Understanding Credit & Using Credit Cards Personal Finance – Raymond High School

Bell Ringer: Key Terms Graphic Organizer  Create a graphic organizer for the 10 Key Terms on Slides 3 and 4.

Key Terms  Credit – receiving goods/services now and paying later.  Debtor – person who borrows money.  Creditor – people who loan money.  Finance Charge – Cost of borrowing money includes interest plus other fees added to the original loan amount.  Annual Percentage Rate (APR) – The cost of credit expressed as a yearly interest rate.  Credit – receiving goods/services now and paying later.  Debtor – person who borrows money.  Creditor – people who loan money.  Finance Charge – Cost of borrowing money includes interest plus other fees added to the original loan amount.  Annual Percentage Rate (APR) – The cost of credit expressed as a yearly interest rate.

Key Terms  Opportunity Cost – the cost of giving up one thing for another.  Minimum payment – the smallest amount that must be paid on a loan/credit card each month.  Opportunity Cost – the cost of giving up one thing for another.  Minimum payment – the smallest amount that must be paid on a loan/credit card each month.

Key Terms  Collateral – Property of value that a borrower promises to cover the amount of the loan.  Secured Credit – Credit that requires the borrower to put up collateral to cover the amount of the loan. Ex. House or Car  Unsecured Credit – Credit given with a promise to repay in the future. Ex. Credit Cards.  Credit limit – the maximum dollar amount that can be borrowed.  Usury – Charging any amount above a legally set amount.  Collateral – Property of value that a borrower promises to cover the amount of the loan.  Secured Credit – Credit that requires the borrower to put up collateral to cover the amount of the loan. Ex. House or Car  Unsecured Credit – Credit given with a promise to repay in the future. Ex. Credit Cards.  Credit limit – the maximum dollar amount that can be borrowed.  Usury – Charging any amount above a legally set amount.

What is Credit?  Credit is a promise to pay later for goods or services purchased today. It is an amount of financial trust extended to you by a lender based on your ability and willingness to repay. People find obtaining credit easy but the continuing monthly repayment of principal and interest difficult. Credit should be used carefully within the limits of your resources.

Advantages of Credit  Immediate Possession  Flexibility  Safety  Emergency Funds  Immediate Possession  Flexibility  Safety  Emergency Funds

Advantage – Immediate Possession  Credit enables you to enjoy goods and services immediately – when funds are not available.

Advantage – Flexibility  Credit allows flexibility to take advantage of sale items or bargains – when they don’t have funds to purchase.

Advantage – Safety  Credit cards provide a safe and convenient means for people to make purchases while traveling or shopping without carrying large amounts of cash.

Advantage – Emergency Funds  Credit cards provide a safe and convenient means for people to carry their purchasing power while traveling or shopping without carrying large amounts of cash.

Disadvantages of Credit  Overspending  Higher Cost  Impulse Buying  Overspending  Higher Cost  Impulse Buying

Disadvantage – Overspending  Credit cards often make it too easy to spend money – that you don’t have. As debt increases, it is often difficult to make the required monthly payments.

Disadvantage – Higher Cost  Buying on credit costs more than paying with cash. Interest and other charges are added to the cost of goods sold on credit. Therefore, the final cost will be higher than the original cost of the item.

Disadvantage – Impulse Buying  Buying on credit costs more than paying with cash. Interest and other charges are added to the cost of goods sold on credit. Therefore, the final cost will be higher than the original cost of the item.m

Who uses credit?  Most Americans use credit in one form or another.  About 80% of all adults have a credit card.  Most people buy their homes with a mortgage.  About 60% of college students use loans to pay for tuition and expenses.  Most Americans use credit in one form or another.  About 80% of all adults have a credit card.  Most people buy their homes with a mortgage.  About 60% of college students use loans to pay for tuition and expenses.

When should you use credit?  When you are deciding to use credit, there are some questions that you should ask yourself before you proceed:  Do I really need this item or can I wait?  What is the least amount I have to borrow?  How much is the interest rate and are there other fees?  Will I be able to afford the monthly payment?  What happens if I do not make payments on time?  What is the total cost of buying on credit and it is worth it?  What will I have to give up to pay for it (opportunity cost)?  When you are deciding to use credit, there are some questions that you should ask yourself before you proceed:  Do I really need this item or can I wait?  What is the least amount I have to borrow?  How much is the interest rate and are there other fees?  Will I be able to afford the monthly payment?  What happens if I do not make payments on time?  What is the total cost of buying on credit and it is worth it?  What will I have to give up to pay for it (opportunity cost)?

