agreement may provide
that the creditor will permanently increase the interest rate on your
credit card by a large amount if you do not pay your credit card bill on
time or if you exceed your credit limit. For example, the penalty rate
• If you and your parents are comfortable with you having access to a
credit card, there are cards designed just for teens. One is a credit card
with a low credit limit (maximum amount you can borrow), which can
keep you from getting deeply in debt.
• An alternative to buying with a credit card is to use a debit card, but this
also comes with costs and risks. A debit card allows you to make pur-
chases without paying interest or getting into debt because the money is
automatically deducted from an existing savings or checking account.
Again, if you’re under 18, you may qualify for this card with a parent or
other adult.
• One example of a debit card that may be appropriate for teens 13 and
older is a pre-paid card that carries a certain value from which purchases
are deducted. This kind of debit card isn’t linked to your bank account.
Instead, just like with a pre-paid telephone plan, there is a limit on how
much you may spend. Keep in mind that many debit cards have fees that
can add up quickly, so make sure you ask about fees before using a debit
card. Also, because a debit card can provide a thief easy access to an ac-
count, you need to protect your card and any PINs (personal identification
numbers) that go with it.
✤ It’s A Fact!!
Small Payments Can Mean Big Costs When Borrowing
It’s never too early to begin learning how credit (borrowing) works. The
main message is this: The longer you take to pay back what you owe on a credit
card or loan, the more you’ll pay the lender in interest charges. In particular, if
you use a credit card to make a major purchase and you only pay back a little of
what you owe each month, “it will take you a very long time to pay off the
balance, and the interest costs can be shocking,” according to Janet Kincaid,
Federal Deposit Insurance Corporation (FDIC) Senior Consumer Affairs Of-
ficer.
Table 28.1 shows what an expensive purchase will really cost you if you
charge it and only pay back the minimum amount due each month, which may
be something like $20 or $30. In this example, a $500 stereo would end up
costing you about $900 when you figure in the total interest you’d pay, and a
$1,000 computer would set you back more than $2,100. Instead, if you pay
back as much as you can each month—the entire balance, if possible—you can
really limit interest charges.
Note: Years are rounded to the nearest whole year. These examples assume an
interest rate (Annual Percentage Rate) of 18 percent and a minimum monthly
payment of the interest due plus one percent of the outstanding balance owed.
Source: “Small Payments Can Mean Big Costs When Borrowing,” FDIC Con-
sumer News, Federal Deposit Insurance Corporation, Summer 2006.
Borrowing Basics 279
may apply if you are late on more than two payments in a six-month
period. The Truth in Lending disclosures will provide details on whether
the creditor has penalty APRs and when they apply.
• Universal Default: A related concept is universal default. Some lend-
ers have policies that will raise your credit card interest rate to the
highest possible rate if you are late on any other account. Example: If
you have five credit cards and you are late on one, the interest rate for
the other four cards may be increased by a large amount. The Truth in
Lending disclosures will tell you if your lender has such a policy.
Lenders want to determine the value of your assets. Assets are things you
own that have financial value. Lenders will also compare the difference be-
tween the value of your assets and the amount of debt you have. This is
called net worth. A positive net worth demonstrates your ability to manage
your money. Lenders will ask the following:
• How much money do you have in your checking and savings accounts?
• Do you have investments or other assets (for example, a car)?
Character: Character refers to how you have paid your bills or debts in
the past. Lenders will ask the following:
• Have you had credit in the past? If you have a good credit history of
repaying your other loans, you will have an easier time getting your
loan request approved and at the best rate. For instance, you can build
a positive credit history by making your student loan payments on
time.
• How many credit accounts do you have? If you have never had a credit
account, you may have difficulty getting approved for a loan. Having a
good credit history shows a lender you can borrow money responsibly.
Some lenders let you prove this without a credit history. For example,
they might ask for proof that you pay your rent and utility and phone
bills on time or that you make regular deposits to a savings account.
Other examples of alternative ways to show a creditor that you are a
good credit risk may include insurance premium payments, payments
for school tuition; and payments of personal loans (documented by a
written loan agreement and canceled checks). Ask the lender to con-
sider alternative forms of history. If a lender is not willing to do this,
shop around for one who will.
282 Cash and Credit Information for Teens, Second Edition
Banks will use credit reports to obtain character information. You can
request a copy of your credit report by visiting http://www.annualcredit
report.com or calling 877-322-8228.
Collateral: Collateral refers to what you own that you can use to offer the
lender in the event that you default on the loan. Lenders will ask: Do you
have assets to provide to secure the loan beyond your capacity to pay it off?
Collateral is security you provide the lender. Giving the lender collateral
means that you pledge an asset that you own, such as your home, property
you own, or other object that has value, to the lender with the agreement
that it will be the repayment source in case you cannot repay the loan.
About This Chapter: From “Choosing a Credit Card,” Federal Reserve Board, October
19, 2004.
284 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Can Teens Get Credit Cards?
Yes, teens can get... or get access to... credit
cards and debit cards. Under most state laws, for ex-
ample, you must be at least 18 years old (a young adult) to
obtain your own credit card and be held responsible for repay-
ing the debt. And if you’re under 18, you can qualify for a credit
card if a parent co-signs, but only the parent can be held account-
able for the payments.
Credit and debit cards can be good ways for teens to pay without
carrying cash or checks, and they can help teach kids about how to manage
money. But teens—and their parents—need to be especially careful to avoid
serious debt problems or a bad credit record at a young age.
First, make financial education a priority, especially the lessons about bor-
rowing responsibly. “Teens need to be aware that a bad credit record can affect
their ability to rent an apartment or even find employment after graduation,”
says Lynne Gottesburen, a Federal Deposit Insurance Corporation (FDIC)
Consumer Affairs Specialist.
Also, understand the alternatives. There are cards with features some-
times described as “training wheels” for young cardholders. One is a credit
card with a low credit limit—say, $300 or $500—which can keep a teen
from getting too deeply in debt. Another is a pre-paid, re-loadable pay-
ment card that parents can get for teens aged 13 or older and that
comes with parental controls, including spending limits. A debit
card also enables a teen to make purchases without paying in-
terest or getting into debt because the money is automati-
cally deducted from an existing bank account.
If you carry over a part of your balance from month to month, even a
small difference in the APR can make a big difference in how much you will
pay over a year.
Credit card companies use one of several methods to calculate the out-
standing balance. The method can make a big difference in the finance charge
you’ll pay. Your outstanding balance may be calculated over one billing cycle
or two; using the adjusted balance, the average daily balance, or the previous
balance, and including or excluding new purchases in the balance.
Choosing A Credit Card 287
Depending on the balance you carry and the timing of your purchases
and payments, you’ll usually have a lower finance charge with one-cycle bill-
ing and either the average daily balance method excluding new purchases,
the adjusted balance method, or the previous balance method.
✤ It’s A Fact!!
Credit Card Balance Computation Methods
• Average Daily Balance: This is the most common calculation method.
It credits your account from the day the issuer receives your payment. To
figure the balance due, the issuer totals the beginning balance for each
day in the billing period and subtracts any credits made to your account
that day. While new purchases may or may not be added to the balance,
cash advances typically are included. The resulting daily balances are
added for the billing cycle. Then, the total is divided by the number of
days in the billing period to get the “average daily balance.”
• Adjusted Balance: This usually is the most advantageous method for
cardholders. The issuer determines your balance by subtracting payments
or credits received during the current billing period from the balance at
the end of the previous billing period. Purchases made during the billing
period aren’t included. This method gives you until the end of the billing
period to pay a portion of your balance to avoid the interest charges on
that amount. Some creditors exclude prior unpaid finance charges from
the previous balance.
• Previous Balance: This is the amount you owed at the end of the previ-
ous billing period. Payments, credits, and purchases made during the
current billing period are not included. Some creditors exclude unpaid
finance charges.
• Two-Cycle Or Double-Cycle Balances: Issuers sometimes calculate your
balance using your last two month’s account activity. This approach elimi-
nates the interest-free period if you go from paying your balance in full
each month to paying only a portion each month of what you owe. For
Choosing A Credit Card 289
purchases differently. If you plan to use your card for cash advances, look for
information about the following items:
• Access: Most credit cards let you use an ATM to get a cash advance.
Or the credit card company may send you “checks” that you can write
to get the cash advance.
• APR: The APR for cash advances may be higher than the APR for
purchases.
example, if you have no previous balance, but you fail to pay the entire
balance of new purchases by the payment due date, the issuer will com-
pute the interest on the original balance that previously had been subject
to an interest-free period. Read your agreement to find out if your issuer
uses this approach and, if so, what specific two-cycle method is used.
How do these methods of calculating finance charges affect the cost of
credit? Suppose your monthly interest rate is 1.5 percent, your APR is 18 per-
cent, and your previous balance is $400. On the 15th day of your billing cycle,
the card issuer receives and posts your payment of $300. On the 18th day, you
make a $50 purchase:
• Using the average daily balance method (including new purchases), your
finance charge would be $4.05.
• Using the average daily balance method (excluding new purchases), your
finance charge would be $3.75.
• Using the average daily balance double cycle method (including new
purchase and the previous month’s balance), your finance charge would
be $6.53.
• Using the adjusted balance method, your finance charge would be $1.50.
If you don’t understand how your balance is calculated, ask your card issuer.
An explanation also must appear on your billing statements.
Source: Excerpted from “Choosing a Credit Card: The Deal Is in the Disclo-
sures,” Federal Trade Commission, June 2008.
290 Cash and Credit Information for Teens, Second Edition
• Fees: The credit card company may charge a fee in addition to the
interest you will pay on the amount advanced.
• Limits: Some credit cards limit cash advances to a dollar amount (for
example, $200 per cash advance or $500 per week) or a portion of your
credit limit (for example, 75% of your available credit limit).
• How Payments Are Credited: Many credit card companies apply your
payments to purchases first and then to cash advances. Read your credit
card agreement to learn how your payments will be credited.
