10 How to Speak “Credit” S Teacher Background

Personal Finance Program
LESSON
10 How to Speak “Credit”
Teacher Background
S
“Credit is a basic financial
tool.”
— Money Management Standards,
Jump$tart Coalition Benchmarks
tories abound about the wonders of credit and its woes as well. Without credit few
people would ever know home ownership, purchase a vehicle or major appliance,
or even attend college. With personal lines of credit, people have been able to start
successful businesses — something not always possible without having a large sum of
savings in the bank. But credit and its misuse have also sent people deep into debt and
even bankruptcy proceedings. In fiscal year 2007 alone, there were 1,011,132 adults
who declared bankruptcy in the United States.*
This lesson introduces or reintroduces
students to what credit is — and the part
it plays in the economy of the country.
Students will analyze various forms of
credit in society and discuss ways that
credit helps people to obtain goods and
services without paying for them in full at
the time of purchase.
Costs and Benefits
This lesson introduces credit as a basic
financial tool that must be managed and
used responsibly. Students will learn
about the costs and benefits associated
with credit. They will complete a set
of six Credit Task Cards that provides
background information on credit and
its special vocabulary. From this activity
they will learn how to speak “credit” and
also that credit can be both a positive and
a negative.
In Lesson 11 students will learn how
to comparison shop for credit cards.
Lesson 12 provides information on credit
reports and scores, credit protection laws,
and credit fraud. The final lesson in
Topic 4 examines bankruptcy and credit
counseling programs.
TOPIC 4
Credit — A
Matter of Trust
* www.aarp.org/research/press-center/presscurrentnews/bankruptcy_rates_rise_among_older_americans.html
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Student Objectives
N Students will be able to describe different types of credit.
N Students will be able to analyze costs and benefits of using credit.
N Students will be able to identify people’s varying attitudes about credit.
N Students will be able to explain how creditworthiness is measured.
Materials Needed
N Student Handout 10-A, Credit Task Cards (Duplicate and cut task cards.)
N Advertisements for mortgage loans, department store charge cards,
Visa or Mastercard credit cards, etc. (i.e., materials representative of a
range of credit available to consumers)
Connecting With the Internet
N www.consumer-action.org
Consumer Action’s website offers an extensive library of downloadable resources,
including “Building and Keeping Good Credit (2007)” — a fact sheet explaining credit
history, credit reports, and and how to establish good credit. The site also offers “Improve
Your Credit — Put Bad Credit Behind You,” which explains the importance of good credit,
consumer rights if credit applications are rejected, how to check a credit report and
dispute any mistakes, and how to rebuild good credit. Many Consumer Action publications
are available in Chinese, Korean, Spanish, and Vietnamese.
N www.creditcardnation.com/calculator.html
Credit Card Nation has an online Debt Zapper calculator, which allows users to estimate
how long it would take, depending on the interest rate, to pay off a credit card debt.
N www.federalreserve.gov/pubs/brochure.htm
Federal Reserve Board. Informational brochures on credit issues can be downloaded at
the Federal Reserve Board’s website in online and printable versions. The brochures are
suitable for classroom use; up to 100 copies can be ordered from the Federal Reserve Board
free of charge. Many of the brochures are also available in Spanish. Titles include: Tips
for Improving Your Credit Score, Choosing a Credit Card, Consumer Handbook to Credit
Protection Laws, A Guide to Business Credit for Women, Minorities, and Small Businesses,
and There’s a Lot to Learn About Money.
N www.ftc.gov/bcp/conline/pubs/credit/gettingcredit.shtm
Getting Credit: What You Need to Know About Credit. The Federal Trade Commission’s
page on what the consumer needs to do to obtain and maintain good credit. Includes a
dedicated website for more information — www.ftc.gov/gettingcredit.
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TOPIC 4 • CREDIT — A MATTER OF TRUST
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Focus Question
What are the costs and benefits of using credit?
Procedures . . .
1
2
3
Ask students to speculate on the various
meanings credit has for different people.
One person can view credit as the key to
financial happiness and prosperity and
another can view it as the road to debt and
despair. Student responses could include:
Credit enables people to obtain and use
money that they do not currently have.
Having credit means for many purchasing an
auto with a small downpayment or obtaining
a mortgage loan to buy a condo or a student
loan to pay for higher education. Ask what is
expected in return for the use of this money
(i.e., the money will be repaid with interest
and fees, and within a certain time period).
never use credit to (10) a person who
absolutely cannot live without credit, with
(5) being credit used only when necessary.
