lesson seven understanding credit teacher s guide

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1 lesson seven understanding credit teacher s guide

2 understanding credit web sites web sites for consumer credit The Internet is probably the most extensive and dynamic source of information in our society. The following Web sites can provide students and others with current information, assistance, and data related to this lesson. Web addresses ending in.com are commercial sites;.org are non-profit sites; and.gov are government sites. CardTrak: Comparison of Costs & Features Credit Law Information Credit Report Information Current Loan & Credit Card Rates Debt Counselors of America National Foundation for Consumer Credit RAM Research Springboard Note: Addresses and content of Web sites change, and new sites are created daily. Use search engines such as Yahoo, Google, AltaVista, Infoseek, Lycos, or Hotbot, to update and locate Web sites related to this topic. understanding credit teacher s guide

3 understanding credit lesson outline lesson 7 overview Buy now, pay later. In today s world, using credit is part of our everyday lives. From making online purchases to reserving a concert ticket, credit cards are a necessary convenience. Using credit wisely is critical to building a solid credit history and maintaining sound finances. Lesson 7 begins by defining credit and its advantages and disadvantages. Next, the lesson teaches students what it means to be credit-worthy and how to establish a good credit record. Using provided guidelines, students practice making calculations to determine safe personal debt loads. High school students may already be looking forward to owning their first credit card. This lesson lists the various types of credit cards as well as costs and features of different cards. Finally, it gives students an opportunity to analyze a credit card statement. Suggested teaching strategies, teaching notes, activities, overheads, and short quizzes are linked to student objectives. Additional ideas to help students practice and generalize skills related to understanding credit in real life situations are included at the end of the lesson. lesson 7 goals: The student will increase his/her awareness and understanding of what credit is, how to establish it, and the responsibilities of using credit. lesson 7 objectives: The student will 7-1 recognize advantages, disadvantages, and responsibilities of using credit. 7-2 identify ways to establish credit history. 7-3 use math skills to determine a safe debt load. 7-4 compare features and costs of various credit cards. 7-5 identify critical actions to take when in financial trouble. understanding credit teacher s guide

4 understanding credit teaching notes 7-1 The student will recognize advantages, disadvantages, and responsibilities of using credit. should you use credit? how do you use credit wisely? discussion Define credit. Explain to students that they probably use credit, even if they don t own a credit card (ex. borrowing lunch money from a friend). Credit may be in the form of credit cards, store credits, installment plans, car loans, or home mortgages. Outline and discuss the advantages and disadvantages of using credit. (overheads 7-1a and 7-1b) Stress that because using credit is so convenient, it is easy to overspend. Talk about impulse buying. Ask students if they ever made a quick purchase that they later regretted. Remind students that they must always repay what they borrow. Explain that making small monthly payments on a credit card means it will take longer for them to repay debts. They will pay increased interest costs as well. Outline and discuss the responsibilities of using credit. (overhead 7-1c) overhead 7-1a: advantages overhead 7-1b: disadvantages overhead 7-1c: your responsibilities terms you should know credit borrowing on the promise to repay at a later date. Credit is a loan. A credit customer has time to pay the money back, usually for a fee or with interest. debt money that is owed to a lender. impulse buying purchasing items in an unplanned, spur-of-the-moment manner. advantages of credit Buying needed or wanted goods and services using anticipated future income Not having to carry cash Having a record of purchases More convenient than writing checks for each purchase Consolidating bills overhead 7-1a: advantages understanding credit teacher s guide 7-1

5 understanding credit teaching notes disadvantages of credit Interest payments Credit cards can be lost or stolen Membership fees Increased chance of overspending Financial troubles if card is not managed properly your responsibilities 1. Not to run up more debt than you can comfortably repay 2. To read and understand the credit contract 3. To pay debts promptly 4. To notify the credit company immediately if you cannot meet payments 5. To notify the creditor immediately if your credit card is lost or stolen 6. To never give your card number over the phone unless you have initiated the call or you are certain of the caller s identity overhead 7-1b: disadvantages overhead 7-1c: your responsibilities lesson 7 quiz: credit knowledge quiz 7-1 quiz key understanding credit teacher s guide 7-1

6 advantages Using credit means you can buy items now. you don t have to carry cash. you have a record of your purchases. convenience. your bills are combined into one payment. understanding credit overhead 7-1a