Credit cards may also offer, for a price, services such as the following:
• Insurance to cover the payments on your credit card balance if you
become unemployed or disabled, or die. Premiums are usually due
monthly, making it easy to cancel if the payments are higher than you
want to pay or you decide you don’t need the insurance any longer.
• Insurance to cover the first $50 of charges if your card is lost or stolen.
Under federal law, you are not responsible for charges over $50.
Before you sign up to pay for any of these features, think carefully about
whether it will be useful for you. Don’t pay for something you don’t want or
don’t need.
Under federal law, all solicitations and applications for credit cards must
include certain key information, in a disclosure box similar to the one shown
in Figure 29.1 (on page 292).
• Other APRs: The APRs you’ll be charged if you get a cash advance on
your card, transfer a balance from another card, or are late in making a
payment. More information about the penalty rate may be stated out-
side the disclosure box—for instance, in a footnote. In the example
shown in Figure 29.1, if you make two payments that are more than
ten days late within six months, the APR will increase to 23.9%.
• Variable-Rate Information: Information about how the variable rate
will be determined (if relevant). More information may be stated out-
side the disclosure box—for instance, in a footnote.
• Grace Period For Repayment Of Balances For Purchases: The num-
ber of days you’ll have to pay your bill for purchases in full without
triggering a finance charge.
• Method Of Computing The Balance For Purchases: The method that
will be used to calculate your outstanding balance if you carry over a
balance and will pay a finance charge.
• Annual Fees: The amount you’ll be charged each twelve-month pe-
riod for simply having the card.
Choosing A Credit Card 293
Make a list of your account numbers and the companies’ phone numbers.
Keep the list in a safe place. If your wallet or purse is lost or stolen, you’ll have
all the numbers in one place. Take the list of phone numbers—not the account
numbers—with you when you travel, just in case a card is lost or stolen.
If you think your credit card bill has an error, take the following steps:
• Write to the credit card company within 60 days after the statement
date on the bill with the error. Use the address for “billing inquiries”
listed on the bill. Tell the company your name and account number,
that you believe the bill contains an error, and why you believe it’s
wrong, and the date and amount of the error (the “disputed amount”).
• Pay all the other parts of the bill. You do not have to pay the “disputed
amount” or any minimum payments or finance charges that apply to it.
If there is an error, you will not have to pay any finance charges on the
disputed amount. Your account must be corrected.
If there is no error, the credit card company must send you an explanation
and a statement of the amount you owe. The amount will include any finance
charges or other charges that accumulated while you were questioning the bill.
Chapter 30
Credit cards provide a revolving line of credit. This means you can make
an unlimited number of purchases, up to a pre-approved dollar limit. The
limit might be $500, $1,000, $3,000, or much more.
You must pay at least a part of the bill every month. This is called a
minimum payment. It is often a certain percentage of your balance.
Charge cards are used like credit cards, but you must pay the entire bal-
ance every month.
Debit cards are similar to credit cards except that they are tied to your
checking account at a bank. When you use them to make a purchase or to
take out money at an automated teller machine (ATM), the money is imme-
diately taken out of your checking account. You need to be sure you have
money in your checking account before you use a debit card.
About This Chapter: Excerpted from “Module 6: Charge It Right,” Money Smart for
Young Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
296 Cash and Credit Information for Teens, Second Edition
Credit Cards
Payments: Buy now, pay later.
Interest Charges: Yes, if you carry a balance or your card offers no “grace
period” (time to repay without incurring interest).
Other Potential Benefits: Freebies, such as cash rebates and bonus points
good for travel deals. Some purchase protections.
Other Potential Concerns Fees And Penalties: Also not all cards offer
grace periods. Overspending can cause debt problems.
Debit Cards
Payments: Buy now, pay now.
Other Potential Benefits: Easier and faster than writing a check. Avoid debt
problems. More cards are now offering freebies. Some purchase protections.
There are two major types of stored value cards: those that can only be
used at one particular store or retailer (gift cards), and those that can be used
at any merchant that accepts credit cards.
Depending on the type of card, stored value cards can have the following
benefits:
• Reduce or eliminate check-cashing fees
• Offer 24-hour access to funds
• Make money transfers easy
• Offer the ability to make purchases using credit card networks
• Reduce the need to carry a lot of cash
One potential disadvantage of a stored value card is that your name may
not be printed on the card and a refund may not be available if your card is
lost or stolen. Ask if you can register your card with its issuer. Be sure to ask
about any fees associated with a stored value card, such as monthly fees or
inactivity fees. These lower the balance on your card.
Smart Cards
A smart card resembles a credit card in size and shape, but inside it is
different. The inside of a smart card usually contains a microprocessor or
computer chip. The chip is under a gold contact pad on one side of the card.
298 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Gift Cards Are Great But
Beware Of Risks And Costs
You probably love getting gift cards for your
birthday or other occasions so you can pick out
exactly what you want at the store. Gift cards also
are easy to buy and give to friends and relatives be-
cause they’re widely available at stores and even at banks.
But while gift cards may seem to be the perfect gift, they
also can come with potential risks and costs. Whether you’re
giving or receiving a gift card, remember this:
Watch out for fees: You may be charged a fee for purchasing a
gift card. You also may have fees deducted each time you use the
card at a store or restaurant. Or, you may be charged fees for not using
the card, perhaps $1 or more each month after going a year or so with-
out making a purchase. “When a fee is deducted, that’s less money for you
to spend,” says Janet Kincaid, Federal Deposit Insurance Commission
(FDIC) Senior Consumer Affairs Officer.
Find out if there is an expiration date: “Gift cards aren’t exactly like
cash—they usually can’t be used indefinitely,” advises Kincaid. “You don’t
want to put gift cards away and forget about them because, if you let
them expire, you could lose the entire balance on the card.”
Think of the computer chip as replacing the usual magnetic strip on a credit
card or debit card. It is used in some credit and cash cards, but also for secu-
rity systems, wireless communication, and other technologies.
Some credit card companies are beginning to issue credit cards that are
also smart cards. These may allow you to simply touch your card to a reader
to make a payment, instead of having to swipe your card as in the past.
The most common smart card applications are include the following:
• Credit cards
• Electronic cash
• Computer security systems
• Wireless communication
• Banking
• Satellite TV
• Government identification
• Loyalty systems (like frequent flyer points)
Chapter 31
Installment Loans
Types Of Loans
There are two types of installment loans:
• Secured loans
• Unsecured loans
Secured
A secured installment loan is one where the borrower offers collateral for
the loan. The borrower gives up the collateral to the lender if the loan is not
paid back as agreed.
About This Chapter: Excerpted from “Module 7: Paying for College and Cars,” Money
Smart for Young Adults, a CD-based curriculum developed by the Federal Deposit In-
surance Corporation (FDIC), March 2008.
302 Cash and Credit Information for Teens, Second Edition
Loan Approval
The Four Cs Of Loan Decision Making
Lenders generally review the Four Cs to decide whether to make a loan
to you. The Four Cs are capacity, capital, character, and collateral.
• Capacity refers to your present and future ability to meet your pay-
ment obligations. This includes whether you have enough income to
pay your bills and other debts.
• Capital refers to the value of your assets and your net worth.
• Character refers to how you have paid bills or debts in the past. Your
credit report is one tool lenders use to consider your willingness to
repay your debts.
• Collateral refers to property or assets offered to secure the loan.
Installment Loans 303
☞ Remember!!
Cheaper Than Alternatives
A loan can be expensive, but it is usually
cheaper than some alternatives.
Chapter 32
Car Loans
About This Chapter: Excerpted from “Module 7: Paying for College and Cars,” Money
Smart for Young Adults, a CD-based curriculum developed by the Federal Deposit In-
surance Corporation (FDIC), March 2008.
306 Cash and Credit Information for Teens, Second Edition
Financing A Car
Getting a car loan is also referred to as financing a car. A car loan can be
used to purchase a new or used car. Your car becomes your collateral for the
loan, which means the lender will hold the car title until the loan is paid off.
The title indicates who owns the car.
If you do not pay off the loan, the bank can take back the car and then sell
it to get the remaining loan amount back. New car loans typically are for
three to seven years and used car loans two to five years.
✤ It’s A Fact!!
Where To Get Information
There are many decisions you must make before pur-
chasing or leasing a car. You should know some points to con-
sider when looking for a car.
A car loan might be one of the biggest expenses you have. Therefore, if
you decide to purchase a car, you should know exactly how much you are
paying for the car and exactly how much you need to borrow.
When shopping for a car, don’t negotiate or make a decision based just
on the monthly payment, even if the car dealer suggests that you do. The
total amount you will pay depends on the price of the car you negotiate, the
APR, and the length of the loan.
You decide to buy a used car and have saved $2,500 from your summer
job for a down payment. You find a car you like and the monthly payment is
Car Loans 307
$225 for 60 months with your $2,500 down payment. The tax and registra-
tion fee is $575 and the APR is 12.10 percent. With this information you
figure the total cost of the car as follows:
$225 Monthly payment x 60 Number of payments = $13,500
Total of payments
Now, we can figure out how much the loan actually costs by comparing
$16,575 to the cost of the car if you were to pay cash. If you pay cash for the
car and do not take out a loan, the car dealer tells you he will give you a deal
so that the car costs $12,595 plus tax and registration:
$12,595 + $575 = $13,170
Now that you know the cost of the car if you paid cash and the cost of a
60-month loan, you can figure out the difference which would be the cost of
your loan.
Most lenders can even pre-approve you for a car loan before you go car
shopping. This means the financial institution calculates how much money
you can borrow to buy your car. This is typically a free service and does not
require you to accept a loan offer from the institution.
Education Loans
College is a large expense that will need a lot of planning and research.
Some of you may not be attending college; you may be going on to voca-
tional or trade school or be entering the workforce.
The cost of the college should be considered along with the academic
programs of a school. College comparison shopping should include options
such as two-year community colleges and schools close to home, which can
help save on room and board.