4
Ask students to place themselves (or, if
appropriate, their families) on this continuum
by assigning a number (1-10) that indicates a
place on the continuum. Ask them to give
reasons for this choice. For example, student
responses might include:
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Ask students to describe any personal
experiences they have had with credit (e.g.,
their own credit cards, credit at a corner
grocery store, applying for credit to buy
a DVD player, etc.). Students might also
discuss the use of a parent’s credit card to
order computer accessories or clothes.
L
L
L
L
Have students discuss the attitudes that
people have about the use of credit (i.e.,
ask how goals and values influence attitudes
about credit). This range of attitudes can be
illustrated by drawing a continuum on the
board and deciding where various attitudes
about credit lie on the line. Ask students to
imagine the continuum goes from (1) would
5
Credit should only be used in emergency
situations.
Credit (credit and store charge cards) lets
me purchase all the things I want when I
want them.
Credit is only for the big purchases in life
(e.g., consumer loans for mortgages).
Credit is how my family opened its own
business.
It’s credit, not cash, that makes the “world
go around.”
There are costs and benefits to using credit.
Review that “attitudes” about credit vary —
what is important is having the knowledge,
information, and skills for using credit
wisely. Have students discuss the importance
of consumers understanding how much
credit really costs and how to do comparative
shopping for credit (i.e., compare interest
A Credit Continuum
10
1
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Always pay cash,
Credit —
Credit is
never borrow money
use only when
the only way
for purchases.
necessary.
to live.
LESSON 10 • HOW TO SPEAK “CREDIT”
95
and fees). Discuss how the five-step
decision-making model can be used when
considering credit choices (see Appendix A).
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(a) Have students discuss and list the
disadvantages of credit. (b) Ask students to
give some examples of credit abuse. (c) Ask
students to define predatory lending.
Duplicate and distribute the cards printed on
Student Handout 10-A, Credit Task Cards.
Provide students with printed materials or
online access to help answer the questions
on the cards. Divide students into small
groups and have them prepare reports that
are illustrated (e.g., with posters) or that are
“role-played” in an interview format. Groups
should prepare their findings and report back
to the class. Responses for each of the six task
cards will vary, but responses should include
the points made below.
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a) Purchases cost more due to interest
and fees; consumers might be tempted
to overspend, have a false sense of
security, risk possible poor credit
rating; future earnings are committed.
b) Answers will vary (e.g., shopping
frenzies, purchase of unneeded goods or
services, living beyond one’s income).
c) Definitions could include excessively
high interest, packing a loan with
unneeded extras, misrepresenting
critical loan details. Also, see definition
in Vocabulary section.
Credit Task One (Credit):
(a) How would you define credit? What
words (with the same root, cred) are related
to credit? (b) What are the different types of
credit?
L
L
Credit Task Two (The Pros):
(a) Have students discuss and list the
advantages of credit. (b) Direct them to
list ways that they or other group members
might use credit in the near future.
a) Credit makes it possible to buy and
enjoy expensive items while still paying
for them; it provides convenience when
traveling and purchasing by mail or
Internet; it facilitates the handling of
financial emergencies.
b) Answers will vary and are likely to
include student loans, auto purchases
or rentals, home buying.
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TOPIC 4 • CREDIT — A MATTER OF TRUST
Credit Task Four (Buy Now, Pay Later!):
(a) Ask students to provide and analyze
five or more examples of how businesses
“promote” credit to consumers.
(b) Analyze the hidden messages in
promotional advertisements. Answers will
vary depending on the advertisements or
brochures that students select to illustrate
“promotion of credit.”
a) Credit can mean deferred payment
of a loan or purchase. The word is
related to credible, belief or confidence
in something; for example, credit is
confidence in a buyer’s ability to repay
a loan. Also: incredible, credulous, etc.
b) Types of credit include bank loans,
mortgages, charge cards, and credit
cards.
Credit Task Three (The Cons):
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Credit Task Five (The Vocabulary of Credit):
(a) Ask students to explain the statement:
“All loans are not equal.” (b) Have
students define and give examples of the
following vocabulary words: APR, credit
limit, finance charge, creditor, interest,
minimum payment, overlimit fees.
a) Loans incur a range of interest rates
and fees from low cost to exorbitant.
b) For APR, creditor, finance charge,
interest, see Vocabulary section in this
lesson. Credit limit is the maximum
amount a bank will loan based on a
person’s credit rating. Minimum payment
on a loan: a certain percentage of the
balance due, paid at regular intervals.