7 disadvantages Using credit also means you pay more for items (interest payments). your credit cards may be lost or stolen. possible added fees. you may do more impulse buying. it s easy to lose track of how much you spend. possible financial problems. understanding credit overhead 7-1b

8 your responsibilities Borrow only what you can repay. Read and understand the credit contract. Pay debts promptly. Notify the credit company immediately if you cannot meet payments. Report lost or stolen credit cards immediately. Never give your card number over the phone unless you placed the call. understanding credit overhead 7-1c

9 name date lesson 7 quiz: credit knowledge choose the correct answer. 1. A common advantage of using credit is: a. less impulse buying. b. lower cost for items purchased. c. ability to obtain items now. d. lower chance of overspending. 2. You may pay more for an item bought on credit because of: a. interest payments. b. sale prices. c. debts. d. financial problems. 3. A common disadvantage of using credit is: a. having to carry extra cash. b. having a record of your purchases. c. spending more than you should. d. buying now, paying later. 4. If you use credit, you should: a. run up as much debt as you can. b. notify the credit company immediately if your credit card is lost. c. give your credit card number to anyone who asks for it. d. borrow more than you can repay. 5. If you use credit, you should not: a. give your card number over the phone. b. pay debts promptly. c. read and understand the credit contract. d. tell anyone if your credit card is lost. understanding credit quiz 7-1

10 name date lesson 7 quiz: credit knowledge choose the correct answer. 1. A common advantage of using credit is: a. less impulse buying. b. lower cost for items purchased. c. ability to obtain items now. * d. lower chance of overspending. 2. You may pay more for an item bought on credit because of: a. interest payments. * b. sale prices. c. debts. d. financial problems. 3. A common disadvantage of using credit is: a. having to carry extra cash. b. having a record of your purchases. c. spending more than you should. * d. buying now, paying later. 4. If you use credit, you should: a. run up as much debt as you can. b. notify the credit company immediately if your credit card is lost. * c. give your credit card number to anyone who asks for it. d. borrow more than you can repay. 5. If you use credit, you should not: a. give your card number over the phone. * b. pay debts promptly. c. read and understand the credit contract. d. tell anyone if your credit card is lost. understanding credit quiz key 7-1

11 understanding credit teaching notes 7-2 The student will identify ways to establish credit history. how do you establish a credit history? discussion Explain that banks and businesses give credit only if they expect that their customers will pay off their loans. Define the terms associated with credit worthiness. Talk about the Three C s that determine the likelihood that an individual will pay back a loan. (overheads 7-2a, 7-2b and 7-2c) Stress that for students to obtain credit for the first time, they must demonstrate that they are responsible individuals. Discuss the ways that students can begin to build a credit history. (overhead 7-2d) Talk to students about credit bureaus and their role in documenting past uses and misuses of credit. Stress the importance of maintaining a clean credit history in order for them to meet future financial goals. As a class, have students examine a sample credit report and identify categories of information the document covers: employment data, payment history, inquiries and public record information. (overhead 7-2e) Using the sample document, ask students to determine how many times the customer made late payments or filed for bankruptcy. Explain that potential creditors look for the three C s, based on an applicant s work history and how well he/she managed credit in the past. Tell students that they have a legal right to check their credit ratings. They can obtain their own credit reports for a small fee. If they find a mistake in their credit histories, they can contact the credit bureau to have the incorrect information changed. overheads 7-2a, 7-2b & 7-2c: the three C s overhead 7-2d: building a credit history overhead 7-2e: a credit report terms you should know capital funds invested in a bank, property, or business. capacity the borrower s ability to pay, based on income. understanding credit teacher s guide 7-2

12 understanding credit teaching notes asset anything owned that has monetary value. collateral anything that a borrower promises to give a lender if the borrower does not repay a loan. dependents people who rely upon a wage earner s income for financial support (the wage earner s spouse and/or children). credit worthiness 1. Character 2. Capital 3. Capacity overheads 7-2a, 7-2b & 7-2c: the three C s credit bureau An agency that checks credit information and keeps a complete file on people who apply for and use credit. A credit bureau furnishes credit reports on request. Consumers have a right to inspect their own credit report. credit rating A financial institution s evaluation of whether a person is suitable to receive credit. Credit ratings are based on an individual s character, capacity to repay, and capital. a credit report Identification and employment data Payment history includes timeliness of payments Inquiries companies that have requested your credit file Public record information liens, bankruptcy, etc. overhead 7-2e: a credit report lesson 7 quiz: establishing a credit history quiz 7-2 quiz key understanding credit teacher s guide 7-2

