Getting Smart about Credit

Getting Smart about Credit LESSON PREPARATION AND TEACHER INFORMATION Lesson Summary: This lesson is intended for high school students during a 40 minute time period. The lesson teaches students about the use of credit and topics related to credit cards. Lesson Objectives: At the end of the lesson, the students will be able to: Explain the difference between simple and compound interest Explain the difference between variable and fixed-rate interest Describe the pros and cons of having and using a credit card including the types of fees and charges related to credit card usage Explain what a FICO score is and the importance of credit history Know what questions to ask before selecting a credit card Materials Needed Student Handout What Do You Know About Credit? Questions Instructor Answer Sheet What Do You Know About Credit? - at the end of Teacher Class Outline Important Information Handout Lesson Objective: 35 mins. LESSON CONTENT Introduction for Metro Bank Metro Money Sense Instructors Hello, my name is, and I work at Metro Bank. I m pleased to visit your class today to share with you the pros and cons of credit cards and things you need to know to use credit cards wisely. Every day, people around the world use funds from loans and credit cards to make their lives better; do business and, for some, get through difficult times. Loans and credit are an integral part of the economy and how the world works. At the end of the lesson, you ll be able to explain the difference between various types of interest, describe the pros and cons of having and using a credit card, know what a FICO score is and why your credit history is so important, and have a list of questions to ask before selecting a credit card. Metro Bank: Metro Money Sense Getting Smart about Credit - High 1

Activity To discuss important information about credit and credit cards, I m going to divide you into groups and have each group see what it knows about these topics. Each group will be assigned one question and have 5 minutes to write down your answers. If your team completes its question before the time is up, go ahead and look at the next question after the one assigned to you. Start working on the next question until the time is up. I ll also provide a credit card IMPORTANT INFORMATION sheet that credit card providers are required to give to Customers. For some of the groups, you may find some references for your answers on this document. Also, please decide how you want to share the information with the rest of the class. For example, you could have each student in the group share a part of the answer. What questions do you have before we get started? Monitor the groups work: [Quickly move the class into 8 groups. Make certain that there are at least 3 students in each group. Distribute the Get Smart About Credit? questions and Important Information handouts. Assign each group one question, (unless it is a smaller class, then adjust the number of questions that each group receives). You may need to give each group more than one question; then give them 8 minutes to work on their two questions. The ninth question you can cover if you have time with the group, or quickly review the answers yourself for the class.] [Walk around the room and monitor the students work pace. Check to make certain that students are working on their assigned question(s). Even if they are still working at the 5 minute mark, move forward with the answers, and you can share information not covered by the students.] Group reporting and instructor comments: Let s see how you did. [Have each group give its answers to each question starting with questions 1 and 2. Use your Instructor Answer sheet to add critical information not shared by the students. You have 3 minutes per question for the students to share and for you to add any comments to each question. Suggestion: After questions 1 and 2, select questions out of order for the students to answer to keep the students thinking and involved. Continue to add information as needed.] Lesson Objective: 4 mins. Review Important Information Handout: With new regulations passed by Congress and other government agencies, each bank or financial institution must provide an Important Information document regarding rates, fees and other cost information and Terms and Conditions documents for new credit cards. Let s take a quick look at the Sample Important Information page. Metro Bank: Metro Money Sense Getting Smart about Credit - High 2

[Briefly explain what each category means only spending a few seconds on each.] You can obtain additional information about credit cards and how they work by visiting the government websites listed on the second page of your questions handout. I included Metro Bank s website as you ll find a fact sheet including some of the information we covered in class today in the Metro Money Sense section of the website. Wrap Up 1 min. Ask the class what questions they have. Thank you for their attention and participation. Metro Bank: Metro Money Sense Getting Smart about Credit - High 3

Get Smart About Credit What Do You Know About Credit? Instructor Answers Question #1 Please give 5 specific reasons that people use loans or credit cards. Education, home improvement, purchases of almost any type, building, starting a business, etc. List as many different types of loans as you can. Personal/consumer, auto, unsecured, Home Equity line of credit or installment loan, reward credit cards, gift-type credit cards, swing loans, etc. What are different ways people can borrow money? From banks, credit unions, from friends, family, in person, online Question #2 Explain what simple interest is. Simple interest -- interest on any investment that is calculated once per period, usually annually, on the amount of the capital or principal balance alone and not on any interest already earned Explain compound interest. Compound interest - interest that is calculated on the combined total of the principal balance and the interest that has accrued What is the difference between fixed and variable rate interest? Fixed rate -- interest rate is pre-determined and does not change during the term of the contract or specified time period Variable rate interest rate changes based on a stated criteria and usually determined using a scale or standard What type of interest do credit cards have? Credit cards can be a fixed or variable rate that can be fixed for some period of time, but may change depending upon payment history, late payments or other stated events What does APR stand for? APR Annual percentage rate -- The yearly percentage rate charged when a balance is held on a credit card. This rate is applied each month that an outstanding balance is present Metro Bank: Metro Money Sense Getting Smart about Credit - High 4

