General Financial Literacy
Strand 4 Standard 2
2 class periods of 45 minutes each
Students learn credit terminology and analyze an actual loan application from a family member.
See student worksheets in the Instructional Procedures section.
Credit and Debt
The sword cuts both ways, as the saying goes. The same applies to credit: it can be a tool or a trap, depending on how it's handled. Used well, credit can be an asset to help build wealth as part of a financial plan; used poorly, credit can lead to excessive debt, which can quickly consume an individual's financial resources. As with any tool, credit must be used carefully and with caution.
Today more than ever, students need to be keenly aware of credit and the lure of "easy money." Credit card companies routinely offer cards to college students, with an average credit limit of $3,683 in 1999. One fifth of undergrads carry at least four cards, and the average revolving balance for all college students is $1,843. These are students who passed through the halls of your high school within the last year or so.
And those are just the credit card statistics. Other sources of credit include traditional financial institutions like banks and credit unions, finance companies, auto dealers, pawn shops, rent-to-own businesses, "pay day" cash-advance lenders, and friends and family. In short, there is no lack of credit available to high school students. The more students know about using credit wisely, the better the odds of it becoming a tool instead of a trap.
What are some of the basics of credit? One simple strategy is to avoid interest by paying off the full balance on a credit card every month. Another is to always pay bills on time, which builds a strong credit reputation. Yet another is to avoid bouncing checks.
In addition to the "Top Ten Questions to Ask Before Signing On the Dotted Line," other questions to consider are: What is the total amount of credit needed? How is the interest calculated? Is there a penalty for early payoff of the balance? What collateral is needed to secure the credit? What will be the value of the item being financed upon final payment? What is the reputation of the credit institution? What other financial obligations already exist?
When credit is abused, it can lead to excessive debt and potential bankruptcy. It's easier to get into debt than to get out of it, but teaching students the basics of credit greatly increases their chances of avoiding debt as a trap in the future.
Credit History and the Five C's of Credit
Credit history is very important to an individual's ability to obtain credit. A person's credit history is the equivalent of his or her credit reputation. A damaged credit reputation can follow the individual for up to 10 years before being cleared.
Many people think access to credit is a right. It actually is a privilege and convenience available to those who are considered creditworthy. The determination of who qualifies for credit will vary by institution. constant in the qualifying process. To be approved, an individual must have the ability and willingness to repay the loan or credit amount, document the ownership of assets to be used as collateral, have an established credit history, and, less critical but still important, have good character, appearance, and behavior. These characteristics are sometimes referred to as "The Five Cs of Credit": Capacity, Collateral, Capital, Conditions, and Character. We discuss three of the "Cs of Credit" in the High School Program: Capacity, Character, and Capital.
Credit Report
A credit report provides a very complete and detailed record of an individual's payment history. It includes all monies that have been borrowed from a lender and use of all credit cards.
If payment is not received within 30 days after the due date, the account is flagged as delinquent with a code of "2." This alerts creditors that either a payment has not been made on time or it has been missed completely. An example of "Timeliness of Payments: codes could range from "0" (approved not used) to "9" (seriously delinquent/bad debt). Creditors use these ratings to determine if they will extend credit. The three major credit reporting agencies are Equifax, Experian (formerly TRW), and Trans Union.
Source: NEFE.org
How Credit Works
Objective: Discover what students already know about credit and what they would like to learn about it.
Credit Masquerade
Objective: Students define basic terms and concepts related to credit.
Objective: Students learn to analyze real-life credit offers.
Loan Ranger
Objective: Students analyze an actual loan application from a family member.
Instructional Procedures
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W
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What do you know about credit?
What do you want to know about credit?
What have you learned about credit?
Let's Break Down a Deal
Students will be able to evaluate a loan application.
These mini lessons are provided by NEFE (www.nefe.org).