About This Chapter: Excerpted from “Module 7: Paying for College and Cars,” Money
Smart for Young Adults, a CD-based curriculum developed by the Federal Deposit In-
surance Corporation (FDIC), March 2008.
310 Cash and Credit Information for Teens, Second Edition
students who are eligible for scholarships sponsored by religious or civic or-
ganizations. You will need to check with each college to see what scholar-
ships are available.
There are also private loans. There are often big differences between pri-
vate loans and federal student loans. A private lender likely will offer both
types of loans, so be sure to ask questions to fully understand the pros and
cons of any loan product.
Your state’s department of education and the college’s financial aid de-
partment are good resources when deciding on which type of loan is best for
you. Don’t completely depend on your school to pick the right loan or lender,
though. Some colleges and private lenders have been scrutinized for con-
flicts of interest in steering students toward “preferred lenders.” So, be sure
to always do your own research and ask questions.
Exit Counseling
You’ll receive information about repayment. Your loan provider will no-
tify you when you have to start making loan payments. It is very important
to make your full loan payment according to your repayment schedule. If
you don’t, you could end up in default, which has serious consequences. Stu-
dent loans are real loans—just as real as car loans or mortgages. You have to
pay back your student loans.
Depending on the type of loan you have, some graduates who get jobs in
certain fields may even be eligible for special perks such as forgiveness of
part of their student loan balance.
✤ It’s A Fact!!
Cost Of College Calculator
There are many expenses besides tuition that need to be considered when it
comes to college. Here are some to consider:
Expenses
• Education • Health
• Tuition • Insurance
• Books • Doctor/Prescriptions
• Fees • Personal/Miscellaneous
• Supplies • Laundry/Cleaning
• Transportation • Drug Store Items
• Bus/Air/Train • Clothing
• Car Payment • Entertainment
• Car Repair/Insurance
• In-school interest
• Housing • Direct Unsubsidized
• Mortgage Loan
• Dormitory/Rent
• Utilities • Emergencies
• Telephone • Other Expenses
• Food • Credit Card Payment
• Room and Board Plan
• Groceries
Education Loans 313
You can also explore options to manage your student loan payments after
graduation, such as loan consolidation. But be sure to fully research the pros
and cons of consolidation before signing any paperwork. Student loan consoli-
dation can be used to reduce your monthly student loan payment or simplify
your finances by making one payment per month.
considered first for a FSEOG. Just like Pell Grants, the FSEOG does not
have to be repaid.
fourth years of undergraduate study to full-time students who are eligible for
the Federal Pell Grant and who are majoring in physical, life, or computer
sciences, mathematics, technology, or engineering, or in a foreign language
determined critical to national security. The student must also have main-
tained a cumulative grade point average (GPA) of at least 3.0 in coursework
required for the major. The National SMART Grant award is in addition to
the student’s Pell Grant award.
Institutional Grants
Colleges provide institutional grants to help make up the difference between
college costs and what a family can be expected to contribute through income,
savings, loans, and student earnings. Other institutional grants, known as merit
awards or merit scholarships, are awarded on the basis of academic achievement.
Some merit awards are offered only to students whose families demonstrate
financial need; others are awarded without regard to a family’s finances. Some
grants come with special privileges or obligations. You’ll want to find out about
the types of grants awarded by each college you are considering.
you direct otherwise) and at least monthly. Wages for the program must
equal at least the current federal minimum wage but might be higher, de-
pending on the type of work you do and the skills required. The amount you
earn can’t exceed your total FWS award. When assigning work hours, your
employer or financial aid administrator will consider your award amount,
your class schedule, and your academic progress.
loan, but not both, for you during the same enrollment period. They also
must have an acceptable credit history.
Part Five
Liabilities are your debts. Debt reduces net worth. Plus, the interest you
pay on debt, including credit card debt, is money that cannot be saved or
invested—it’s just gone. Debt is a tool to be used wisely for such things as
buying a house. If not used wisely, debt can easily get out of hand. For ex-
ample, putting day-to-day expenses—like groceries or utility bills—on a credit
card and not paying off the balance monthly can lead to debt overload.
About This Chapter: From “Building Wealth: A Beginner’s Guide to Securing Your
Financial Future,” reprinted with permission from the Federal Reserve Bank of Dallas,
www.dallasfed.org. © 2007.
322 Cash and Credit Information for Teens, Second Edition
Do you need to reduce your credit card debt? Here are some suggestions.
• Pay cash.
• Set a monthly limit on charging, and keep a written record so you
don’t exceed that amount.
Avoid Out-Of-Control Debt 323
• Limit the number of credit cards you have. Cut up all but one of your
cards. Stash that one out of sight, and use it only in emergencies.
• Choose the card with the lowest interest rate and no (or very low)
annual fee. But beware of low introductory interest rates offered by
mail. These rates often skyrocket after the first few months.
• Don’t apply for credit cards to get a free gift or a discount on a pur-
chase.
• Steer clear of blank checks that financial services companies send you.
These checks are cash advances that may carry a higher interest rate
than typical charges.
• Pay bills on time to avoid late charges or increased interest rates.
Predatory lenders often target seniors and low-income people they con-
tact by phone, mail or in person. After her husband died, 73-year-old Pauline
got plenty of solicitations from finance companies. She was struggling to
make ends meet on her fixed income. To pay off her bills, she took out a
$5,000 home equity loan that carried a high interest rate and excessive fees.
Soon she found she was even deeper in debt, so she refinanced the loan once,
then again, and again, paying fees each time.
Pauline’s children discovered her situation and paid off the loan. The
lessons here are:
• Don’t borrow from Peter to pay Paul.
324 Cash and Credit Information for Teens, Second Edition
✎ What’s It Mean?
Legal Terms For Types Of Debt Actions
Bankruptcy: A legal declaration of insolvency. Bankruptcy will not fix credit
record problems and will be part of your credit history for 10 years. You cannot
necessarily walk away from your debts even with bankruptcy, as the law requires
you to pay a portion of your unsecured debt if you are able to.
Foreclosure: A legal proceeding initiated by a creditor to take possession of
collateral, for example a home that secured a defaulted loan.
Garnishment: A process by which a lender obtains directly from a third party,
such as an employer, part of an employee’s salary to satisfy an unpaid debt. Part
of the employee’s salary is taken each pay period until the debt is fully paid.
This process must be authorized by a court order.
Judgment: A court order requiring a debtor to pay money to the creditor. The
judgment places a security lien on the debtor’s property until the judgment is
satisfied (the debt is repaid).
Lien: A creditor’s claim against property to secure repayment of a debt.
Repossession: Seizure of collateral that secured a loan in default.
Source: Excerpted from “Module 5: Borrowing Basics,” Money Smart for Young
Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
Avoid Out-Of-Control Debt 325
The information in your credit report is used to create your credit score.
A credit score is a number generated by a statistical model that objectively
predicts the likelihood that you will repay on time. Banks, insurance compa-
nies, potential landlords and other lenders use credit scores.
Credit scores range from under 500 to 800 and above and are determined
by payment history, the amount of outstanding debt, length of your credit
history, recent inquiries on your credit report and the types of credit in use.
Factors not considered in a credit score include age, race or ethnicity, in-
come, job, marital status, education, length of time at your current address,
and whether you own or rent your home.
Review your credit report at least once a year to make sure all informa-
tion is accurate. If you find an error, the Fair Credit Reporting Act requires
credit reporting companies and those reporting information to them to cor-
rect the mistake. To start the process of fixing an error:
• Contact the credit reporting company online, by fax, or certified let-
ter, identifying the creditor you have a dispute with and the nature of
the error.
• Send the credit reporting company verifiable information, such as can-
celed checks or receipts, supporting your complaint.
• The credit reporting company must investigate your complaint within
30 days and get back to you with its results.
• Contact the creditor if the credit reporting company investigation does
not result in correction of the error. When you resolve the dispute, ask
the creditor to send the credit reporting company a correction.
If the issue remains unresolved, you have the right to explain in a state-
ment that will go on your credit report. For example, if you did not pay a car
repair bill because the mechanic didn’t fix the problem, the unpaid bill may
show up on your credit report, but so will your explanation.
326 Cash and Credit Information for Teens, Second Edition
Table 34.1. Interest Paid On A Sample $15,000 Care Loan For 5 Years
☞ Remember!!
Take Steps To Control Your Debt
As you can see, a big part of building wealth is making wise
choices about debt. You need to maximize assets and minimize liabili-
ties to maximize net worth. To manage debt, you need to know how much
you have and develop strategies to control it.
When Bob decided to reduce his $3,000 credit card debt, he analyzed his
debt and developed a strategy. He listed the balance, interest rate, and monthly
interest on each credit card. He checked his credit score and shopped for the
best rate on a new credit card. Then he transferred all his balances to that
card. He cut up the old credit cards and used the interest he saved to
pay toward the principal balance. He used the new card only for
emergencies.
obvious is that your credit score may determine which interest rate you are
offered. Use an online auto loan calculator to compare rates.
Let’s use Betty as an example again. Betty, knew her new car would cost
more than the sticker price because she would have to pay interest on the
loan from the bank. After checking her options, she chose a shorter payment
term with higher payments. Betty budgeted enough money each month to
make the higher payments. By doing this, she will reduce the amount of
interest she ultimately pays.
Table 34.2 (on page 328) shows how shorter terms with higher payments
would affect the total amount and interest on Betty’s $15,000 car loan.
328 Cash and Credit Information for Teens, Second Edition
Avoid the trap of getting “upside down”—owing more on the car than it
is worth when you sell or trade it in. Betty’s car will be paid for in three years,
and she plans on driving it for at least eight years. Once her car is paid for,
she will continue to budget for the car payment but will invest the money to
further build her wealth.
Chapter 35
Predatory lending occurs when companies offer loan products using cer-
tain sales tactics or collection practices that are designed to frighten people
and loan terms that deceive borrowers. Predatory lending has become a seri-
ous problem.
