Framework for Career Education and Consumer, Family, and Life Skills Classroom Activity by New Jersey Educator Title: Understanding Credit and Selecting a Author Information: Credit Card Names: Andrew Bellin and Content Area: Career Education and Consumer, Sheree Green Family, and Life Skills School: Teaneck High School Grade Level: 12 District: Teaneck County: Bergen Student Learning Objectives: NJ Core Curriculum Content Standards Students will be able to: Content Standard Grade Strand CPI Area 1. Identify and explain the Career 9.2 12 E 3,4 various types of credit. Education 2. Identify and explain credit and terminology. Consumer, 3. Analyze a credit card Family, and statement. Life Skills 4. Calculate the cost of credit. 5. Analyze credit reports. Mathematics 4.5 12 A 1 6. Investigate identity theft and Mathematics 4.5 12 C 3, 4 correcting credit problems. 7. Compare and contrast credit card offers. Social 6.5 12 A 1 8. Create advertisements for Studies credit card offers. Purpose and Overview: The purpose of this activity is for students to develop an understanding of the principles of credit management. Instructional Activity: 1. Teacher begins lesson by presenting information on credit. Information should include: a. Types of credit available for personal use; such as car loans, student loans, credit cards, mortgages, credit cards, and payday loans. b. Vocabulary words such as credit, creditor, annual percentage rate, collateral, simple interest, principal, minimum monthly payment, credit rating, grace period, finance charge, close end credit, open end credit, line of credit. (See handout Financial Planning & Money Management Credit #1). Answer key found in document Financial Planning & Money Management #2. c. Comparing credit versus debit use. 2. Teacher will display and discuss a real credit card statement with the class. Students will be provided with another example to locate and analyze information on their own. Sample credit card statements and research questions can be found at the Visa Practical Money Skills website at www.practicalmoneyskills.com. 3. Teacher will discuss the costs associated with using credit (See Guided Notes Section #4 for possible student study sheet and answer key). Students will calculate the cost of paying “The true cost of paying the minimum” at the website: http://www.bankrate.com/brm/calc/MinPayment.asp. (A summary answer sheet is found at Study Guide #5) 4. Teacher will lead discussion on credit history and credit reports. Students will analyze and locate information from the sample credit report form handouts or /transparencies link at: http://www.fordcredit.com/creditdrivesamerica/index.jhtml. Students can view additional sample credit reports from the three credit agencies. See links under Additional Information. 5. Students will investigate identity theft and correcting problems related to credit. Distribute and review brochures provided at the website: http://www.fordcredit.com/creditdrivesamerica/index.jhtml 6. Students will compare and contrast two credit card offers. Students can use paper applications or the Internet to locate credit card offers. 7. Teacher and students will discuss protecting your credit using the web link questions as a guide (Complete Guided Notes Section #3). 8. Students will create two credit card advertisements. One advertisement will be for an optimal credit card offer; and one ad will be for a bad credit card offer. Assessment Strategies: Students will complete a test containing vocabulary terms and credit concepts. Create two credit card advertisements. One advertisement will be for an optimal credit card; and one ad will be for a bad credit card offer. Additional Information: Resources can be obtained at: Practical Money Skills, www.practicalmoneyskills.com Ford Credit Drives America, http://www.fordcredit.com/creditdrivesamerica/ EQUIFAX, www.equifax.com EXPERIAN, www.eperian.com TRANS UNION, www.tuc.com MasterCard, http://www.mastercardintl.com/cgi-bin/newsroom.cgi?id=817& Credit Card Offers, http://www.applycc.com/americanexpress.asp. Students can research credit services and options offered to college students, vocational students, and/or recent graduates for continuing education or career training. Students can research the Fannie Mae website at: http://www.fanniemae.com/index.html. Financial Planning & Money Management Credit #1 VOCABULARY Credit Creditor Consumer Credit Interest Closed-end credit Open-end credit Line of credit Grace period Finance charge List 6 factors to consider before using credit 1. 2. 3. 4. 5. 6. List 3 advantages of credit 1. 2. 3. List 3 disadvantages of credit 1. 2. 3. List 2 types of credit 1. 