Banking, credit and debt

Key topic

It is very important for athletes to develop an understanding about how banks work so that they can manage their banking to their best interest.  Properly managed bank accounts can reduce expenses and protect the athletes’ personal information.  Making purchases on credit is a major part of everyday life to the point that it is being frequently abused and may be transformed into excessive debt which is not manageable.  By understanding ‘good’ and ‘bad’ debt athletes will be able to utilize debt when and where it best suits their overall financial plan.  In this lesson we present the basic banking operations that most closely relate to your needs and discuss the different banking risks associated with credit, debt, and credit history.  Moreover, this lesson discusses the risks of loans and being in debt, as well as presents ways of keeping debt under control.

Learning objectives

• Understand the basic banking operations, including digital banking and digital wallets.
• Discover the risks associated with bad loans and collaterals.
• Opening and maintaining the right bank accounts is a very important aspect of good money management. Your bank accounts are the center of your financial planning.
• There are different types of bank accounts which will help you get your finances in order.
• A debit card works like a plastic check. A credit card is a credit facility from a bank: Knowing the differences between credit and debit cards will help you use them appropriately.
• Credit is an arrangement that defers payment for borrowed money or a purchased item until later. Your credit history represents your financial reputation, and it is very important to build a positive record with lenders.
• Any debt, as a whole, is not good. However, some types of debt are considered good because of the investment value they hold.
• Your personal circumstances and credit score are correlated with loan qualification and loan repayment ability.
• Defaulting on a loan will create a multitude of problems both in the present and the future.

Introduction

A bank is a financial institution that handles money, including keeping it for saving or commercial purposes, and exchanging, investing and supplying it for loans. Banks offer safe, secure and convenient services so you can save money and build a better financial future. Debt, credit and banking are ultimately related to each other in many ways. It is important to learn to distinguish between the three but also learn about their interplay.

There are a number of reasons why you should put your money in a bank:

• Safety: Storing your money in a bank is much safer than holding cash. Deposits are also protected up to a certain amount by authorities such as the FDIC in the USA.
• Earning Capacity: The bank pays you interest every month just for depositing your money, therefore your money creates more money.
• Convenience: Most teams have your paycheck electronically deposited into your checking account and you can make electronic payments for pretty much everything without having to physically go to the bank.
• Organization: Bank accounts help you track spending, manage savings, and stay on target with your budget.
• Alignment of Incentives: It is in the best interest of both you and your bank to be financially successful. If your personal finances are doing well, then you will save more (more money for them), spend more (greater line of credit) and utilize more of the bank’s services.

Remember that how you manage your money today determines whether you achieve financial freedom tomorrow. Your checking account will help you organize and keep track of your finances whereas through your savings account, you can take advantage of the power of compounding interest.  Compounding interest is defined as the process by which the value of an investment increases exponentially because it earns interest both on the principal and the prior interest payments.

How do banks work?

As a business model, the banking concept is pretty simple: banks use your money to make loans to other accountholders. This serves the interests of all parties involved. You earn money through interest when you save money with the bank, like already discussed. When other people borrow money to serve their needs, they are charged with an interest that is higher than the interest on deposits and the bank makes money off of the interest (from the difference between the saving and lending rates) and its ability to use other people’s money.  For example, you deposit your money in a savings account and earn 2.25% interest, and the bank then lends your money to other customers at an interest rate of 4%. The bank makes a profit from the difference between the saving and lending rates.

In addition to traditional banks, there are also digital banks.  A digital bank provides banking facilities exclusively through digital platforms, such as mobiles, tablets and the internet.  It offers basic services in the most simplified manner, with the help of electronic documentation, real-time data, and automated procedures.  The key difference between traditional and digital banks is physical presence.  Traditional banks have brick-and-mortar branches, while digital banks operate entirely online.  This affects accessibility – you can visit a traditional bank in person, but digital banks are accessible 24/7 via internet-connected devices.  Digital banks like Revolut typically offer competitive interest rates and low or no-account fees.

Over the past decade, payment methods have evolved to support different consumer and business needs.  The U.S. has seen a significant shift towards digital wallets, which offer more security and convenience.  Digital wallets, facilitated through mobile applications, store payment information for convenient electronic transactions.