Abusive practices can occur in any sort of lending. We are going to talk
about two common ones. It is also important to note that most of the prob-
lems are not caused by federally insured financial institutions.
Subprime Lending
Predatory lending often affects borrowers in the subprime market.
Subprime lenders charge higher interest rates and loan fees to offset the higher
costs associated with lending to borrowers with credit history problems.
About This Chapter: Excerpted from “Module 5: Borrowing Basics,” Money Smart for
Young Adults, a CD-based curriculum developed by the Federal Deposit Insurance
Corporation (FDIC), March 2008.
330 Cash and Credit Information for Teens, Second Edition
Most predatory loans are made to subprime borrowers, but not all subprime
loans are predatory. Subprime lending can be beneficial, if performed in a
fair, reasonable, and legal manner. A
subprime loan may be the
only alternative available
✎ What’s It Mean?
to some borrowers.
Subprime Lending: Subprime lending in-
volves giving credit to borrowers whose credit his-
Two Types Of tory shows late payments, collections, bankruptcy,
Predatory etc. These types of borrowers are considered to be
Loans higher risk.
Assume you go to a payday lender and borrow $200. The payday lender
will usually make a two-week loan and might charge a fee of $30. You will
write a postdated check to the lender for $230, dated after your next payday.
The payday lender holds the check for two weeks.
When the loan is due, you can repay it by letting the lender cash the
check, or you can give the lender the full amount due in cash.
The annual percentage rate (APR) for this transaction is 390 percent. An
APR for a typical payday loan may be even higher than this example.
Watch Out For Predatory Lending Practices 331
Most payday lenders allow you to “roll over” or renew your loan. The
lender will charge an additional fee. In this case, you would write another
postdated check, this time for $260 ($230 + $30 additional fee).
Remember that payday loans should only be used for emergencies. If you
cannot fully repay the loan within a few pay periods, you should consider a
longer term loan from a financial institution.
✤ It’s A Fact!!
The federal Truth in Lending Act treats payday loans like other types of
credit: the lenders must disclose the cost of the loan. Payday lenders must give
you the finance charge (a dollar amount) and the annual percentage rate (APR—
the cost of credit on a yearly basis) in writing before you sign for the loan. The
APR is based on several things, including the amount you borrow, the interest
rate and credit costs you’re being charged, and the length of your loan.
Source: Excerpted from “Payday Loans Equal Very Costly Cash: Consumers
Urged to Consider Alternatives,” FTC Consumer Alert, Federal Trade Com-
mission, March 2008.
332 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
Indicators Of Possible Predatory Practices
Predatory Payday Lending
1. The company advertises terms that it does not actually offer.
2. You are not given disclosures listing terms, such as the finance charge and
APR.
3. There is no “cooling off ” or waiting period between the time you repay a
payday loan and the time you are allowed to obtain another loan.
4. You can get a payday loan even if you currently owe payday loans to other
companies at the same time.
5. You can obtain as many payday loans as you want each year.
6. You can get a payday loan to finance unpaid interest and fees.
7. The company threatens to prosecute you criminally for writing a bad check
even though it knew you had insufficient funds in your account to pay the
check and you paid it a payday loan fee.
loan fees. This can be very costly. For example, if a $5,000 loan fee is
added into the amount you borrow, you are paying $5,000 plus inter-
est on the $5,000 over the life of the loan.
• “Even if you have a bad credit history…”: Beware of lenders who prom-
ise you loans even if you have a bad credit history. If you have a bad
credit history, you will most likely pay higher interest rates and more
✔ Quick Tip
Be Smart! Tips For Borrowing Money
If you are thinking about borrowing money, keep in mind these do’s and don’ts.
Do
• Pay your bills on time to build good credit history. Make sure your credit
history is correct by reviewing your credit report every year.
• Be an informed customer. Make sure to shop around for the best deal. If
a creditor is not willing to give you information to compare, you prob-
ably do not want to do business with him or her.
• Ask friends, family, and credit counselors for advice. Take someone along
with you when you talk to a lender.
• Take your time before deciding on the best loan or lender.
• Be careful of lenders who tell you they do not care about your credit
history or how much you earn. Many of these lenders charge higher
interest rates and higher fees.
Don’t
• Do not let lenders pressure you into a decision before you are ready.
• Do not respond to advertisements that make lending sound cheap and easy.
• Do not respond to offers to refinance your loan shortly after you just
refinanced it. Make sure you really need the loan or the loan makes eco-
nomic sense for you.
Source: Federal Deposit Insurance Corporation (FDIC), March 2008.
Watch Out For Predatory Lending Practices 335
expensive loan origination fees. All lenders take your credit history
into account. Be aware that while some predatory lenders have been
known to target low-income communities for high-cost, high-interest
loans, no one is immune from their deceptive offers.
• “It’s free and you have nothing to lose”: If it sounds too good to be
true, it probably is. Even though the initial loan evaluation is free,
there are other ways predatory lenders will take money from you. There
might be hidden fees.
• “Act now, this is a limited-time offer”: Beware of “limited-time offers.”
Many predatory lenders try to pressure you into acting fast, even though
you are not comfortable with the loan conditions.
Rent-To-Own
Rent-to-own services let you use an item for a period of time by making
monthly or weekly payments. If you want to purchase the item, the store will
set up a plan for you to rent it until you pay enough to own it. The store is the
legal owner of the item until you make the final payment. If you miss a
payment, the store can take the item back. If this happens, you will not own
the item, and you will not get your money back. Rent-to-own agreements
are technically not loans, so no interest is charged. However, the difference
between the cash price and your total payment is like the interest you pay on
a loan. Generally, using rent-to-own services is more expensive than getting
a consumer installment loan to buy the item outright.
Refund Anticipation
Refund anticipation loans are short-term loans secured by your expected
income tax refund. Although the business preparing your income tax return
336 Cash and Credit Information for Teens, Second Edition
will give you the money, you are actually receiving a loan from a bank or
finance company. Because you do not have to pay any fees associated with
obtaining a refund anticipation loan at the time you receive the money, you
may not realize how much this loan is really costing you.
Here are some typical costs associated with getting a refund anticipation
loan.
• Tax preparation fee: $100
• Refund anticipation fee: $75
• Electronic filing fee: $40
• Document preparation: $33
• Total Cost: $248
When you electronically file (e-file) your tax return and request direct
deposit, your refund is often deposited in your bank account within two
weeks. Sometimes refund anticipation loans take just as long, yet cost you
substantially more money. Many organizations host Volunteer Income Tax
Assistance (VITA) sites. VITA is an IRS-coordinated program that pro-
vides free income tax assistance and e-filing. Income eligibility restrictions
apply. Contact the IRS for a location near you.
Chapter 36
You also may want to check your homeowner’s insurance policy to see if
it covers your liability for card thefts. If not, some insurance companies will
allow you to change your policy to include this protection.
About This Chapter: “Credit, ATM and Debit Cards: What to Do If They’re Lost or
Stolen,” Federal Trade Commission (www.ftc.gov), June 2002.
338 Cash and Credit Information for Teens, Second Edition
you report the loss before your credit cards are used, the FCBA says the card
issuer cannot hold you responsible for any unauthorized charges. If a thief uses
your cards before you report them missing, the most you will owe for unauthor-
ized charges is $50 per card. Also, if the loss involves your credit card number,
but not the card itself, you have no liability for unauthorized use.
After the loss, review your billing statements carefully. If they show any
unauthorized charges, it’s best to send a letter to the card issuer describing
each questionable charge. Again, tell the card issuer the date your card was
lost or stolen, or when you first noticed unauthorized charges, and when you
first reported the problem to them. Be sure to send the letter to the address
provided for billing errors. Do not send it with a payment or to the address
where you send your payments unless you are directed to do so.
transfers involving only your debit card number (not the loss of the card),
you are liable only for transfers that occur after 60 days following the mailing
of your bank statement containing the unauthorized use and before you re-
port the loss.
The following suggestions may help you protect your credit card and
your ATM or debit card accounts.
About This Chapter: Excerpted from “Identity Theft and Identify Fraud,” an undated
document produced by the U.S. Department of Justice, available online at http://
www.usdoj.gov/criminal/fraud/websites/idtheft.html; accessed July 1, 2008 and con-
tact information verified in February 2009.
342 Savings And Investment Information For Teens, 2nd Ed.
running up vast debts and committing crimes while using the victims’ names.
In many cases, a victim’s losses may include not only out-of-pocket financial
losses, but substantial additional financial costs associated with trying to re-
store his reputation in the community and correcting erroneous information
for which the criminal is responsible.
Even the area near your home may not be secure. Some criminals engage
in “dumpster diving”—going through your garbage cans or a communal
dumpster or trash bin—to obtain copies of your checks, credit card or bank
statements, or other records that typically bear your name, address, and even
your telephone number. These types of records make it easier for criminals
to get control over accounts in your name and assume your identity.
If you receive applications for “preapproved” credit cards in the mail, but
discard them without tearing up the enclosed materials, criminals may re-
trieve them and try to activate the cards for their use without your knowl-
edge. (Some credit card companies, when sending credit cards, have adopted
security measures that allow a card recipient to activate the card only from
his or her home telephone number but this is not yet a universal practice.)
Also, if your mail is delivered to a place where others have ready access to it,
criminals may simply intercept and redirect your mail to another location.
In recent years, the internet has become an appealing place for criminals
to obtain identifying data, such as passwords or even banking information.
In their haste to explore the exciting features of the internet, many people
respond to “spam”—unsolicited e-mail—that promises them some benefit but
requests identifying data, without realizing that in many cases, the requester
Identity Theft And Identity Fraud 343
☞ Remember!!
How do thieves steal an identity?
Identity theft starts with the misuse of your personally identifying informa-
tion such as your name and Social Security number, credit card numbers, or
other financial account information. For identity thieves, this information is as
good as gold.