Overlimit fees are levied for charges
exceeding one’s credit limit.
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Credit Task Six (The Three C’s):
(a) Ask students to describe what is
meant by “creditworthiness.” (b) Have
students explain the three C’s (character,
collateral, and capacity). How do the
three C’s help measure creditworthiness?
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a) Lenders want to know that the person
borrowing money will repay them.
b) Character: Is the person trustworthy?
Collateral: Does the person have
sufficient resources in reserve to give
to the lender in case he or she cannot
make payments on a loan? Capacity: Is
the person capable of repaying the loan?
Summarize the lesson by having each student
review one thing about the costs and benefits
of credit. Stress also that the wise use of
credit is an important aspect of personal
money management.
CONNECTIONS TO THE CONTENT STANDARDS
NCEE Voluntary National Content Standards in Economics:
1, 2, 8, and 10
Jump$tart Coalition
Personal Financial Management Guidelines:
IIa, IIIa, IIIb, and IIIc
Extending
the Lessonhe Lesson
I Want a Car! Making it Happen — Buying vs. Leasing
Students research and analyze the choices to be made when it is time to purchase an
automobile. They decide whether to get a new or pre-owned car, the type of make and
model of the vehicle, and any accessories. The students also choose between buying
or leasing the vehicle. This extension activity focuses on auto leasing vs. buying. Today
an estimated one-third of new cars, vans, sport utility vehicles (SUVs), and trucks are
leased.
Students should begin this activity by using advertisements to research the prices on
autos or SUVs that are of interest to them.
Buying vs. Leasing Automobiles
Suggested steps for extension activity:
1) Students discuss what they already know about car leasing (e.g., a leased car is
owned by a finance company or dealership; leasing can involve lower monthly
payments than a loan on a new car; when the lease terminates the person who
leased the car either returns it to the lessor or pays a given amount to buy the car
outright.
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LESSON 10 • HOW TO SPEAK “CREDIT”
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Extending the Lesson (continued)
2) Students identify the costs and benefits of leasing vs. buying and present their
findings to the class. Students should identify how personal needs and values could
impact decisions about leasing vs. buying autos (e.g., some consumers want to drive
autos they could never afford to buy; some consumers like the convenience of leasing).
3) Students review websites that provide guidelines and shopping tips for leasing an
auto. They can begin with the Federal Trade Commission. The FTC has Look
Before You Lease information at www.ftc.gov/bcp/conline/pubs/alerts/lease.shtm. The FTC
website will provide the following information:
a) Shopping tips
b) The language of leasing
c) Extra charges (excessive mileage, wear and tear, and penalties for early return)
d) Service guarantee for leased automobiles.
4) Students research the type of loans and terms that are offered on the purchase of
new autos. They should shop for credit and compare three or more auto loan offers
based on a make and model they have selected. (This can be done online.)
In order to shop for a loan the students should know the amount they need to borrow
(principal of the loan) and the number of years in which they want to repay the loan.
They should look for the lowest APR they can find. Students should calculate the
total cost of the automobile by adding the finance charge to the list price.
Ask students to evaluate how depreciation affects the sale of a car in the first or
second year of ownership (e.g., steep depreciation in the first few years could result
in more money owed on the vehicle than the price at which it could be sold).
5) Students can compare differences in the amount of down payment to lease a
specific auto or to buy it. Students can compare insurance requirements on a
leased or purchased automobile (e.g., what coverage is required).
6) Students can use the Decision Making Model (in Appendix A) and the five step
process to decide whether leasing or buying could be their best choice at a future time
when they might want a new automobile. Help students work through the criteria they
will use when making this decision.
Comparison Chart
Students develop a comparison chart showing the buy and sell costs of specific year
2004 and later models of cars. Have students demonstrate how cars lose their value. Ask
them to describe the implications of buying cars on credit (i.e., car could have little resale
value by the time it is paid off). Have students research and analyze the drawbacks of
long-term financing (e.g., it is possible over time to owe more than the car is worth).
Have students report back to the class using the comparison chart on buy and sell costs.