Digital wallets may contain multiple payment types: credit cards, debit cards or bank transfers.  Examples include PayPal, Apple Pay and Google Pay.  Wallets typically require customer verification (e.g. biometrics, SMS, passcode) to complete payments.

Cryptocurrencies like Bitcoin and Ethereum have gained popularity as a digital payment mode.  These digital or virtual currencies use cryptography for security.  They offer anonymity but are subject to price volatility and government regulations.

To choose the right bank, consider your financial goals and how you intend to use the account. Is it for business, for pleasure, for savings, salary-depositing, eventual loans, or something else?

You should choose a bank that offers online banking because in today’s economy it is a feature you can’t do without. A bank with online and mobile banking is essential in today’s digital economy. With online banking, you can do transactions and check balances from wherever you are.

You should also look at banking costs.  Banks have to be competitive, so it pays to compare fees for opening and running an account. There are often fees for both checking and savings accounts. The bank also may charge separate fees for such things as receiving statements in the mail; online banking; and multiple checkbooks. Make sure to ask and compare all potential fees before settling on a particular bank.

Remember that you want to build a long-term relationship with the bank you choose. You’ll find that the longer you remain a good customer, the more benefits you’ll receive. Then the next time you need a car loan, investment account, business loan, or home loan you may get better terms because of that positive relationship.

In summary, opening and automating your accounts is the first step toward building a financial foundation. Find a bank with which you can grow over time. Look for one that offers the services you need now, as well as those you may need in the future. Build a positive relationship with your bank to unlock better financial opportunities; as that relationship grows, so will the benefits you receive.

Checking and savings accounts

There are different types of accounts you can open at a bank. At minimum, you should have a checking account and a savings account.

• A checking account is where most of your transactions will take place. A checking account is your banking hub and will handle most of your financial ins and outs.  Usually checking accounts do not pay any interest.
• A savings account pays interest on the money you have on deposit. You may use savings accounts for your emergency fund, your short-term fun fund and your long-term investment fund.

Once you have chosen the bank that best suits your needs, you can proceed with opening both a checking and a savings account.  This is the first step to getting your finances in order.  Savings and checking accounts can be linked so you can transfer money between accounts with ease. Ideally, you should set up your accounts to automatically transfer a fixed portion of your money each month from checking to savings. That way saving money becomes easy and automatic. Plus, all your accounts can be monitored smoothly. Regularly monitoring your account balances helps you manage expenses and avoid overdrafts.

Debit cards vs credit cards

Debit and credit cards can be either physical or digital ones. A debit card functions like a digital check, deducting money directly from your checking account when used. A credit card operates as a short-term loan, where the issuer lends you money and charges interest and fees if the balance is not paid in full at the end of the month. The characteristics of a debit card are:

• Debit cards are linked to a bank account.
• When you use a debit card, the amount of the purchase is automatically deducted from your bank account.
• When you use a debit card you cannot make a purchase for more than the balance in your bank account. (If you have US$400 in your account and want to make a US$500 purchase, you will be unable to do that with a debit card.)
• A debit card is an alternative to carrying cash.

Using a credit card is basically the same as a loan. The credit card company lends you money and charges you with fees and interest for borrowing money from them. The interest rate is usually determined from your credit history, which in essence is your past record of paying bills and handling credit.  The characteristics of a credit card are:

• A credit card is a loan from a bank or company.
• The lender pays for the purchase at the time of the purchase, and you must pay the lender back over time.
• The lender of your credit card charges you interest each month until the bill is paid in full.
• When you use a credit card, if you do not pay off the card in full each month you end up paying more than the amount for which you purchased the item because of interest and fees.
• Many credit cards offer bonuses like gifts and airline miles with each purchase. Educated credit card users who pay their bills in full each month can reduce the cost of other purchases by utilizing the bonus offers of credit card companies.
• Generally, credit cards offer greater protection in case of theft.

Credit cards are convenient; most businesses accept them and they’re easier to carry than cash. Credit cards can be a handy tool for your purchases as long as you pay the bills in full each month and avoid paying sizable interest fees.  However, when faced with an emotional or impulse purchase, pulling out the plastic can be far too easy to do.