Skilled identity thieves may use a variety of methods to get hold of your
information, including the following:
• Dumpster Diving: They rummage through trash looking for bills or
other paper with your personal information on it.
• Skimming: They steal credit/debit card numbers by using a special stor-
age device when processing your card.
• Phishing: They pretend to be financial institutions or companies and
send spam or pop-up messages to get you to reveal your personal infor-
mation.
• Changing Your Address: They divert your billing statements to another
location by completing a change of address form.
• Old-Fashioned Stealing: They steal wallets and purses; mail, including
bank and credit card statements; pre-approved credit offers; and new
checks or tax information. They steal personnel records, or bribe em-
ployees who have access.
• Pretexting: They use false pretenses to obtain your personal informa-
tion from financial institutions, telephone companies, and other sources.
Source: Excerpted from “About Identity Theft: Deter. Detect. Defend. Avoid
ID Theft,” Federal Trade Commission (www.ftc.gov).
344 Savings And Investment Information For Teens, 2nd Ed.
If someone you don’t know calls you on the telephone and offers you the
chance to receive a “major” credit card, a prize, or other valuable item, but
asks you for personal data—such as your Social Security number, credit card
number or expiration date, or mother’s maiden name—ask them to send you
a written application form. If they won’t do it, tell them you’re not interested
and hang up. If they will, review the application carefully when you receive it
and make sure it’s going to a company or financial institution that’s well-
known and reputable. The Better Business Bureau can give you information
about businesses that have been the subject of complaints.
If you’re traveling, have your mail held at your local post office, or ask
someone you know well and trust—another family member, a friend, or a
neighbor—to collect and hold your mail while you’re away.
If you have to telephone someone while you’re traveling, and need to pass
on personal financial information to the person you’re calling, don’t do it at
an open telephone booth where passersby can listen in on what you’re saying;
use a telephone booth where you can close the door, or wait until you’re at a
less public location to call.
C: Check your financial information regularly, and look for what should
be there and what shouldn’t.
If you have bank or credit card accounts, you should be receiving monthly
statements that list transactions for the most recent month or reporting
period. If you’re not receiving monthly statements for the accounts you know
you have, call the financial institution or credit card company immediately
and ask about it.
If you’re told that your statements are being mailed to another address
that you haven’t authorized, tell the financial institution or credit card repre-
sentative immediately that you did not authorize the change of address and
that someone may be improperly using your accounts. In that situation, you
should also ask for copies of all statements and debit or charge transactions
that have occurred since the last statement you received. Obtaining those
copies will help you to work with the financial institution or credit card
company in determining whether some or all of those debit or charge trans-
actions were fraudulent.
346 Savings And Investment Information For Teens, 2nd Ed.
If someone has gotten your financial data and made unauthorized debits
or charges against your financial accounts, checking your monthly statements
carefully may be the quickest way for you to find out. Too many of us give
those statements, or the enclosed checks or credit transactions, only a quick
glance, and don’t review them closely to make sure there are no unautho-
rized withdrawals or charges.
If someone has managed to get access to your mail or other personal data,
and opened any credit cards in your name or taken any funds from your bank
account, contact your financial institution or credit card company immedi-
ately to report those transactions and to request further action.
A: Ask periodically for a copy of your credit report. Your credit report
should list all bank and financial accounts under your name, and will provide
other indications of whether someone has wrongfully opened or used any
accounts in your name.
What Should I Do
☞
If I’ve Become
Remember!!
A Victim Of Even if you take all suggested pre-
Identity cautionary steps, it’s still possible that you
Theft? can become a victim of identity theft. Records con-
taining your personal data—credit-card receipts or car-
If you rental agreements, for example—may be found by or
think you’ve shared with someone who decides to use your
become a victim data for fraudulent purposes.
of identity theft or Source: U.S. Department of Justice.
fraud, act immediately
Identity Theft And Identity Fraud 347
Under the Identity Theft and Assumption Deterrence Act, the Federal
Trade Commission is responsible for receiving and processing complaints
from people who believe they may be victims of identity theft, providing
informational materials to those people, and referring those complaints to
appropriate entities, including the major credit reporting agencies and law
enforcement agencies. For further information, please check the FTC’s iden-
tity theft web pages (http://www.ftc.gov/bcp/edu/microsites/idtheft). You
can also call your local office of the FBI or the U.S. Secret Service to report
crimes relating to identity theft and fraud.
You may also need to contact other agencies for other types of identity
theft:
• Your local office of the Postal Inspection Service if you suspect that an
identity thief has submitted a change-of-address form with the Post
Office to redirect your mail, or has used the mail to commit frauds
involving your identity.
• The Social Security Administration if you suspect that your Social
Security number is being fraudulently used (call 800-269-0271 to re-
port the fraud).
• The Internal Revenue Service if you suspect the improper use of iden-
tification information in connection with tax violations (call 1-800-
829-0433 to report the violations).
Call the fraud units of the three principal credit reporting companies:
348 Savings And Investment Information For Teens, 2nd Ed.
✤ It’s A Fact!!
Warning: Identity Thieves Target Young People, Too
You’ve probably heard or read about “identity theft,” which happens when
someone learns enough private information about another person to be able to
withdraw money from a bank account or obtain a new credit card in that other
person’s name and use it for purchases that will not be paid for. But did you know
that adults aren’t the only people whose identity is being used by ID thieves?
Crooks target young people like you even though you may be too young to
have a checking account or credit card on your own. They can use your name,
address, and Social Security number to open accounts.
While we don’t want to scare you, we do want to help you protect yourself
and your family from ID theft.
Be extra careful with your full name and address, date of birth, Social Secu-
rity number, bank account information, phone number, and your mother’s maiden
name. This is personal information that banks and other businesses use to con-
firm your identity, which can be very valuable to an ID thief wanting to pose as
you to commit fraud.
In the typical phishing scam, you receive an e-mail supposedly from a com-
pany you may do business with or even from a government agency. The e-mail
Identity Theft And Identity Fraud 349
To opt out of pre-approved offers of credit and marketing lists, call (800)
680-7293 or (888) 5OPTOUT or write to P.O. Box 97328, Jackson, MS
39238.
Contact all creditors with whom your name or identifying data have been
fraudulently used. For example, you may need to contact your long-distance
telephone company if your long-distance calling card has been stolen or you
find fraudulent charges on your bill.
describes a reason you must “resubmit” bank account numbers or other per-
sonal information. If you follow their instructions, the thieves hiding behind
what you think is a legitimate website or e-mail can use the information to
withdraw or spend money in your name.
Never share your passwords or ID numbers for your computer with friends
or strangers. Be especially suspicious of new “friends” you’ve met through the
internet, such as through a website where people can post information about
themselves and can contact others through that site. These people could be
fraud artists.
Don’t leave your birth certificate or documents with your Social Security
number unprotected at home, at school or anywhere else. For example, while
you may need to provide your birth certificate as proof of your age when you
sign up for a sports league or get your learner’s permit, you shouldn’t leave your
birth certificate in your locker at school or any other place that may not be safe.
Source: From “Warning: Identity Thieves Target Young People, Too,” FDIC
Consumer News, Federal Deposit Insurance Corporation, Summer 2006.
350 Savings And Investment Information For Teens, 2nd Ed.
Contact all financial institutions where you have accounts that an iden-
tity thief has taken over or that have been created in your name but without
your knowledge. You may need to cancel those accounts, place stop-payment
orders on any outstanding checks that may not have cleared, and change
your automated teller machine (ATM) card, account, and personal identifi-
cation number (PIN).
• CheckRite: 800-766-2748
• ChexSystems: 800-428-9623 (closed checking accounts)
• CrossCheck: 800-552-1900
• Equifax: 800-437-5120
• National Processing Co. (NPC): 800-526-5380
• SCAN: 800-262-7771
• TeleCheck: 800-710-9898
Chapter 38
If you get a phone call or a letter with a message like this, be skeptical.
Scam artists often use the promise of a valuable prize or award to entice
consumers to send money, buy overpriced products or services, or contribute
to bogus charities. People who fall for their ploys may end up paying more
and more for the products—if they ever get them at all.
About This Chapter: This chapter includes information from the following documents
produced by the Federal Trade Commission (www.ftc.gov): “Sweepstakes and Lotteries
Scams,” undated; “Charities and Fundraising Phone Fraud,” undated; “Work-at-Home
Schemes,” March 2001; “‘Net Based Business Opportunities: Are Some Flop-portunities?”
June 2002; “Costly Coupon Scams,” August 1997; “Multilevel Marketing Plans,” (pro-
duced in cooperation with the North American Securities Administrators Association),
November 1996; and “Take This Scheme and Stuff It: Avoiding Envelope-Stuffing Rip-
Offs.” Despite the older dates of some of these documents, the information still provides
appropriate guidance regarding potential fraudulent activities. Additional information
from Investopedia ULC is cited separately within the chapter.
352 Cash and Credit Information for Teens, Second Edition
✤ It’s A Fact!!
Fake Check Scams
It’s your lucky day! You just won a foreign lottery! The caller says so. And
they are sending a cashier’s check to cover the taxes and fees. All you have to do
to get your winnings is deposit the check and wire the money to the sender to
pay the taxes and fees. You’re guaranteed that when they get your payment,
you’ll get your prize.
There’s just one catch: this is a scam. The check is no good, even though it
appears to be a legitimate cashier’s check. The lottery angle is a trick to get you to
wire money to someone you don’t know. If you were to deposit the check and wire
the money, your bank would soon learn that the check was a fake. And you would
be out the money: The money you wired can’t be recovered, and you’re respon-
sible for the checks you deposit—even though you don’t know they’re fake.
sound or look like legitimate organizations. Ask the caller “Can you
point me to a website or another resource for more information about
your organization?”
✤ It’s A Fact!!
International Lottery Scams
“Congratulations! You may receive a certified check for up to $400,000 U.S.