13 the three C s 1. Character Will you repay the debt? Are you honest and reliable? Have you used credit before? Do you pay your bills on time? Do you have a good credit report? Do you have character references? How long have you lived at your present address? How long have you been at your present job? understanding credit overhead 7-2a

14 the three C s 2. Capital What if you don t repay the debt? Do you have any valuable assets? Do you own property? Do you have a savings account? Do you have investments? understanding credit overhead 7-2b

15 the three C s 3. Capacity Can you repay the debt? Do you earn enough income to support your credit use? Do you have a steady job? What is your salary? How many other debts do you have? What are your current living expenses? What are your current debts? How many dependents do you have? understanding credit overhead 7-2c

16 building a credit history Establish a steady work record. Pay all bills on time. Open a checking account. Don t bounce checks. Open a savings account. Make regular deposits. Apply for a local store credit card. Make regular payments. Get a co-signer on a loan. Pay off the loan as agreed. understanding credit overhead 7-2d

17 a credit report understanding credit overhead 7-2e

18 name date lesson 7 quiz: establishing a credit history choose the correct answer. 1. When you pay all your bills on time, you are showing good: a. character. b. capital. c. collateral. d. capacity. 2. A steady job and regular income is referred to as: a. character. b. capital. c. collateral. d. capacity. 3. Which one of these would not be used to repay a debt? a. income b. owned property c. collateral d. character references Put a check beside the four best ways to build a credit history: always pay in cash. establish a steady work record. pay all your bills on time. bounce checks in your checking account. use your savings to buy items instead of using credit. make regular payments in a savings account. apply for a local store credit card and pay regularly. get a co-signer to pay back your loans. understanding credit quiz 7-2

19 name date lesson 7 quiz: establishing a credit history choose the correct answer. 1. When you pay all your bills on time, you are showing good: a. character. * b. capital. c. collateral. d. capacity. 2. A steady job and regular income is referred to as: a. character. b. capital. c. collateral. d. capacity. * 3. Which one of these would not be used to repay a debt? a. income b. owned property c. collateral d. character references * Put a check beside the four best ways to build a credit history: always pay in cash. establish a steady work record. * pay all your bills on time. * bounce checks in your checking account. use your savings to buy items instead of using credit. make regular payments in a savings account. * apply for a local store credit card and pay regularly. * get a co-signer to pay back your loans. understanding credit quiz key 7-2

20 understanding credit teaching notes 7-3 The student will use math skills to determine a safe debt load. what is a safe debt load? Define the term debt load. Use overhead 7-3a to illustrate that debt is like carrying a load or weight. Discuss the idea that determining how much is safe to carry is based on the individual. Explain the importance of determining a personal safe debt load, based on income and expenditures, before borrowing money. Demonstrate use of the rule using overhead 7-3b. Review the definition of net income. Have students determine safe debt loads for several consumers based on various incomes and fixed expenses. (activity 7-3a) If necessary, complete the questions as a group, writing their calculations on the chalkboard or overhead. Review the formula frequently. overhead 7-3b: how much can you afford? student activity 7-3: how much is a safe debt load? terms you should know safe debt load the amount of credit that a person can afford and still stay within a safe budget. how much can you afford? The rule net income the amount of pay available to spend after deductions are taken. understanding credit teacher s guide 7-3

21 what is a debt load? understanding credit overhead 7-3a

22 how much can you afford? How much can you afford to borrow? (the rule) 20: Never borrow more than 20% of your yearly net income. Example: You earn $400 a month after taxes. Your yearly net income is: $400 x 12 months = $4,800 20% of your yearly net income is: $4,800 x 20% = $960 You should have less than $960 of debt! 10: Your monthly payments should be less than 10% of your monthly net income. Example: You earn $400 a month after taxes. 10% of your monthly net income is: $400 x 10% = $40 You should pay less than $40 per month for all debts! understanding credit overhead 7-3b

23 name: date: how much is a safe debt load? Directions Read each of the following scenarios. How much debt can each person safely carry? 1. Jessie has a monthly net income of $800. He pays $150 a month for rent. He pays $80 each month for a credit card bill. Now, he wants to buy a car. How much does Jessie have left in his budget for a car payment? (Hint: His monthly payment should be less than 10% of his monthly net income.) Answer: Work: 2. Carla has a monthly net income of $450. She wants to buy a new bike with a credit card. What is the largest monthly payment she can make? (Hint: Her monthly payments should be less than 10% of her monthly net income.) Answer: Work: understanding credit activity 7-3