If money is tight, it can be tempting to charge purchases to a credit card without considering the long-term cost. However, failing to manage spending responsibly can lead to financial strain.

The best way to manage a credit card is to be the credit card company’s worst customer. Credit card companies make their money when customers carry a balance from month to month. Plan and budget for your purchases properly so you can pay your credit card bills in full each month.  You may think it’s okay to pay just the minimum payment the credit card company calculates for you. That’s a common misunderstanding.  In fact, the minimum payment just represents the minimum amount that will keep your account active. It’s not enough to actually settle the debt in a reasonable time.

A small balance for a short period may not be a major issue, but consistently carrying debt can signal financial trouble.   If you start carrying balances longer than three months, that can be a good indicator that you’re developing a debt management problem.  If you can’t handle credit card debt, you need to literally “cut it out”— cut your plastic cards into pieces before you get into real trouble!  If you understand the dangers of using credit cards, you can learn how to use them to your advantage. For instance, traveling with a credit card is much safer than carrying a pocketful of cash. Credit cards allow you to rent cars easily and, in an emergency, a credit card can be a lifesaver.

You should be aware that as you build your credit status, credit card offers will begin flooding your mailbox. Credit card offers vary a lot, so read them carefully.  A ‘pre-approved’ credit card offer does not guarantee approval or favorable terms, so evaluate it carefully before applying.

Action Steps – Exercise 1 (10 minutes):

Tell athletes that they have a bank account with a debit card linked to that account.  Their account has a balance of $400.  Tell them that they also have a credit card with a $2,000 limit to use for purchases, with a 28% interest rate each month.

Given the above budget, have the athletes select what they want to purchase from the below choices and state how they will pay for their choices:

• Dinner for two                                 $450
• Brand new outfit                            $900
• Clubbing with friends                    $600
• Day trip with friends                     $600

• Lunch with friends $180

Ask 4 or 5 athletes to disclose their choices and the rationale for their choices.  Discuss whether they would consider purchasing something with credit and when it is appropriate to use credit for purchases.

Credit and credit history

Credit is a financial arrangement that allows you to borrow money or make a purchase now and pay for it later. In other words, you get money or stuff now, and you agree to pay it back later. When you buy or borrow on credit, you generally end up paying back more than the original amount in interest. How much interest you pay depends on your credit history (your record of paying bills and handling credit in the past). The percentage of the debt that you’re charged on top of the original amount is called interest and it is determined by the interest rate.  Learning how credit works is the key to building an outstanding credit history.

Credit refers to your ability to borrow money to pay for something. Such borrowed money also includes credit cards. Credit is used to buy cars, houses, and major appliances. Simply defined, good credit means you keep all your financial agreements in good faith; you honor your commitments and pay all your bills on time.

Your credit score is similar to a report card in school; it will open doors if it’s high and close them if it’s low.  If you don’t pay your bills on time, carry a high debt load, and have bills that you stopped paying, you will probably have a bad credit score.  Your credit history, or credit report, is a detailed account of all the information about your credit situation: how much you owe, how you pay your bills, and whether your payments have ever been delinquent. Credit bureaus track and analyze this information to calculate your credit score. Credit scores are expressed in numbers between 300 and 850, the higher your score, the better your credit. A strong credit score can help you secure loans, rent an apartment, improve job prospects, and qualify for lower interest rates, reducing overall borrowing costs.

Action Steps – Exercise 2 (10 minutes):

Athletes should form small groups.  Each group has $400 in cash and $1,000 in credit.  Have athletes look at the items in the grid and determine the best method for purchasing the items.  Choices are: save money over time; buy now with cash or buy now with credit.  Athletes should be able to justify their reasoning.

What is the best payment option?

Item	Cost	Save money over time	Buy now in cash	Buy now with credit
New computer	$800
New clothes for summer	$1,000
Birthday present for a friend	$300
Brakes for your car	$300
New TV	$2,000

 

Once the activity is complete, discuss the athletes’ choices.

• Ask each group to disclose their decisions on the three options above and to provide their reasoning for why it is the best option.
• Challenge their reasoning to determine if there are equally viable options.
• Encourage athletes to reflect upon their answers and add suggestions.
• Remind them that they want to carefully build their credit over time, so using credit for purchases on some level is okay.