CASH! Tax free! Your odds to WIN are 1-6.” “Hundreds of U.S. citizens win
every week using our secret system! You can win as much as you want!”
Scam operators are using the telephone to entice U.S. consumers to buy
chances in high-stakes foreign lotteries from as far away as Australia and Eu-
rope. These lottery solicitations violate U.S. law, which prohibits the cross-
border sale or purchase of lottery tickets by phone or mail.
The FTC has these words of caution for consumers who are thinking about
responding to a foreign lottery:
✤ It’s A Fact!!
Telemarketers who make calls across state lines on
behalf of charitable organizations must comply with certain
federal standards:
• They must make their calls between 8:00 a.m. and 9:00 p.m.
• They must promptly identify the charity they represent and that
they are calling to ask for money.
• They may not lie or mislead you to get a contribution.
• They may not call you again if you asked them not to.
Source: “Charities and Fundraising Phone Fraud,” FTC, undated,
online at http://www.ftc.gov/bcp/edu/microsites/
phonefraud/publicsafety.shtml; accessed October
31, 2008.
• Avoid giving cash gifts. They can be lost or stolen. For security and tax
purposes, it’s best to pay by check, made payable to the charity, not the
solicitor. Ask, “Can you give me a receipt showing the amount of my
contribution and stating that it is tax deductible?”
• Be skeptical if someone thanks you for a pledge you don’t remember
making. If you have any doubts about whether you’ve made a pledge
or previously contributed, check your records.
• Reject high pressure appeals. Legitimate fund-raisers don’t put you on
the spot to give. Ask, “Can you mail me more information about the
charity and how it works?”
• Do not do business with any charity offering to send a courier or over-
night delivery service to collect your donation.
• Consider the costs. When you buy merchandise or tickets for special
events, or get “free” goods in exchange for giving, remember that part
of your contribution was used to pay for it.
356 Cash and Credit Information for Teens, Second Edition
• Be cautious of promises of
guaranteed sweepstakes win- ✤ It’s A Fact!!
nings in exchange for a con- Facts About Fire, Police,
tribution. According to U.S. Or Military Fundraisers
law, you never have to give a
• Simply having the words “police” or
donation to be eligible to win
“firefighter” in an organization’s
a sweepstakes. name doesn’t mean police or
• A special word about appeals firefighters are members of the
group or will benefit from the funds
that tug at your heart strings,
raised.
especially pleas involving pa-
triotism and current events: • An organization may claim it has
ties with local police or firefighters,
Before you give, make sure
but that doesn’t mean contributions
the organization has the in- will be used locally or for public
frastructure to deliver the safety. Call your local organization
help it is claiming to provide. to verify the connection.
• After receiving a call asking • Many solicitations for police and
for a donation, call the char- fire service organizations are made
ity in question to find out by professional fund-raisers who are
paid to do the job.
whether it is aware of the so-
licitation and has authorized • Donations to some police or
firefighter groups may not be tax
the use of its name.
deductible.
to your newspaper and PC. While you may find these ads appealing, espe-
cially if you can’t work outside your home, proceed with caution. Not all
work-at-home opportunities deliver on their promises.
Many ads omit the fact that you may have to work many hours without
pay. Or they don’t disclose all the costs you will have to pay. Countless work-
at-home schemes require you to spend your own money to place newspaper
ads, make photocopies, or buy the envelopes, paper, stamps, and other sup-
plies or equipment you need to do the job. The companies sponsoring the
ads also may demand that you pay for instructions or “tutorial” software.
Consumers deceived by these ads have lost thousands of dollars, in addition
to their time and energy.
The promoter also may tell you that many doctors who process claims
electronically want to “outsource” or contract out their billing services to
save money. Promoters will promise that you can earn a substantial income
working full or part time, providing services like billing, accounts receivable,
electronic insurance claim processing, and practice management to doctors
and dentists. They also may assure you that no experience is required, that
they will provide clients eager to buy your services or that their qualified
salespeople will find clients for you.
The Reality: You will have to sell. These promoters rarely provide experi-
enced sales staff or contacts within the medical community.
The promoter will follow up by sending you materials that typically include
a brochure, application, sample diskettes, a contract (licensing agreement), dis-
closure document, and in some cases, testimonial letters, videocassettes, and
358 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
Where To Complain
If you have spent money and time on a work-at-home program and now
believe the program may not be legitimate, contact the company and ask for a
refund. Let company representatives know that you plan to notify officials about
your experience. If you can’t resolve the dispute with the company, file a com-
plaint with these organizations:
• The Federal Trade Commission works for the consumer to prevent fraud
and deception. Call 877-FTC-HELP (877-382-4357) or log on to http://
www.ftc.gov.
• The Attorney General’s office in your state or the state where the com-
pany is located. The office will be able to tell you whether you’re pro-
tected by any state law that may regulate work-at-home programs.
• Your local consumer protection offices.
• Your local Better Business Bureau.
• Your local postmaster. The U.S. Postal Service investigates fraudulent
mail practices.
• The advertising manager of the publication that ran the ad. The man-
ager may be interested to learn about the problems you’ve had with the
company.
Source: FTC, 2001.
Con Artists Want Your Money 359
billing market is fierce and revolves around a number of large and well-
established firms.
Assembly Or Craft Work: These programs often require you to invest hun-
dreds of dollars in equipment or supplies. Or they require you to spend many
hours producing goods for a company that has promised to buy them. For ex-
ample, you might have to buy a sewing or sign-making machine from the com-
pany, or materials to make items like aprons, baby shoes, or plastic signs. However,
after you’ve purchased the supplies or equipment and performed the work, fraudu-
lent operators don’t pay you. In fact, many consumers have had companies refuse
to pay for their work because it didn’t meet “quality standards.”
Questions To Ask
Legitimate work-at-home program sponsors should tell you—in writing—
what’s involved in the program they are selling. Here are some questions you
might ask a promoter:
• What tasks will I have to perform? (Ask the program sponsor to list
every step of the job.)
• Will I be paid a salary or will my pay be based on commission?
• Who will pay me?
• When will I get my first paycheck?
• What is the total cost of the work-at-home program, including sup-
plies, equipment and membership fees? What will I get for my money?
360 Cash and Credit Information for Teens, Second Edition
The answers to these questions may help you determine whether a work-
at-home program is appropriate for your circumstances, and whether it is
legitimate.
You also might want to check out the company with your local consumer
protection agency, state Attorney General, and the Better Business Bureau,
✔ Quick Tip
Advice From The Federal Trade Commission
The Federal Trade Commission (FTC) offers this advice to consumers con-
sidering an internet-related business opportunity:
• Consider the promotion carefully. If it claims buyers can earn a certain
income, then it also must give the number and percentage of previous
purchasers who achieved the earnings. If an earnings claim is there—but
the additional information isn’t—the business opportunity seller is prob-
ably violating the law.
• Get earnings claims in writing. If the business opportunity costs $500 or
more, then the promoter must back up the earnings claim in a written
document. It should include the earnings claim, as well as the number
and percentage of recent clients who have earned at least as much as the
promoter suggested. If it’s a work-at-home or other business opportu-
nity that involves an investment of under $500, ask the promoter to put
the earnings information in writing.
• Study the business opportunity’s franchise disclosure document. Under
the FTC Franchise Rule, many business opportunity promoters are re-
quired to provide this document to potential purchasers. It includes in-
formation about the company, including whether it has faced any lawsuits
from purchasers or lawsuits alleging fraud. Look for a statement about
previous purchasers. If the document says there have been no previous
purchases but the seller offers you a list of references, be careful: the
references probably are phonies.
• Interview each previous purchaser in person, preferably where their busi-
ness operates. The FTC requires most business opportunity promoters
to give potential purchasers the names, addresses, and phone numbers of
at least ten previous purchasers who live the closest to the potential
Con Artists Want Your Money 361
not only where the company is located, but also where you live. These or-
ganizations can tell you whether they have received complaints about the work-
at-home program that interests you. But be wary: the absence of complaints
doesn’t necessarily mean the company is legitimate. Unscrupulous companies
may settle complaints, change their names, or move to avoid detection.
However, the Federal Trade Commission (FTC) says that many of these
business opportunities are scams that promise more than they can possibly
deliver. The scam artists lure would-be entrepreneurs with false promises of
big earnings for little effort. They pitch their fraudulent offerings on the
web, in e-mail solicitations, through infomercials, classified ads and newspa-
per and magazine “advertorials,” and in flyers, telemarketing pitches, semi-
nars, and direct-mail solicitations.
✔ Quick Tip
Reporting Possible Fraud
If you suspect a business opportunity promotion is fraudulent,
report it to the following agencies:
• The state attorney general’s office in the state where you live and in the
state where the business opportunity promoter is based.
• Your county or state consumer protection agency. Check the blue pages
of the phone book under county and state government.
• The Better Business Bureau in your area and the area where the pro-
moter is based.
The Problem: The program claims to pay participants based on how many
people they recruit into the program, not on their product sales. That makes
the program a pyramid scheme—not a legitimate multi-level marketing plan.
Pyramid schemes are illegal. Mathematically, nearly everyone who partici-
pates in them loses their money. When there are no new recruits, the pyra-
mid collapses.
The Problem: Rather than the high-traffic locations that the promoter
promises, the buyer’s machines get placed where demand for internet access
is low. As a result, a would-be entrepreneur can’t possibly make the promised
earnings.
The Problem: The seminars really feature high-pressure sales pitches for
the promoter’s internet yellow pages or internet advertising. And, even though
the promoter promises to provide internet and sales training to buyers—for
364 Cash and Credit Information for Teens, Second Edition
a fee of several thousand dollars—the buyers never get the promised train-
ing. In the end, they never earn the promised amounts.
There’s only one legitimate way to use a coupon: Cut it out of the news-
paper or other source and use it toward the purchase of the designated prod-
uct. A coupon is meant to be used only by the consumer who buys the product
for which the coupon is printed. Selling or transferring coupons to a third
party violates most manufacturers’ coupon redemption policies—and usu-
ally voids the coupon.