24 name: date: how much is a safe debt load? (cont.) 3. David has a monthly net income of $1,360. He has a monthly rent payment of $450. He is paying $116 a month for a student loan. David would like to buy a new television set using a credit card. How much can David safely pay each month for his debts? (Hint: His monthly payments should be less than 10% of his monthly net income.) Answer: Work: 4. Marsha and Michael have a combined monthly net income of $3,500. They pay $675 a month for rent. They have an outstanding student loan balance of $6,000. They owe a balance of $1,000 on a new stereo. How much more debt can they safely take on? (Hint: They should not borrow more than 20% of their yearly net income.) Answer: Work: 5. Juanita has a monthly net income of $2,500. She pays $500 a month for rent. She pays a car insurance premium of $68. She also makes a car payment of $167. Are these payments within Juanita s safe debt load? (Hint: Her monthly payments should be less than 10% of her monthly net income.) Answer: Work: understanding credit activity 7-3

25 name: date: how much is a safe debt load? Directions Read each of the following scenarios. How much debt can each person safely carry? 1. Jessie has a monthly net income of $800. He pays $150 a month for rent. He pays $80 each month for a credit card bill. Now, he wants to buy a car. How much does Jessie have left in his budget for a car payment? (Hint: His monthly payment should be less than 10% of his monthly net income.) Answer: $0 Work: $800 x 10% = $80 $80 - $80 = $0 2. Carla has a monthly net income of $450. She wants to buy a new bike with a credit card. What is the largest monthly payment she can make? (Hint: Her monthly payments should be less than 10% of her monthly net income.) Answer: $45.00 Work: $450 x 10% = $45 understanding credit activity key 7-3

26 name: date: how much is a safe debt load? (cont.) David has a monthly net income of $1,360. He has a monthly rent payment of $450. He is paying $116 a month for a student loan. David would like to buy a new television set using a credit card. How much can David safely pay each month for his debts? (Hint: His monthly payments should be less than 10% of his monthly net income.) Answer: $20.00 Work: $1,360 x 10% = $136 $136 - $116 = $120 Marsha and Michael have a combined monthly net income of $3,500. They pay $675 a month for rent. They have an outstanding student loan balance of $6,000. They owe a balance of $1,000 on a new stereo. How much more debt can they safely take on? (Hint: They should not borrow more than 20% of their yearly net income.) Answer: $ Work: $3,500 x 12 = $42,000 $42,000 x 20% = $8,400 $ $6,000 - $1,000 = $1,400 Juanita has a monthly net income of $2,500. She pays $500 a month for rent. She pays a car insurance premium of $68. She also makes a car payment of $167. Are these payments within Juanita s safe debt load? (Hint: Her monthly payments should be less than 10% of her monthly net income.) Answer: Yes Work: $2,500 x 10% = $250 $250 - $167 - $68 = $15 understanding credit activity key 7-3

27 understanding credit teaching notes 7-4 The student will compare features and costs of various credit cards. what features do credit cards offer? how do you read a credit card statement? Begin by asking students if they know what a credit card is. Explain that each card carries a line of credit. Stress that credit cards usually have high interest rates, so it s best for customers to pay bills in full each month to avoid interest charges. Remind students that finance charges are calculated based upon three factors: interest rate, amount of money borrowed, and the length of time before the money will be paid off. Have students name as many credit cards as they can and list them on the board. Then, list other sources of credit cards (ex. banks, businesses, phone companies, stores). Discuss how costs and features vary between credit cards. It is a wise idea to shop around and compare credit cards. (overhead 7-4a) Discuss questions that consumers should ask before selecting a credit card or using credit. (overhead 7-4b) Collect samples of mailed promotional offers from credit card companies to show students. Ask students if they have seen or received similar credit card solicitations. Explain that credit companies target teenagers as a growing group of consumers with money to spend. Interest rates and fees may be higher and credit limits lower for cards geared for teenagers than they are for other cards. Have students analyze the solicitations. (overhead 7-4b) Can they identify promises used to tempt consumers? Can students identify advertisements that specifically target teenagers? Which claims appeal to consumers with poor credit history? Remind students to beware of promotions that promise credit cards regardless of previous credit history. Emphasize that as appealing as these offers sound, students need to comparison shop before signing up for the first low-rate offer they receive. Have students examine the fine print of a sample discussion overhead 7-4a: comparing credit cards overhead 7-4b: are you thinking about a credit card? understanding credit teacher s guide 7-4