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TOPIC 4 • CREDIT — A MATTER OF TRUST
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Vocabulary
annual percentage rate (APR)
A rate that shows the total cost of credit annually. It
includes a percentage of the principal as interest on
a loan plus other costs (e.g., points on a mortgage
loan, service charges).
capacity
A person’s ability to repay a loan (judged by earning
power and a current financial commitments; also
based on record of financial responsibility). A measure
of creditworthiness.
capital
The amount of monetary resources a potential
buyer and/or loan applicant has available. A
measure of creditworthiness.
character
A person’s willingness to repay a debt. A character
loan is based on the reputation and/or personal
credit history of a borrower, rather than collateral. A
measure of creditworthiness.
collateral
An asset such as an automobile or a piece of
property that a person uses when taking out a
loan, promising to give the asset to the lender if
loan payments cannot be met.
credit
The borrowing capacity of an individual or
company. A transaction in which a borrower
(or debtor) receives goods, services, or cash
and agrees to repay the lender at a future date,
normally with interest.
Siebert PFP
creditor
The lender or supplier of money, goods, services,
or securities.
debit card
A card used for purchases that is issued by the
consumer’s bank. Funds are deducted from the
consumer’s checking account and transferred
electronically to the merchant’s bank account
when a purchase is made.
depreciation
A loss or decrease in value, especially because of
wear or age (e.g., the depreciation of a new auto).
finance charge
The cost of credit, including interest paid by a
customer or a consumer for a consumer loan.
Under the Truth in Lending Act, the finance charge
must be disclosed to the customer in writing.
installment credit
Credit that is granted for purchase of durable
goods, on condition of its repayment at regular
intervals over a specified period of time until
paid in full (e.g., for an automobile or home). The
seller retains legal title to goods until the last
installment is paid.
installment loan
A loan, extended by a financial institution or
retail firm, to be repaid with interest charges in
installments over a fixed period of time. Example:
student loans.
LESSON 10 • HOW TO SPEAK “CREDIT”
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Vocabulary (continued)
interest
An amount of money paid for using funds over a
period of time, generally an annual percentage
rate. Bank interest is both an amount paid to
depositers of funds and a finance charge for
money that is borrowed.
predatory lending
Fraudulent, unethical, discriminatory, or
abusive lending practices designed to exploit
vulnerable borrowers and lead to their increased
indebtedness (e.g., excessive and disguised fees
for home mortgages).
secured loan
A loan which is backed by the borrower’s assets,
when the borrower’s credit rating is not strong
enough to justify an unsecured loan (not backed by
the borrower’s assets). The assets may be forfeited
to the lender if the borrower fails to make the
necessary payments.
three C’s of credit
Creditworthiness is measured by three factors,
sometimes called the three C’s of credit —
character, collateral, and capacity (see definitions
above).
principal
The original sum borrowed.
revolving credit
System of retail credit (e.g., department store or
bank credit cards) in which buyers make periodic
payments on purchases and service charges.
The service charge is based on the outstanding
balance; if the buyer pays the entire balance, no
service charge accrues.
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TOPIC 4 • CREDIT — A MATTER OF TRUST
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Student Handout 10-A
Lesson 10: How to Speak “Credit”
Credit Task Cards
Name of Student _______________________________
(To be duplicated and distributed by teacher.)
Credit
CREDIT TASK ONE
a) How would you define credit?
What words (with the same root, cred) are
related to credit?
CREDIT TASK TWO
The Pros
a) Discuss and list the advantages of credit.
b) What are the different types of credit?
b) List ways that credit might be used in the
near future by you and/or people in your
task group.
CREDIT TASK THREE
CREDIT TASK FOUR
The Cons
a) Discuss and list the disadvantages of
credit.
b) Give some examples of credit abuse.
c) What is predatory lending?
CREDIT TASK FIVE
The Vocabulary
of Credit
Buy Now,
Pay Later!
a) Provide five or more examples of
how businesses “promote” credit to
consumers.
b) Analyze the hidden messages in these
promotional advertisements.
CREDIT TASK SIX
The Three C’s
a) Explain the statement “All loans are not
equal.”
a) Describe what is meant by
“creditworthiness.”
b) Define and give examples of the following
vocabulary words:
b) Explain the three C’s (character,
collateral, and capacity). How do
the three C’s help measure
creditworthiness?
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APR
credit limit
finance charge
creditor
L
L
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interest
minimum payment
overlimit fees
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Notes
Credit:
For the borrower, this means repaying the
amount borrowed, plus interest, in a timely
manner. For the creditor, it means providing
the loan based on mutually agreeable terms
in compliance with all laws related to the
transaction.
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