Use Caution with Credit!  Credit is not free. Borrowing money comes with a cost, known as INTEREST.  Interest is added to the amount borrowed (Principal)  You will spend more money over time for the item  It is better to wait and pay CASH for the item, if possible.  Credit is not free. Borrowing money comes with a cost, known as INTEREST.  Interest is added to the amount borrowed (Principal)  You will spend more money over time for the item  It is better to wait and pay CASH for the item, if possible.

3 Cs of Credit  Character  Is the borrower a reliable person?  Does the borrower have a good credit rating in repaying other loans and bills?  Capacity  Does the borrower have a steady income?  Collateral  Does the borrower earn enough money to repay the loan?  Character  Is the borrower a reliable person?  Does the borrower have a good credit rating in repaying other loans and bills?  Capacity  Does the borrower have a steady income?  Collateral  Does the borrower earn enough money to repay the loan?

Fair Debt Collections Practices Act The basic provisions of the law include:  The right of consumers to sue debt collectors individually or in class actions for violations of the law.  Protection against harassment, including excessive phone calls, abusive language and threats of violence, harm or arrest.  Prohibiting disclosure of the existence of debts to others who are not authorized to know about the debts.  Banning contact with consumers at inconvenient times, such as before 8 a.m. and after 9 p.m. The basic provisions of the law include:  The right of consumers to sue debt collectors individually or in class actions for violations of the law.  Protection against harassment, including excessive phone calls, abusive language and threats of violence, harm or arrest.  Prohibiting disclosure of the existence of debts to others who are not authorized to know about the debts.  Banning contact with consumers at inconvenient times, such as before 8 a.m. and after 9 p.m. Source:

Bell Ringer Activity: Use of Credit  Make a list of products or services that you, friends or family members have bought on credit.  What are the advantages and disadvantages of using credit to pay for:  College tuition?  Car to get to school/work?  Family Vacation?  New Outfit for Prom or Formal Event?  Write 3 rules for acceptable use of credit and 3 rules for unacceptable use of credit.  Make a list of products or services that you, friends or family members have bought on credit.  What are the advantages and disadvantages of using credit to pay for:  College tuition?  Car to get to school/work?  Family Vacation?  New Outfit for Prom or Formal Event?  Write 3 rules for acceptable use of credit and 3 rules for unacceptable use of credit. Source:

Activity: The Cost of Credit  Students will complete “The Cost of Credit” Handout.

The Cost of Credit  Scenario: John, Amy and Tyler each want to purchase a Playstation 4 that costs $500 and finance it with credit. Using the information below, how much would the game player cost including finance charges?  Calculate Total Spent and Cost of Credit for each one:  John paid $45.00 a month for 12 months.  Amy paid $12.00 a week for one year.  Tyler paid $25.00 a month for 2 years.  Which person will pay the most to borrow $500? Who will pay the least?  Scenario: John, Amy and Tyler each want to purchase a Playstation 4 that costs $500 and finance it with credit. Using the information below, how much would the game player cost including finance charges?  Calculate Total Spent and Cost of Credit for each one:  John paid $45.00 a month for 12 months.  Amy paid $12.00 a week for one year.  Tyler paid $25.00 a month for 2 years.  Which person will pay the most to borrow $500? Who will pay the least?

The Cost of Credit – Part 2  Scenario: You want to borrow $1,000.  Which will cost more:  Paying $92 a month for 12 months.  Pay $36 a month until the loan is paid in full.  What conclusions can you make  The length of a loan?  The size of the payment?  The total amount a person pays for a loan?  Scenario: You want to borrow $1,000.  Which will cost more:  Paying $92 a month for 12 months.  Pay $36 a month until the loan is paid in full.  What conclusions can you make  The length of a loan?  The size of the payment?  The total amount a person pays for a loan?

Day 2: Paying off Debt  Objective: Students will be able to discuss the cost of credit and to understand the consequences of not making monthly payments.  Essential Questions:  What are the requirements for credit?  What are the consequences of not paying off the loans?  Open lesson with review of Cost of Credit.  Pass out “Paying off debt” handout.  Objective: Students will be able to discuss the cost of credit and to understand the consequences of not making monthly payments.  Essential Questions:  What are the requirements for credit?  What are the consequences of not paying off the loans?  Open lesson with review of Cost of Credit.  Pass out “Paying off debt” handout.

Activity: Brochure  Students will create a brochure on credit.  Each brochure must include information on:  Define credit  Advantages and Disadvantages of Credit  Questions one should ask themselves before borrowing money.  Cost of credit  Methods that can be used to collect on a “bad debt”  Rubric  Students will create a brochure on credit.  Each brochure must include information on:  Define credit  Advantages and Disadvantages of Credit  Questions one should ask themselves before borrowing money.  Cost of credit  Methods that can be used to collect on a “bad debt”  Rubric