28 understanding credit teaching notes promotion for a complete description of the terms of the agreement (ex. annual fees, penalties, how long the low introductory rate lasts, etc). Discuss how to distinguish promotional materials from a credit card bill. (overhead 7-4b) Remind students to dispose of unwanted promotional materials carefully: always cut up credit cards and tear up pre-approved credit applications or papers containing personal information. Explain that it is easiest for students to obtain their first credit from a department store. Advise them that stores usually require parents to cosign for their teenagers credit cards. Divide students into teams. Guide teams in using the Internet and credit application forms to compare features of two credit cards: a major credit card and a department store credit card. Have students research answers to specific questions and enter the information onto a chart. (activity 7-4a) Ask the teams to report their findings to the class. Guide students in examining a credit card statement to determine what information it contains. (overhead 7-4e) Explain that credit card customers can catch unauthorized charges and/or billing errors by checking their statements. Tell students they should check their statements carefully each month. Tell them that it sometimes pays to know how to read a statement! Using the credit card statement, have students answer questions related to it. (activity 7-4b) Provide students with additional practice analyzing credit card statements, if needed, by making entries on a credit card statement template and asking students related questions. (activity 7-4c) student activity 7-4a: shopping for credit overhead 7-4e: reading a credit card statement student activity 7-4b the credit card statement student activity 7-4c credit card promotions terms you should know credit card A plastic card that gives access to a line of credit. Users are limited in how much they can charge. They are not required to repay the full amount each month. Interest is added to the balance with only a minimum paywww.practicalmoneyskills.com understanding credit teacher s guide 7-4

29 understanding credit teaching notes ment due. line of credit An authorized amount of credit given to an individual, business, or institution. APR (annual percentage rate) The finance charge a borrower pays on a credit card. installment credit A plan in which the borrower makes regular, partial payments of a debt. grace period The length of time a customer has to make payment on a credit card account before interest is charged. minimum payment The smallest amount that can be paid on a credit card account without interest being charged. types of credit card accounts 1. Bank card Examples (Visa, MasterCard) 2. Store card or priority card Examples (Sears, Home Depot) 3. Travel and entertainment cards Examples (American Express, Diner s Club) shopping for a credit card 1. How will you use your credit card? pay bill in full each month and avoid interest charges repay bill over time and pay interest charges 2. What are some of the costs and features of credit cards? Type of account How widely card is accepted Annual fee Annual Percentage Rate (APR) Grace period Credit limit Minimum monthly payment Late payment fee Other features 3. How do I compare the costs and features of credit cards? the credit card statement: student activity 7-4a: shopping for credit A credit card statement provides information such as how understanding credit teacher s guide 7-4

30 understanding credit teaching notes and when you ve used your credit card, how much you owe, how much interest you re paying to use the card, how much your minimum payment is, and how much credit you have left. Knowing how to read your credit card statement can also help you catch unauthorized charges and/or billing errors. lesson 7 quiz: credit card features and costs quiz 7-4 quiz key understanding credit teacher s guide 7-4

31 comparing credit cards Type of account/ Name of card Acceptability Annual fee APR Grace period Credit limit Minimum monthly payment Late payment fee Other features understanding credit overhead 7-4a

32 are you thinking about a credit card? 1. Shop around Look at different sources. 2. Read and understand the contract Read the contract carefully. Take your time before you sign. Get a copy of your signed contract. 3. Know your cost Figure out total price. Make the largest payments possible. Know the charges for missed payments. understanding credit overhead 7-4b

33 credit card promotions Congratulations!! You have been selected to receive one of our $5000 credit cards 5% Cash Back on Purchases! No Annual Fee! 0% Introductory APR! BAD CREDIT? IT S OKAY... YOU RE APPROVED! School is tough enough but choosing the best credit card to get you through is a breeze YOU CAN T BE TURNED DOWN! Earn points towards free merchandise! GUARANTEED INSTANT APPROVAL No Credit? It s Okay... You re Approved! This cool card comes loaded with a great low interest rate, photocard ID, and super discounts on stuff you really want. NO Co-Signer and NO Minimum Credit Required Money-Saving Student Special Offers There are no job or credit checks. You can t afford to pass this up! understanding credit overhead 7-4c