Loans, risk and collateral

A loan is a sum of money that you borrow now and which you can repay in the future with interest.  A lender is a person or organization that lends money.  Sometimes the lender may ask you for collateral, so that they minimize risk. In the world of financial management, risk refers to the possibility of financial loss.  Collateral is something you pledge as security for a loan. If you do not repay the loan, the lender keeps your collateral. Lenders estimate the value of your collateral to reduce their risk. There are high-risk loans, and there are low-risk loans.

Lenders look at the overall picture to determine whether you qualify for a loan.  They want to see that you are not high-risk.  A high-risk applicant is one whose financial situation indicates that they would have trouble repaying a loan.

A borrower’s credit history is the primary factor lenders assess when determining loan eligibility. Maintaining a strong credit history increases the likelihood of loan approval and favorable terms.  Also, the debt-to-income ratio shows lenders you are able to afford monthly loan payments on the basis of your income.

Lenders also consider financial and employment stability when reviewing loan applications If a person moves a lot or has had a lot of different types of jobs within a short time, they appear to be unstable, and instability is considered high risk to lenders.

Tips on keeping your debt under control

In today’s world, debt has become a necessity in various stages of our lives. Every person, at some point in their life, wants to acquire something expensive, such as a car or a house. To finance these purchases, you need to take out a loan in most cases.

As an athlete, you have learned to have full control of your physical condition and your health. The same attitude and discipline should be applied to your financial life, especially to the management of your debt. If you dream of a successful financial future, you have to be able to manage your debt regardless of its size.

If your debt is small, you have to be sure it doesn’t get out of control by keeping up with your installments. On the other hand, if you have a large debt, your efforts towards paying that debt should be more rigorous. The following are four small but important tips for keeping your debt under control.

TIP #1 – Be Fully Aware – “The Debt List”

Knowing to whom and how much you owe is by far the most important part in the process. In order to have the situation under control create a “debt list” with your debts, which will include:

• the creditor
• the interest rate
• the due date
• the total amount of debt
• the amount of monthly installments
• the interest rate the loan carries

By making this list and grouping all of your debts together, you will be able to see the bigger picture and be fully aware of your complete debt position. You should make sure that you update your debt list regularly and keep tab of decreasing debt. Watching your debt go down will make you feel good and will give you the right perspective to continue paying your installments as planned.

TIP #2 – Be Consistent

Being prompt with your monthly installments, keeps the situation under control and yourself in check. On the other hand, late payments make the situation a bit chaotic and more difficult to handle; it becomes harder to repay the debt due to the fact that it accumulates, plus you are charged with overdue interest and other default charges.

 

What can you do? If you don’t want to create a standing order agreement with your banking institution, you can use a calendar system on your smart phone or your computer, record the installment due dates there and set an alert to remind you in advance when your payment is due. It is important if you miss an installment, not to wait until the next due date, but to proceed with the payment prior to the due date of the next installment.

TIP #3 – At Least, Pay the Minimum

In case of credit card debt, if you cannot afford to pay any additional amount on top of the minimum, make sure you will at least proceed with your minimum payment. This will not really help you in making actual progress towards repayment of your debt, but it will keep your account stable, and your debt will not grow further. Missing payments makes it increasingly difficult to catch up, potentially leading to loan default.

TIP #4 – Prioritize

Last but not least, you should prioritize your debts.  In other words, decide which debt is best to settle first. For instance, credit card debt has higher interest rates than other forms of debt. Therefore, the best you can do is to prioritize the repayment of any credit card debt you may have. Another option is to repay the debt with the lowest balance first. In order to avoid any extra costs, use your list to rank and prioritize your debts, in the best possible way so as to improve your financial position.

Keeping your debt under control is not impossible. All it needs is some careful planning and lots of discipline. You have to be careful and realize that defaulting on a debt will create a multitude of financial problems, both in the present and the future. Always make sure that you follow these tips when borrowing money and make sure that you get some credible financial planning advice before proceeding with any major financial decisions.