Coupons are big business. More than 3,000 manufacturers distribute nearly
330 billion coupons—worth an estimated $280 billion—every year in an
effort to help consumers save money. Indeed, it is thought that 77 percent of
American households use some eight billion coupons to save $4.7 billion on
their grocery bills.
In theory, the investor should make big profits selling the booklets to
consumers. And consumers should save big money by using the coupons
when they buy the groceries. In reality, though, the promoter is the only one
who makes money.
These ads may seem appealing, especially if you are looking for a home-
based business. But according to the Federal Trade Commission (FTC), the
nation’s consumer protection agency, ads like these don’t tell the whole story
because the promoters aren’t really offering a job.
Instead, say FTC attorneys, after you send your money, you’re likely to
get a letter telling you to place the same “envelope-stuffing” ad in newspa-
pers or magazines, or to send the ad to friends and relatives. The only way
you’ll earn money is if people respond to your ad; in fact, the government
says, the promoters themselves rarely pay anyone.
The answers to these questions may help you determine whether an envelope-
stuffing opportunity is appropriate for your circumstances and whether it’s
legitimate. It also may help to check out the company with your local con-
sumer protection agency, state Attorney General, and the Better Business
Bureau in the community where the company is located as well as the com-
munity where you live. These organizations can tell you whether they have
received complaints about the promotion that interests you.
The Scheme
As its name indicates, the pyramid scheme is structured like a pyramid. It
starts with one person—the initial recruiter—who is on top, at the apex of
the pyramid. This person recruits a second person, who is required to “in-
vest” $100 which is paid to the initial recruiter. In order to make his or her
money back, the new recruit must recruit more people under him or her,
each of whom will also have to invest $100. If the recruit gets ten more
people to invest, this person will make $900 with just a $100 investment.
The ten new people become recruiters and each one is in turn required to
enlist an additional ten people, resulting in a total of 100 more people. Each
of those 100 new recruits is also obligated to pay $100 to the person who
recruited him or her; recruiters get a profit of all of the money received mi-
nus the initial $100 paid to the person who recruited them. The process
continues until the base of the pyramid is no longer strong enough to sup-
port the upper structure (meaning there are no more recruits).
370 Cash and Credit Information for Teens, Second Edition
The Fraud
The problem is that the scheme cannot go on forever because there is a
finite number of people who can join the scheme (even if all the people in
the world join). People are deceived into believing that by giving money they
will make more money (“with an investment of just $100, you will receive
$900 in return”). But no wealth has been created; no product has been sold;
no investment has been made; and no service has been provided.
The fraud lies in the fact that it is impossible for the cycle to sustain itself,
so people will lose their money somewhere down the line. Those who are
most vulnerable are those towards the bottom of the pyramid, where it be-
comes impossible to recruit the number of people required to pay off the
previous layer of recruiters. This kind of fraud is illegal in the Unites States
and most countries throughout the world. It is estimated that 90% of people
who get involved in a pyramid scheme will lose their money.
☞ Remember!!
It is easy to see how a pyramid scheme can
work, but participating in it (regardless of the form
in which it is presented) involves deception and fraud
because not everyone will receive the money that is prom-
ised in return.
Fraud Disguised
Because people are attracted to the idea of making a quick buck with very
little effort, many different forms of disguised pyramid schemes have suc-
ceeded in fooling people. Despite the illusion of legality presented by these
revamped schemes, they are still illegal. It is thus important to recognize the
characteristics of such so-called investment plans.
Many schemes will adopt the guise of gift-giving or loans that take place
in investment clubs because none of these activities are technically illegal.
However, the practice of donating a gift (tax free up to $12,000 in the U.S.)
to someone (the recruiter), then having to recruit people into the club in
order to receive a return on your investment (or your gift, rather) is essen-
tially a pyramid scheme in disguise.
A pyramid scheme MLM, however, will most likely sell a product with
no independent value. The product could take the form of reports of some
kind, for example, or mailing lists. In this kind of pyramid scheme, you would
be required to recruit new members into the MLM in order to make a profit
and keep the MLM alive. Joining the MLM is the only reason anyone would
buy the products sold by this pyramid scheme.
Ponzi Schemes
Named after Charles Ponzi, who ran such a plot from 1919–1920, the
Ponzi scheme is a fraudulent investment plan. It is not necessarily a pyramid,
which is hierarchical. In a Ponzi scheme, there is one person who takes people’s
money as an “investment” and does not necessarily tell them how their returns
372 Cash and Credit Information for Teens, Second Edition
Chain Letters
Chain letters can be received electronically or through snail mail and are
not illegal on their own. However, they take on the form of a pyramid scheme
when the letter asks you to donate a certain amount of money (even just
$0.05) to the people on a list, then delete the name of the first person on the
list, add your name, and forward the letter to a certain number of other
people. The next people receiving the letter are then asked to do the same
thing, so that you can receive your money as well. By forwarding the letter,
you are asking people to give money with the promise of making money.
Chapter 39
It’s true that some successful models have been discovered in everyday
places like malls, boutiques, clubs, and airports. But the vast majority of would-
be models knock on door after agency door before work comes their way.
About This Chapter: “If You’ve Got The Look, Look Out! Avoiding Modeling Scams,”
Federal Trade Commission (www.ftc.gov), May 1999. Despite the older date of this
document, the cautions it provides are still pertinent.
374 Cash and Credit Information for Teens, Second Edition
say just about anything to get it. But what they say isn’t always what they
mean.
“ You must be specially selected for our program. Our talent experts will care-
fully evaluate your chances at success in the field and will only accept a few
people into our program.”
We take almost everyone.
“ You can’t afford our fees? No problem. You can work them off with the
high-paying jobs we’ll get you.”
We demand payment, whether or not you get work.
Pose-itioning Yourself
To break into the business, you—the talent—need professional photos.
There are two types of standard photographs—a “head shot” and a “com-
posite card.”
Avoid Modeling Scams 375
Agencies and schools offer separate and distinct services. Make sure you
know the difference.
• Modeling (or talent) agencies secure employment for experienced models
and actors. Some agents require that you sign up exclusively with them;
others may allow you to register with them as well as with other agen-
cies in town.
• Modeling and acting schools claim to provide instruction—for a fee—
in poise, posture, diction, skin care, make-up application, the proper
walk, and more. Modeling schools do not necessarily act as agents or
find work for you—after you take their classes, you may be on your own.
Before you show up at the airport with your boogie board, passport, or
skis, review the tour package carefully and investigate the operator. Lots of
students don’t get the trip they expect; others lose out completely. They
didn’t take the time to carefully read the fine print, evaluate the promo-
tion, and make sure it’s not run by a fly-by-night company peddling a
first-class scam.
Flights for many school break trips are by public charter, which have
different rules than commercial flights. Before you dot the “i”s and cross the
“t”s on your contract, do some homework and take a good look at the pack-
age. The Federal Trade Commission (FTC) and the American Society of
Travel Agents (ASTA) offer the following tips and information to help you
avoid a school break bust.
About This Chapter: This chapter includes “Avoid a School Break Bust,” July 1999,
and “Telemarketing Travel Fraud,” August 2000, Federal Trade Commission
(www.ftc.gov). Despite the older date of these documents, the cautions provided are
still pertinent.
378 Cash and Credit Information for Teens, Second Edition
✔ Quick Tip
How To Gear Up For A Great Trip
Whether you’re off to see the sights, ski the slopes, or sunbathe on the sand,
it pays to be an informed travel shopper. To help you avoid vacation frustration,
the Federal Trade Commission (FTC), the nation’s consumer protection agency,
offers these tips.
• Buy your vacation package from a business you have confidence in. Ask
family and friends to recommend a company with a good track record.
Think twice if you can’t get a person on the phone to answer your ques-
tions or if the ad doesn’t give the company’s street address. Contact the
state Attorney General, consumer protection agency and Better Business
Bureau where you live and where the company is based to see if there is
a history of complaints on file.
• Be on the alert for the telltale signs of a travel scam. Unsolicited faxes or
e-mails for deeply discounted travel packages promise the world. But
the fraudsters behind these offers will leave you at the gate.
• Verify and clarify. Call to verify your reservations and arrangements. Get
the details behind vague promises that you’ll be staying at a “five-star”
resort or sailing on a “luxury” cruise ship. When you have the names,
addresses, and telephone numbers of the airlines, car rental companies,
and hotels you’ll be using, confirm all arrangements for yourself.
• Put it on paper. Get the details of your vacation in writing. Get a copy of the
company’s cancellation and refund policies, and ask “What if...?” Consider
whether some form of travel cancellation insurance may be appropriate.
• Use a credit card to make your purchase. If you don’t get what you paid
for, you may be able to dispute the charges with your credit card com-
pany. However, don’t give your account number to any business until
you’ve verified that it is reputable.
• Avoid a travel club flub. Ask questions before joining a travel club. Some-
times, a “free trial” membership can result in unauthorized charges on your
credit card. Find out what you’ll get for your money and how you can cancel.
• Won a “free” vacation? Not so fast. Scam artists may tell you you’ve won
a “free” vacation, but then claim to need your credit card number for
“verification.” Tell ‘em to take a hike. If the promotion is legit, you never
need to pay for a prize.
Source: “Travel Tips: How to Gear Up for a Great Trip,” Federal Trade Com-
mission (www.ftc.gov), February 2006.
Travel Fraud: Avoiding A Spring Break Bust 379
Have you ever been tempted to sign up to win a “free” trip at a fair, trade
show, or restaurant? If so, you may get a phone call, letter, unsolicited fax, e-
mail, or postcard telling you that you’ve won a vacation. Be careful. It may be
a “trip trap.” The vacation that you’ve “won” likely isn’t free. And the “bar-
gain-priced” travel package you’re offered over the telephone or internet may
not fit your idea of luxury.