34 keep it or discard it? understanding credit overhead 7-4d

35 reading a credit card statement understanding credit overhead 7-4e

36 name: date: shopping for credit Directions Compare the costs and features of two different credit cards on the chart below. CARD ONE: a major credit card CARD TWO: a credit card from a department store 1. Card name 2. Locations accepted 3. Annual fee 4. APR 5. Grace period 6. Minimum payment 7. Late payment fee 8. Other features CARD ONE CARD TWO 1. Card name What is the charge or credit card name? 2. Locations Where are the cards accepted? 3. Annual fee Do the cards have an annual fee? 4. APR How much are the annual percentage rates? 5. Grace period What is the grace period for paying? 6. Minimum monthly payment What is the smallest payment you can make each month? How is it calculated? 7. Late payment fee Is there a charge for late payments? How much is it? 8. Other features Do the cards offer any other special features? understanding credit activity 7-4a

37 name: date: the credit card statement Directions Use the credit card statement on the following page to answer these questions: 1. What is the Annual Percentage Rate (APR)? 2. What is the new balance? 3. What was the previous balance? 4. How many charges were made during the billing cycle? 5. How many credits and payments were made during the billing cycle? 6. Were there any charges for late payments? 7. What is the total amount of the credit line? 8. What is the total amount of charges made during the current billing period? 9. Was there a finance charge for the current billing cycle? 10. What is the account number on the statement? understanding credit activity 7-4b

38 name: date: the credit card statement Your First Bank CREDIT CARD STATEMENT SEND PAYMENT TO Box 1234 Anytown, USA ACCOUNT NUMBER NAME John Doe STATEMENT DATE 2/13/01 PAYMENT DUE DATE 3/09/01 CREDIT LINE $ CREDIT AVAILABLE $ NEW BALANCE $ MINIMUM PAYMENT DUE $20.00 REFERENCE SOLD POSTED ACTIVITY SINCE LAST STATEMENT AMOUNT 483GE7382 1/25 PAYMENT THANK YOU F349ER3 1/12 1/15 RECORD RECYCLER ANYTOWN USA DIS2 1/13 1/15 BEEFORAMA REST ANYTOWN USA NX34FJD32 1/18 1/18 GREAT EXPECTORATIONS BIG CITY USA RT3293A 1/20 1/21 DINO-GEL PETROLEUM ANYTOWN USA DWS321 2/09 2/09 SHIRTS 'N SUCH TINYVILLE USA Previous Balance (+) Current Amount Due Purchases (+) Amount Past Due Cash Advances (+) Amount Over Credit Line Payments (-) Minimum Payment Due Credits (-) FINANCE CHARGES (+) Late Charges (+) NEW BALANCE (=) FINANCE CHARGE SUMMARY PURCHASES ADVANCES For Customer Service Call: Periodic Rate 1.65% 0.54% XXX-XXXX Annual Percentage Rate 19.80% 6.48% For Lost or Stolen Card, Call: XXX-XXXX 24-Hour Telephone Numbers Please make check or money order payable to Your First Bank. Include account number on front. understanding credit activity 7-4b cont.

39 name: date: the credit card statement Directions Use the credit card statement on the following page to answer these questions: 1. What is the Annual Percentage Rate (APR)? 19.8% 2. What is the new balance? $ What was the previous balance? $ How many charges were made during the billing cycle? Five 5. How many credits and payments were made during the billing cycle? One 6. Were there any charges for late payments? No 7. What is the total amount of the credit line? $1, What is the total amount of charges made during the current billing period? $ Was there a finance charge for the current billing cycle? No 10. What is the account number on the statement? understanding credit activity key 7-4b

40 name: date: credit card statement template Your First Bank CREDIT CARD STATEMENT SEND PAYMENT TO Box 1234 Anytown, USA ACCOUNT NUMBER NAME STATEMENT DATE PAYMENT DUE DATE CREDIT LINE CREDIT AVAILABLE NEW BALANCE MINIMUM PAYMENT DUE REFERENCE SOLD POSTED ACTIVITY SINCE LAST STATEMENT AMOUNT Previous Balance (+) Current Amount Due Purchases (+) Amount Past Due Cash Advances (+) Amount Over Credit Line Payments (-) Minimum Payment Due Credits (-) FINANCE CHARGES (+) Late Charges (+) NEW BALANCE (=) FINANCE CHARGE SUMMARY PURCHASES ADVANCES For Customer Service Call: Periodic Rate 1.65% 0.54% XXX-XXXX Annual Percentage Rate 19.80% 6.48% For Lost or Stolen Card, Call: XXX-XXXX 24-Hour Telephone Numbers Please make check or money order payable to Your First Bank. Include account number on front. understanding credit activity 7-4c