Real Life Examples The case of Ryan Broyles Ex NFL player Ryan Broyles had a terrible credit report when he entered the NFL draft. “I had late payments. Delinquent bills. Accounts in collections. It was bad.” Having read Robert Kiyosaki’s classic, “Rich Dad Poor Dad,” Broyles realized he needed to make some changes in his financial choices. After signing a $3.6 million rookie contract with the Lions, Broyles’ first decision was to pay off all his debt and arrange automatic payments for all of his bills. Since then, he has chosen to live on the very “human” amount of $60,000 per year and put the rest of his salary in savings and investments.

What happens if you are already in debt?

If you’re already in credit card debt, don’t panic. With a structured plan and commitment, you can regain control of your finances and work towards becoming debt-free.   You just need to get organized, follow the tips on keeping your debt under control, and commit in order to get out of the hole. The key to getting out of credit card debt is to prioritize the payments on the cards that have higher interest rates because they are the ones that can do the most damage. Put simply, the higher the interest rate, the more exponential damage they cause.  Once you have the rates each credit card company charges, you can proceed and organize a payment structure.

Pay the minimum payment on all credit cards except for the one with the highest interest rate where you should be paying much more in order to get the debt down as fast as possible.  Once that card is paid off, take the card with the next-highest rate and pay that one down. Alternatively, some people use the ‘debt snowball’ method—paying off the smallest balance first to build momentum and stay motivated. This approach prioritizes psychological motivation rather than interest rates, as eliminating smaller debts quickly can create a sense of progress. While the avalanche method (paying off high-interest debt first) saves more money in the long run, the debt snowball can be an effective alternative for those who need extra motivation. Following this payment structure will save you a lot in interest. Keep up that plan until all the cards are paid off.

Real Life Examples The case of Dorothy Hamill Olympic gold medal figure skater, breast cancer survivor and television personality Dorothy Hamill, at the height of her career in the 1980s, was reportedly raking in $1 million a year to skate in prime-time TV specials. However, after years of excessive spending, she had to file for bankruptcy in 1996 and faulted her husband for bad advice. To help pay off her debt Hamill toured the professional ice-skating circuit for several years, returned to television and published her autobiography which made the New York Times bestseller list. After she survived from breast cancer, she partnered with vitamin brand Nature’s Bounty to promote health and wellness. Through the above actions she managed to bring her finances back in order and her net worth now is $5 million.

Lending money to friends and family

It is a good thing to help out friends and family occasionally, not systematically. Asking for money is a decision that most people don’t take lightly. On the other hand, freeloaders, those who habitually ask for money do so without blinking an eye. You need to distinguish between the two and only help out those who fall within the first description.

Money shouldn’t but often does come between friends and family. As a general rule, you should only lend money to loved ones if you do not expect it back.  Many times, when friends need money, it is due to poor money management. Of course, emergencies do occur, and you may want to treat emergency situations differently. But if your friends are already unable to pay their bills, there’s a good chance they won’t be able to pay you either.

By the phrase “expecting back”, we do not mean that you should only give money to completely unreliable and untrustworthy friends and family, not by a long shot. What we mean is that you should only give out money that is not vital to your own needs and that in the event that you don’t get it back, you will still be able to make it through without them. In addition, when lending money, always have in the back of your mind that you might never see it back.

Real Life Examples The case of Antoine Walker Ex NBA star, Antoine Walker made more than $108 million during his 13-year NBA career. Walker had many questionable financial habits such as never wearing the same designer suit twice and lending financial support to 70 different friends and family members at the height of his spending. In 2009, he was arrested for writing over $1 million in bad checks to Las Vegas casinos. He filed for Chapter 7 bankruptcy in 2010, and has since teamed up with Morgan Stanley, to provide insight to financial advisers and clients.

 

There is ‘good’ debt and ‘bad’ debt

It is natural to get into some form of debt over the course of your lifetime. To build positive credit history, it is important that you strive to obtain debt that is good, rather than bad.

• Any debt, as a whole, is not good. However, some types of debt are considered good because of the value investment they
• Any type of debt — good or bad — increases your
• Acquiring debt on investments may help you get a higher return on your investment, meaning that you are able to make more money, but you also carry greater risk at the same time.