While some travel opportunities sold over the phone or offered through
the mail, internet, or by fax are legitimate, many are scams that defraud con-
sumers out of millions of dollars each month. The word “offer” can be a clue
to hidden charges. When you get the phone call, or place the call in response
to a postcard, letter, fax or internet ad, you also get a sales pitch for a suppos-
edly luxurious trip—one that you could pay dearly for.
The salesperson may ask for your credit card number to bill your account
for the travel package. Once you pay, you receive the details of the “package,”
which usually include instructions for making trip reservation requests. Your
request often must be accompanied by yet another fee. In addition, many
offers require you to pay upgrade costs to receive the actual destinations,
accommodations, cruises, or dates you were promised. Some offers may re-
quire you to pay more for port charges, hotel taxes, or service fees.
See a pattern developing? New charges are being added every step of the
way. You may never get your “bargain” trip because your reservations may not
be confirmed or because you must comply with hard-to-meet hidden or ex-
pensive “conditions.”
Travel Fraud: Avoiding A Spring Break Bust 381
• Ask detailed questions. Find out exactly what the price covers and
what it doesn’t. Ask about additional charges. Get the names of the
hotel, airports, airlines and restaurants included in your package. Con-
sider contacting these businesses directly to verify arrangements. Ask
about cancellation policies and refunds. If the salesperson can’t give
you detailed answers, hang up.
• If you decide to buy, find out the name of the travel provider—the
company that is getting your reservations and tickets. This company
usually is not the telemarketer.
• Get all information in writing
before you agree to buy. Once ✔ Quick Tip
you receive the written in- Where To Complain
formation, make sure it re-
Several organizations can provide ad-
flects what you were told
ditional information and help you with
over the phone and the complaints. Your state Attorney General
terms you agreed to. or the Attorney General in the state where
the company is located probably has a divi-
• Don’t buy part of the
sion that deals with consumer protection is-
package—the air fare or sues.
hotel stay—separately
from the rest. If the deal The American Society of Travel Agents,
Consumer Affairs, at 1101 King Street,
is not what you expected,
Alexandria, VA 22314, may be able
it may be difficult to get to mediate your dispute with
your money back for the part an ASTA member.
of the package you purchased.
• Don’t give your credit card number
or bank information over the phone un-
less you know the company. One easy way for a scam operator to close
a deal is to get your credit card number and charge your account. Some-
times fraudulent telemarketers say they need the number for verifica-
tion purposes only. Don’t believe them.
• Don’t send money by messenger or overnight mail. Some scam artists
may ask you to send them a check or money order immediately. Oth-
ers may offer to send a messenger to pick up your payment. If you pay
Travel Fraud: Avoiding A Spring Break Bust 383
with cash or a check, rather than a credit card, you lose your right to
dispute fraudulent charges under the Fair Credit Billing Act. If you
charged your trip to a credit card, you may dispute the charges by
writing to your credit card issuer at the address provided for billing
disputes. If possible, do this as soon as you receive your statement. In
any case, the law gives you up to 60 days after the bill’s statement date
to dispute the charge.
• Check out the company before you buy. Contact the Attorney Gen-
eral in your state or where the company is located to see if any com-
plaints have been lodged against the travel firm or the travel provider.
Be aware that fraudulent businesses often change their names to avoid
detection.
• If in doubt, say “no.” Trust your instincts. It’s less risky to turn down
the offer and hang up the phone.
Chapter 41
“Say you bet $100,” says Drew, who started gambling on sports when he
was 14 and taking his friends’ bets at 16. “If you win, you win $100. But if
you lose, you can lose $110 to $125, depending on the juice the book wants
to charge. And if you bet and win that $100, most likely you are going to roll
that over into some other bets. I have never seen someone win more than
they lose.”
A Losing Prospect
OK, Drew isn’t dumb, and neither are most teens. But millions of them
still gamble every year. A study by the University of Florida shows that most
people have placed bets by the time they reach their 12th birthday—that’s
About This Chapter: “Gambling: Don’t Bet on Winning,” reprinted with permission
from Planned Parenthood® Federation of America, Inc. © 2008 PPFA. All rights re-
served. For additional information, visit www.plannedparenthood.org.
386 Cash and Credit Information for Teens, Second Edition
earlier than the age most people first try drinking or smoking cigarettes.
Between half and three-quarters of underage teens—about seven million
nationwide— gamble. They know the odds are stacked against them. So
why do they keep throwing their hard-earned cash down the drain?
Drew, who plays basketball, thinks athletes and other competitive kids
bet on sports because it makes the game more exciting for them—almost
like the rush they get when they’re playing. Plus, they see their friends doing
it, and they don’t always get the straight story on how tough it can be. “You
rarely ever hear of the guys going to pay the book money,” he says, “but they
will always tell you of the time they
went to collect their money from the
book.”
✤ It’s A Fact!!
Most people can gamble for fun Here are reasons experts say people
and never have a problem with it. It gamble:
helps if you’re “legal,” of course— • Everyone Else Is Doing It:
check the laws where you live, but in Even Mom, Dad, and Prin-
most states it’s 18 or 21, depending cipal Skinner! Gambling is
on the type of game you’re playing. pretty socially acceptable
(Also, if you’re not sticking to state- these days. Some schools
sanctioned gambling, like in casi- even sponsor events like after-
prom casino nights. And
nos—if you’re placing bets with a
most people start gambling
bookie—you’re participating in a with their families.
criminal enterprise and could be ar-
• The Self-Esteem Boost: Ev-
rested!) Chad, for example, lost $40
eryone loves a winner, and
on a scratch-off lottery ticket on his sometimes even losers feel
18th birthday, and now occasionally cool when they’re waving
bets $10 or $20 on darts. He’ll never around $20 bills.
have a problem, he says, because he • Escape From Other Prob-
hates losing so much he’ll never bet lems: Like drugs and alcohol,
more money than that. gambling can offer a tempo-
rary reprieve from depression
Not Just Fun And Games or just a way to take your
mind off your parent’s divorce
Many teens do have a problem, or your recent breakup.
though. Four percent of the teens in
Gambling: Don’t Bet On Winning 387
the Florida study were problem, or pathological, gamblers, and that can be
as much of a problem as drug or alcohol addiction. And it can happen to
anyone. The average teen who has problems with gambling is super-smart,
involved in lots of activities, successful, and motivated—at least until the
addiction starts to get in the way. Then, the person’s likely to stop being
interested in friends or activities, sell a prized CD collection to get more
cash, or suddenly become moody, tired, and angry.
✔ Quick Tip
If you think you or a friend might have a prob-
lem with gambling, there are ways to get help. Check
out the National Council on Problem Gambling website
(http://www.ncpgambling.org), or call its help line at 800-
522-4700. Because really, there are lots of better
ways to spend your hard-earned dough!
Part Six
Calculators
Alliance for Investor Education (AIE)
Savings Calculator
Website: http://www.investoreducation.org/cindex2.cfm
Bankrate.com
Mortgage, Auto, Credit Card, Home Equity, Investment, Retirement,
Personal Finance, Savings, and Tax Calculators
Website: http://www.bankrate.com/brm/rate/calc_home.asp
Calculators—Financial.com
Home Financing, Personal Financing, Investment, Retirement, and Lease
Calculators
Website: http://calculators-financial.com
About This Chapter: The websites in this chapter are listed in alphabetical order. Inclu-
sion on this list does not mean endorsement. All websites were verified in July of 2008.
392 Cash and Credit Information for Teens, Second Edition
Choose to Save
American Savings Education Council (ASEC)
Auto, Bond, Budget, College, Credit Card, Home, Insurance, Life
Expectancy, Mutual Funds, Paycheck Planning, Retiree Health,
Retirement, Roth IRA, Savings, Social Security, Stock, and Tax
Calculators
Website: http://www.asec.org/tools/ycalcs.htm
FinAid
College Costs and Savings, Integrated Saving/Borrowing, Trust Funds,
Needs Analysis, Loans, Budgeting, and Insurance Calculators
Website: http://www.finaid.org/calculators
Money Matters To Me
Loan, General Interest, Mortgage, and Repayments Calculators
Website: http://www.moneymatterstome.co.uk/Interactive-Tools
My Money
College Planning, Group Life Insurance, Home Buying, Investing,
Mortgage, Saving Bonds, Social Security, Tax Withholding, and Thrift
Savings Plan Calculators
Website: http://www.mymoney.gov/calculators.shtml
Wachovia Securities
IRA, Retirement, and Savings Calculators
Website: http://www.agedwards.com
Young Consumers
Loan, Repayments, and Interest Calculator
Website: http://www.gov.im/youngconsumers/tools
Financial Quizzes
Acción
Financial Self Assessment Quiz
Website: http://yourmoney.accion.org/site/c.cqLMI2OGKrF/b.1626171/
k.C9B7/Test_Your_Financial_Literacy__Financial_Literacy_Quiz.htm
394 Cash and Credit Information for Teens, Second Edition
Rutgers
Financial Fitness, Identity Theft Risk Assessment, Investment Risk
Tolerance, and Personal Resiliency Resources Assessment Quizzes
Website: http://njaes.rutgers.edu/money
Games
Ernest & Young’s Moneyopolis
Website: http://www.moneyopolis.com
Investopedia Simulator
Website: http://simulator.investopedia.com
Online Money Management Tools 395
It All Adds Up
Website: http://www.italladdsup.org
LavaMind’s Gazillionaire
Website: http://www.gazillionaire.com
Planet Orange
Website: http://www.orangekids.com
Stock-Trak
Website: http://www.stocktrak3.com
StocksQuest.com
Website: http://investsmart.coe.uga.edu/C001759/stocksquest/
mystocks.htm
About This Chapter: The organizations in this chapter are listed alphabetically by topic.
All contact information was verified in July of 2008.
398 Cash and Credit Information for Teens, Second Edition
Experian
P.O. Box 1017
Allen, TX 75013-0949
Toll-Free: 888-397-3742
Website: http://www.experian.com
Resources For Financial Information 405