41 name date lesson 7 quiz: credit card features and costs choose the correct answer. 1. Comparing the APR of different credit cards allows you to get the: a. longest grace period. b. lowest annual fee. c. lowest interest rate. d. lowest minimum payment. 2. The grace period refers to the time: a. taken to process a credit card application. b. for paying an account without an interest charge. c. allowed to notify the creditor of a billing error. d. used for calculating interest. 3. The smallest amount you can pay on a credit card account without paying interest is called the: a. late payment fee. b. credit limit. c. annual fee. d. minimum payment. 4. Which of the following is not important when shopping for a credit card? a. the costs of the card b. the features of the card c. what the card looks like d. how you plan to use the card 5. Which of the following is not included on a credit card statement? a. the balance in savings and checking accounts b. the previous credit account balance c. the names of stores where purchases were made d. the new credit account balance understanding credit quiz 7-4

42 name date lesson 7 quiz: credit card features and costs circle the correct answer for each question. 1. Comparing the APR of different credit cards allows you to get the: a. longest grace period. b. lowest annual fee. c. lowest interest rate. * d. lowest minimum payment. 2. The grace period refers to the time: a. taken to process a credit card application. b. for paying an account without an interest charge. * c. allowed to notify the creditor of a billing error. d. used for calculating interest. 3. The smallest amount you can pay on a credit card account without paying interest is called the: a. late payment fee. b. credit limit. c. annual fee. d. minimum payment. * 4. Which of the following is not important when shopping for a credit card? a. the costs of the card b. the features of the card c. what the card looks like * d. how you plan to use the card 5. Which of the following is not included on a credit card statement? a. the balance in savings and checking accounts * b. the previous credit account balance c. the names of stores where purchases were made d. the new credit account balance understanding credit quiz key 7-4

43 understanding credit teaching notes 7-5 The student will identify critical actions to take when in financial trouble. what should you do if you get into financial trouble? discussion Discuss how easily consumers can get into trouble using credit. Do students know of friends or family members who have experienced difficulties? As a class, list some possible causes. Talk about the warning signs of financial difficulties. (overhead 7-5a) Remind students of the responsibilities associated with using credit. Discuss actions a consumer can take when in financial trouble. Explain that most creditors are willing to work with and make adjustments for customers who act responsibly. (overhead 7-5b) Let students know that there are resources available if they need further assistance with their finances. Describe the debt management services provided by non-profit credit-counseling centers. Warn students to avoid companies that promise to erase a poor credit history and get consumers out of debt quickly and easily. Explain that no one has an easy fix, but over time, it is possible for consumers to improve their credit records by working hard to pay off their debts. (overhead 7-5c) overhead 7-5a: warning signs of financial difficulties overhead 7-5b: first steps to take if you can t pay your bills overhead 7-5c: credit counseling how you can get in trouble using credit Overspending Mismanaged budget Increased cost of living Unemployment Illness or disability Family emergencies warning signs of financial difficulties You don t know how much you owe. You often pay bills late. You obtain a new loan to pay old loans. You pay only the minimum balance due each understanding credit teacher s guide 7-5

44 understanding credit teaching notes month on credit cards and other charge accounts. You spend more than 20% of your net income (after paying rent) on loans and credit card payments. You would have an immediate financial problem if you lost your job. You are spending more than you earn. You use savings to pay day-to-day expenses. first steps to take if you can t pay your bills 1. Cut living expenses. Be realistic about what you can afford. 2. Contact your creditors immediately. Call before you get behind, and ask for a voluntary plan for paying debts. overhead 7-5b: first steps to take if you can t pay your bills credit counseling 1. National Foundation for Consumer Credit (NFCC) Non-profit financial counseling service Arranges repayment plans that work for both debtor and creditor. Helps you set a realistic budget. Finding the office nearest to you overhead 7-5c: credit counseling 2. Cooperative Extension Service County-based source of education and information on financial and consumer topics, offering educational programs and/or direct guidance on budgeting and other financial management matters lesson 7 quiz: avoiding financial trouble quiz 7-5 quiz key understanding credit teacher s guide 7-5