2. What are the 2 sources of consumer credit and list 4 facts about each? 1. a. b. c. d. 2. a. b. c. Financial Planning & Money Management #2 Consumer Credit : Key VOCABULARY Credit An arrangement to receive cash, goods, or services now and pay for them in the future Creditor An entity (bank, finance company, credit union, business, or individual) to which money is owed Consumer Credit the use of credit for personal needs Interest the price that is paid for the use of another’s money Closed-end credit a one-time loan that is paid back over a specified period of time and in payments of equal amounts Open-end credit the ability to borrow money for a variety of goods and services up to a limit set by the company issuing the credit Line of credit the maximum amount of money a creditor has made available to someone Grace period a time period during which no finance charges will e added to a person’s credit card account Finance charge the total dollar amount a person pays to use credit List 6 Factors to Consider Before Using Credit 1. Do you have the cash you need for the down payment? 2. Do you want to use your savings instead of credit? 3. Can you afford the item? 4. Could you use the credit in some better way? 5. Could you put off buying the item for a while? 6. What are the costs of using credit? List 3 advantages of Credit 1. Enjoying goods and services now, and paying later 2. Special discount coupons and advance notice of sales 3. Viewed as a responsible borrower by other lenders List 3 disadvantages of Credit 1. Temptation to overspend 2. Losing your good credit reputation 3. Losing you income and property List 2 Types of Credit 1. Closed-end credit used for a specific purpose and involves a definite amount of money. Usually have lower interest rates Ex. Mortgage, auto loans 2. Open-end credit given a certain limit on the amount of money you can borrow Ex. Department store cards, bank credit cards What are the 2 Sources of Consumer Credit? 1. Loans a. Inexpensive loans—family and/or friends b. Medium-priced loans-commercial banks, credit unions c. Expensive loans—finance companies and retail stores, high interest rates (12-25%) d. home-equity loans—the difference between the current market value of you home and the amount you still owe on the mortgage interest is tax-deductible Use only for: education, home improvements, medical bills Missing payment may result in loss of home 2. Credit cards a. Debit cards-electronically subtracts money from checking/savings b. Smart cards—combine info onto one card (credit card balances, driver’s license, health care identification) c. Travel & Entertainment cards (T&E)—balance due in full each month. Ex. Diners Club card Guided Notes Section #3 Protecting Your Credit Term Definition Co-Signing What must you do if you believe you have been wrongfully billed for an item? What should you do if you think your Identity has been stolen? 1. 2. 3. How can you protect your credit card(s) from being stolen? 1. 2. 3. How can you protect your credit information on the Internet? 1. 2. 3. 4. 5. 6. 7. Consumer Credit Protection Laws 1. Truth in Lending and Consumer Leasing Acts 2. Equal Credit Opportunity Act (ECOA) 3. Fair Credit Billing Act 4. Fair Credit Reporting Act 5. Consumer Credit Reporting Reform Act What should you do if you feel you are being discriminated against? Guided Notes Section #4 Measuring the Cost and Obtaining Credit Term Definition Net Income Annual Percentage Rate Collateral Simple Interest Principal Minimum Monthly Payment Credit Rating Methods Calculating the Cost of Credit: 1. 2. 3. 4. 5. 6. The 5 C’s of Credit C C C C C Identify the 6 things that could be in your credit file: 1. 2. 3. 4. 5. 6. Identify the 3 Steps that you could take to maintain a good credit: 1. 2. 3. Guided Notes Answer Key #5 Measuring the Cost and Obtaining Credit Term Definition Net Income The income a person receives (from sources such as take-home pay, allowance, gifts, and interest on bank accounts) Annual Percentage Rate The cost of credit on a yearly basis expresses as a percentage Collateral A form of security to help guarantee that a creditor will be repaid Simple Interest Interest computed only on the principal Principal The amount borrowed Minimum Monthly Payment The smallest amount a person can pay on a credit card bill and remain a borrower in good standing Credit Rating A measure of a person’s ability and willingness to make credit payments on time Methods Calculating the Cost of Credit: 1. Simple Interest 2. Simple interest on the Declining Balance 3. Add-on interest 4. Cost of Open-end credit 5. Cost of credit and expected inflation 6. Avoid the minimum monthly payment trap The 5 C’s of Credit Character: Will you repay the Loan? Capacity: can you repay the loan? Capital: What are your assets and net worth? Collateral: What if you don’t repay the loan? Credit History: What is your credit History? Identify the 6 things that could be in your credit file: 1. Your employer, position, and income 2. Your previous address 3. Your previous employer 4. Your spouse’s name, Social Security number, employer, and income 5. Whether you rent or own your home 6. Checks returned for insufficient funds Identify the 3 Steps that you could take to maintain a good credit: 1. Open a checking or savings account, or both 2. Apply for a local department store credit card 3. Take out a small loan from your bank. Make payments on time.