Good debt is typically used to acquire assets such as real estate, stocks, and businesses—investments that are expected to grow in value over time and contribute to wealth building. Bad debt, on the other hand, is used to finance depreciating or consumable items, such as vacations, clothing, and luxury goods. Regardless of whether debt is good or bad, it should always be managed responsibly. Even good debt can lead to financial trouble if it is not handled properly.

What types of debt are considered ‘Good debt’?

Investment Loans: For investment fanatics with high-level knowledge and a trusted team of advisors, investment loans may help gain leverage to earn higher return on investment.

Loans for Income-Producing Real Estate: This may be considered good debt because it produces revenue when the real estate is rented out and the resulting revenue can be used to repay the loan.  Therefore, you have the chance to repay the loan fully and be left with a money producing asset as well.  It is also possible that real estate may increase in value and thus when sold, it may bring in profit (re-sold at a higher price).

Business Loans: For entrepreneurs looking to expand and grow their businesses, taking on a business loan may help them do that. Such loans are provided by financial and non-financial institutions. You can look for one from a bank, but there are also several government bodies and institutions providing them, the European Union being a prime example.

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Education Loans: Athlete student loans and other investments that finance one’s education can be good debt, depending on how well you plan. Since individuals with degrees tend to make more over a lifetime, typically around US$500,000 (depending on location) more than those without higher education, this investment can be considered a good debt.

Home Loans for a property you live in: This may be considered good or bad debt, depending on your investment strategy. Purchasing a home may be a good investment because instead of paying rent, your payment goes towards the mortgage, and the house will end up being yours after you have repaid the loan.  However, it all depends on the location of the house, the type of mortgage and interest rate that you pay and the acquisition price of the house.  If you bought an expensive house when real estate was high, in a neighborhood with high real estate taxes, with little down payment and a high mortgage interest rate, while shortly after real estate prices are beginning to fall, then you are in for some real trouble!

What types of debt are considered ’Bad debt’?

Credit Card Debt: Essentially, any type of credit card debt is considered bad debt. Credit cards carry high interest rates and finance charges. Retail stores, banks, and other companies offer credit cards to consumers. These cards usually come with incentives to spend, such as points which can be redeemed in future purchases or travel miles to be used in future trips.  A credit card can be good debt if you pay the money you borrow, back in full each month; that helps increase your credit score and you incur no interest charges; plus, you may accumulate bonus points to be used towards future purchases.

Personal/Consumer Loans or Bank overdrafts are cash loan facilities from a bank. These types of loans are an unwise investment. Like credit cards, they carry high interest rates, and they usually cater for the acquisition of ‘toys’ plainly offering either relief from ‘pain’ or instant gratification.

Some bad debt may be unavoidable, but it is important to be in control of the situation and to have a reasonable strategy for its timely repayment.

Real Life Examples Former NFL quarterback Vince Young, filed for bankruptcy protection in 2014, after being riddled with financial difficulty emanating from two lawsuits. Young’s former financial adviser stated under oath that he arranged a high-interest, seven-figure loan for the athlete because he wanted to throw himself a… $300,000 birthday party even though his financial situation was strained at the time. NHL star, Jack Johnson earned more than $18 million during his nine-year long career. Johnson filed for bankruptcy in 2014 following a series of high-risk loans with high interest rates. Defaults on those loans proved catastrophic for Johnson.

What happens if you default on a loan?

You found yourself in a difficult financial situation and decided to take out a loan, fully intending to repay it. However, you’ve fallen behind on one or more payments, and catching up may seem impossible. Whether the loan was from a traditional bank or an alternative lender, the consequences of defaulting will likely be the same.

Each lender has their own guidelines and timelines for deeming a loan to be in default. Bank X might take action after one missed payment while Bank Y might wait for a few months before acting. Lenders will start making contact with a person who has let a loan go into default. As time goes by, communication will become more firm, aggressive and demanding. A strict lender like Bank X might contact the credit bureaus within 30 days of a missed payment, which will lead to the deterioration of the borrower’s credit score.

If we are talking about a secured loan that you had to commit some kind of collateral to get, that will mean that you will lose the collateral if you default. A simple example of that is a car loan. In the case of default on that loan then the car that you were loaned the funds to purchase will be repossessed and resold at an auction to recover the amount or at least part of the amount.  If the lender believes that the only way to recoup the loan and interest is to appropriate the collateral, they will.