45 warning signs of financial difficulties You don t know how much you owe. You often pay bills late. You obtain a new loan to pay old loans. You pay only the minimum balance each month on credit cards and other charge accounts. You spend more than 20% of your net income (after paying rent) on loans and credit card payments. You would have an immediate financial problem if you lost your job. You are spending more than you earn. You use savings to pay day-to-day expenses. understanding credit overhead 7-5a

46 first steps to take if you can t pay your bills Take a close look at your budget. Trim your expenses. Be realistic about what you can afford. Contact your creditors. Tell them: why you can t pay. that you intend to pay. when/how much you will be able to pay. Ask if you can work out a new payment schedule. If possible, continue to make minimum payments. understanding credit overhead 7-5b

47 understanding credit National Foundation for Consumer Credit (NFCC) Offers information on financial and consumer topics. Reviews your income. Helps you set up a realistic personal budget. May contact your creditors and make arrangements for reduced payments on your bills. Helps you plan for future expenses. Services may be available for no charge or reasonable fee. Listed in yellow pages under credit counseling. Watch out for credit repair companies! Offer for-profit counseling. May advertise they can erase a poor credit history quickly DON T BELIEVE IT! understanding credit overhead 7-5c

48 name date lesson 7 quiz: avoiding financial trouble Put a check in front of the five statements about financial trouble that are true. A warning sign of financial trouble is not knowing how much you owe. It is a good idea to get a new loan to pay old loans. If you have a high-paying job, you can afford to spend more than 20% of your net income on debt maintenance. It is a good idea to contact creditors immediately if you begin falling behind in your payments. A credit repair company can erase a poor credit history quickly. The National Foundation for Consumer Credit will help you set up a realistic budget, contact your creditors, and plan future expenses. Financial difficulties are commonly caused by overspending. The National Foundation for Consumer Credit offers customers a quick, easy fix for financial problems. You should never admit to a creditor that you cannot pay your bills. Setting up a realistic budget is a good way to avoid financial trouble. understanding credit quiz 7-5

49 name date lesson 7 quiz: avoiding financial trouble Put a check in front of the five statements about financial trouble that are true. A warning sign of financial trouble is not knowing how much you owe. * It is a good idea to get a new loan to pay old loans. If you have a high-paying job, you can afford to spend more than 20% of your net income on debt maintenance. It is a good idea to contact creditors immediately if you begin falling behind in your payments. * A credit repair company can erase a poor credit history quickly. The National Foundation for Consumer Credit will help you set up a realistic budget, contact your creditors, and plan future expenses. * Financial difficulties are commonly caused by overspending. * The National Foundation for Consumer Credit offers customers a quick, easy fix for financial problems. You should never admit to a creditor that you cannot pay your bills. Setting up a realistic budget is a good way to avoid financial trouble. * understanding credit quiz key 7-5

50 understanding credit lesson outline additional activities for practice and generalization of concepts related to credit Invite a bank representative to discuss procedures for applying for a credit card and responsibilities associated with using credit. Invite a department store credit manager to discuss procedures for applying for a credit card. Compare with the procedures for obtaining a bank credit card. Obtain credit card applications from local department stores that teenagers are likely to frequent. Have students practice completing the forms and reading the credit agreements. Compare interest rates and features of various stores. Watch and discuss Practical Money Skills for Life, video case study B. Give students a concrete experience in understanding the concept of debt. Collect rocks of various sizes. Have each rock represent a specific item, purchased on credit (ex. DVD player, new sneakers, a car). Determine an appropriate cost for each purchase and affix the item s name and price tag to a designated rock. The size of the rock should correspond to the value of the purchase (the more expensive the item, the heavier the rock). Give each student a mock credit card and a debt bag. Allow them to go on a shopping spree and charge as many purchases as they wish. The only catch is, they must carry their rock-laden bags for as long as the creditor (you, the teacher) asks them to! Discuss the experience and students observations afterward (ex. loading a debt bag with many small purchases can weigh as much as one or two large ones). Take advantage of Internet sites that allow students to personalize their study. For example, using students type in answers about their spending and charging habits to find the best credit card for them. Introduce students to the interactive calculator on the Practical Money Skills for Life website. The Credit Card calculator allows students to find the true cost of their credit card purchases. Have students shop a catalogue for items. Using the calculator, students then insert the price of their purchases, a selected credit card APR, and the amount they plan to pay each month. understanding credit teacher s guide