Question # 3 What are the pros and cons of having a credit card? Pros available and liquid form of cash; usually safer than carrying large amounts of cash; convenient to order purchases online, by phone or other ways; helps to create and build credit history; may have a reward system for airline or other types of points Cons may cause some to spend over their ability to repay; easy money creates a sense of no worry; misuse can damage credit history; if not protected, could be at risk of identity theft What are the costs of having and using a credit card? Costs fees (possible annual, transaction fee, penalty fees); increased interest rate due to your credit history; possible ID theft and costs associated with correcting your financial history Question #4 What is a FICO score? Your credit score created by Fair Isaac Corporation that is available from all three major credit reporting agencies (Equifax, TransUnion, Experian). A credit score is used by lenders to help them decide: If I give this person a loan or credit card, how likely is it that I will get paid back on time? The score is an estimate of your credit risk based on a snapshot of your credit report at a particular point in time. When you apply for credit, is it better to have a high or low score? Better to have a high score. What things impact your credit record or credit history? What impacts your FICO score: o Payment track record how frequently you paid bills on time, and if and how late your payments are o The amount owed on all your debt how much of your available credit is being used at the time you make a loan request o How long your credit accounts have been established in general; how long specific credit accounts have been established; how long it has been since you used certain accounts o How many new accounts you have opened in what time period; how many recent requests for credit you have made; and length of time between lenders requests o Types of credit in use; what kinds of credit accounts you have; and how many cards you have of each Question #5 How can thieves steal or get your credit card number? Credit card receipts or statements stolen by others (in trash, roommates, friends, during parties); people near you when giving your card to someone (fast number readers); online purchases without proper security protection; giving your credit card number over the phone to someone you are uncertain of or do not know. Metro Bank: Metro Money Sense Getting Smart about Credit - High 5

What are the dangers of identity theft? Negatively impacting your credit history; charges and expenses using your name could create a criminal record that you could spend weeks, months or years clearing; specific dollars and lost time associated with all of these issues. Question #6 What problems can arise by not paying on your credit card every month? Impact FICO score; stress of having creditors call; increasing interest % that takes more dollars out of your pocket What actions should you take if you find yourself falling behind in your payments? Contact your creditors and discuss possible payments; do not take on any additional debt; contact non-profit agencies that can help you with budgeting and payoff plans or see a legitimate credit counselor. Avoid credit repair agencies that charge a fee to improve your FICO score since no company can force credit bureaus or lenders to remove accurate information from a credit report. Question #7 What questions should you ask your banker or yourself before selecting a credit card? What do you want to know about the card? What is the annual percentage rate? Is the interest rate fixed or variable? If the rate is variable, under what conditions would that change? Is there an interest-free or low-interest grace period? If so, how long is it? If I don t pay the bill in full, how is the interest calculated? Do I lose the grace period? Is there an annual fee? What are all the other fees that could be associated with this card; such as if I go over my credit limit or make a late payment? What is the interest rate for cash advances? Is there an additional fee? Are there any reward points or benefits such as airline or hotel room discounts or rebates? Question #8 What expenses or fees apply to a credit card and are these fees the same for all banks? Annual fee; penalty fees (such as late payment or returned check payment); transaction fees (such as transferring balances, cash advances or doing foreign transactions outside of the US), costs if you lose your card and need a fast replacement and/or overnight shipping. Every bank is different in the fees it charges. What is a balance transfer on a credit card? Balance transfer taking the funds on one loan or credit card and transferring part or all of that balance to another loan or credit card usually with the intention of getting a lower interest rate for some period of time to reduce the monthly payments or shorten the length of time needed to repay the loan or credit card balance What is a cash advance and how does it work? Cash advance a withdraw of cash using the line of credit feature of the credit card or revolving-type loan Metro Bank: Metro Money Sense Getting Smart about Credit - High 6

Question #9 What should you do if you don t agree with credit card charges on your card? Always check the detail on every credit card bill Contact your credit card issuer about any errors or unauthorized transactions by following the issuer s instructions (such as contacting by written instruction or phone call) Talk with a representative and ensure that the credit card issuer completes the appropriate documentation if an error has occurred When should you take any action? Take action immediately! You only have a certain number of days to contact the credit card issuer (usually 60 days). Check your credit card statement for details in the Terms and Conditions or on the Information Important document. Metro Bank: Metro Money Sense Getting Smart about Credit - High 7

Note for Educators: National Council of Teachers of Mathematics Principles and Standards for School Mathematics, 2012 Numbers and Operations Develop a deeper understanding of very large and very small numbers and of various representations of them [9-12] Judge the reasonableness of numerical computations and their results [9-12] Algebra Understand the meaning of equivalent forms of expressions, equations, inequalities, and relations [9-12] Draw reasonable conclusions about a situation being modeled [9-12] Metro Bank: Metro Money Sense Getting Smart about Credit - High 8