In a case where no collateral was put up, then the loan is considered unsecured. If you fall behind on payments, the lender may start adding fees and driving up the interest rate. If, on the contrary, the lender’s criteria result in the debt to be in default, the loan may be sent to a collection agency which will try to secure loan payment. If the collection agency is unsuccessful, then the agency will turn to the law and the courts in order to pursue other solutions such as garnishing your salary or putting a lien on your home and other assets, which means that you are prohibited from selling, among other things!

As previously mentioned, after defaulting on a loan, your credit score will drop significantly, which will make it harder for you to secure credit in the future. In case you find a lender, who is willing to take a risk on you in spite of your credit score and credit history, the interest rate will probably be much higher than it would be for someone with better credit.

How to Recover from Loan Default

If you have defaulted on a loan, there are steps you can take to rebuild your financial health:

1. Communicate with Your Lender – Some lenders offer hardship programs or restructuring options.
2. Set Up a Repayment Plan – Even small payments can prevent further legal action.
3. Monitor Your Credit Report – Ensure the default is accurately reported and work on improving your credit score.
4. Avoid New Debt – Focus on clearing existing obligations before taking on new financial commitments.

Real Life Examples The case of Charlie Batch Ex NFL, Pittsburgh Steelers backup quarterback Charlie Batch was investing the real estate business. By 2011, it was revealed that Batch’s assets were worth around $2.3 million, but his debts had soared to nearly four times that amount. He was defaulting on loans and lost most of his properties because he couldn’t pay the mortgages. As a result, he had to file for bankruptcy, and he nearly even lost his Super Bowl rings he had won with the Steelers. He has managed since to recover and these days he’s got a job covering the Steelers’ games.

Action Steps – Exercise 3 (10 minutes):

Determine whether the following statements are True or False based on today’s lecture

• One of the advantages of keeping your money in the bank is the fact that it is safe. In other words, having your money in the bank rather than hiding it under your mattress is much safer.                ____
• The simplified business model of banks is that it brings savers and borrowers together. ____
• A checking account pays interest on the amount you deposit ____
• When you use a debit card, the amount of the purchase is automatically deducted from your bank account ____
• Credit history does not have any long-term implications for your borrowing capabilities. ____
• If you borrow to buy a house, then that is automatically considered a bad debt ____
• Any kind of debt, be that good or bad, increases your risk ____
• A loan can be summarized as a sum of money that you borrow now and which you can repay in the future with interest ____
• In the case of car loans, if you miss any payments and, in any way, default, the lender cannot repossess that vehicle and turn around and sell it to recover the amount of the loan ____
• A collection agency is essentially a debt collecting body that your lender may turn to if they don’t manage to get the money from you. ____

Answer Sheet:

• True
• True
• False- That would be a Savings account
• True
• False- It certainly can have
• False- That is not necessarily the case, other factors are in play as well
• True
• True
• False- That is something that the lender can do
• True

Lesson wrap-up

In today’s lesson, we explored key financial concepts related to banking, credit, and debt. We started by explaining how banks operate, their role in financial security, and how they generate profit. We also discussed the importance of choosing the right bank, comparing fees, and distinguishing between checking and savings accounts.

We then connected banking with credit, focusing on the differences between debit and credit cards. We explored how responsible credit use can help build a strong credit history, while mismanagement can lead to financial difficulties. Understanding credit scores and how lenders assess loan applications was also emphasized.

Next, we examined debt management, differentiating between good and bad debt. We discussed how some types of debt, such as investment and education loans, can contribute to financial growth, while high-interest consumer debt can cause financial strain. Strategies for managing debt, such as prioritizing payments and using structured repayment methods, were also covered.

Finally, we explored the consequences of loan default, including loss of collateral, legal action, and damage to credit scores. We also discussed ways to recover from default, such as negotiating with lenders, setting up repayment plans, and improving financial discipline.

At this point, we will wrap-up today’s lesson.  First, we will go over the learning objectives of today’s lesson to see whether they have been achieved and then, we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lecture, and we would love to hear how the concepts we discussed today, relate to you and your greater life plan.