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					                   Using Credit Cards: Key Points (teacher copy)


• Credit
      cards can be more convenient than carrying cash, but remember, you always have to pay the
money back.

• In
   general, people spend more when they use credit cards instead of cash. It can be easy to get in over
your head with credit card debt before you know it!

   a general guideline, never borrow more than 20% of your yearly net income. That’s the amount of
• As
money you take home in a year after taxes and other deductions. A second guideline is that less than
10% of your monthly income should go toward paying off credit card bills.

• Tokeep your credit card spending under control, try this strategy: use cash or your debit card for
everyday purchases. Save your credit card for buying larger, more lasting items. But before you actually
use your card, think through what you want to buy and how you’re going to repay the money.

• Loans are called “installment” credit, meaning you receive the money once and pay it back over time in
installments. Credit cards are called revolving credit because as you pay the money back, your credit
becomes available for you to use again and again.

• Everytime you use your credit card, you’re actually borrowing money from the financial institution that
issued you the card. The financial institution pays the debt to the store for what you bought. In turn, you
pay the money back to the financial institution.

• Asa reminder, when you use your debit card, the money is deducted directly from your checking
account. When you use a credit card, you receive a monthly bill you have to pay.

• Many financial institutions offer credit cards. Some will charge you an annual fee to have one. When
you apply for a card, they’ll check your credit history and decide whether or not to give you a card. They’ll
also decide how much you’re allowed to borrow, or “charge.” This is called your credit limit. If the credit
card company issues you a card, they’ll let you know what your credit limit will be.

• Ifyou haven’t established a good credit history yet, some lenders offer secured credit cards. These are
ideal for people who are starting out on their own or need to rebuild their credit. To qualify, you’re
normally required to open a savings account with a balance equal to the credit limit of the card. For
example, if you want a credit card with a five hundred dollar limit, you must have five hundred dollars in
your account. This gives the lender security that you can pay them back, and some lenders will pay you
interest on this balance. By establishing a good payment history with your secured credit card, you can
improve your qualifications for unsecured credit in the future.

     always a good idea to shop around for the credit card with the lowest interest rate and lowest annual
• It’s
fee you can find. Compare the two examples below. In both cases, customers used a credit card to
purchase a large-screen TV with a $500 price tag, and made a $100 payment each month. But note how
the difference in the interest rate affects the total amount of interest each customer paid:
What percentage of the total price is the interest paid for the TV at 8%? (2%) At 18% (20%)?
What is the difference in the time it took to pay off the TV? (4 times longer)

• Remember     that if you pay off the purchase by paying your first credit card statement in full, you’ll pay no
interest, plus you’ll have your full credit limit available to use again; but if you decide to pay for your
purchase over time, you’re going to be charged interest on the unpaid balance each month – in other
words, on the amount you still owe. So even though your monthly payments may be low, the total amount
you end up spending for that new TV is quite a bit higher! It definitely pays to get a credit card with a low
interest rate, and to pay off your bill as quickly as you can.


        Tips for using credit cards wisely
        • For now, have just one credit card with a low spending limit. This
        will help you start to get comfortable using credit and paying it
        back, and stop you from getting into big trouble with debt.
        • Get a credit card with a low interest rate and pay off the balance or
        as much as you can every month.
        • Make at least the minimum payment each month.
        • Don’t use your credit cards to buy things you really can’t afford.
        Follow your budget.
        • Stay within your credit limit. Track your credit card charges
        throughout the month.
        • Pay your credit card bills on time.
        • Some credit card companies may offer you a cash advance. Avoid
        this option except in emergencies. You’ll be charged a fee and the
        interest rate is usually much higher!
        • If you’re getting into trouble with debt, get help early. Consider
        talking with a credit counselor, an experienced professional, who
        can help you get out of debt.
                            Student Activities (Teacher Copy)

Use these or similar activities to give students an opportunity to apply what they have just learned to real
life scenarios.

1. Suppose you have a credit card balance of $350 and the Annual Percentage Rate (APR) for your card
is 15%. You decide not to use the card again and you make the minimum payment of $10. Using the
credit table below, what is the amount of interest you end up paying? ($113.15)
How long will it take you to pay off your debt? (47 months)
Using the credit tables below, have students compare the interest payments and repayment
schedules on the same amounts at different interest rates.

Example 1: Borrowing $350 at 15% APR, making a minimum payment of $10 monthly.
Month      Minimum Payment     Interest Paid   Principal Paid   Remaining Balance
1               $ 10.00            $ 4.38        $ 5.63         $ 344.38
6                 10.00              4.01          5.99            315.18
12                10.00              3.55          6.45            277.66
18                10.00              3.05          6.95            237.24
24                10.00              2.51          7.49            193.69
30                10.00              1.94          8.06            146.77
36                10.00              1.31          8.69             96.23
42                10.00               .64          9.36             41.76
47                10.00               .04          3.14              0.00
Total Interest $ 113.15

Now, suppose you have a credit card balance of $350 and the APR for your card is 18%. You decide not
to use the card again and you make the minimum payment of $10. Using the credit table below, what is
the amount of interest you end up paying? How long will it take you to pay off your debt?

Example 2: Borrowing $350 at 18% APR, making a minimum payment of $10 monthly:
Month      Minimum Payment      Interest Paid  Principal Paid   Remaining Balance
1            $ 10.00              $ 5.25         $ 4.75            $ 345.25
6              10.00                4.88           5.12              320.41
12             10.00                4.40           5.60              288.05
18             10.00                3.88           6.12              252.68
24             10.00                3.31           6.69              213.99
30             10.00                2.69           7.31              171.69
36             10.00                2.00           8.00              125.44
42             10.00                1.25           8.75               74.87
48             10.00                 .44           9.56               19.57
51                .01               0.00           0.01                0.00
Total Interest $ 150.01

Comparing these two examples, what can you conclude about the different Annual Percentage Rates?
What can you conclude about paying only the minimum amount of payment? What would be the impact if
you paid $20 each month instead of the minimum $10?

2. Create problems that allow students to compare buying goods on credit to saving for the items over
several months.
Go to www.handsonbanking.org
       “click to enter program”
       click “young adults” option
       click “user options”
    
                th
        click 4 button down – “credit calculator”
             o enter “amount borrowed” – have student enter the cost of something they would like to
                   have, like a car, TV, etc.
             o enter annual % rate (8% is a good rate)
             o enter monthly payment they can afford
             o click “calculate” -- student will see number of months to pay off the loan, total to be paid
                   and amount of interest paid.

3. Suppose you purchased goods totaling $5,000 on your credit card. At 18% annual interest (1.5%
monthly), paying $135 a month, it would take you 55 months, or over 4 ½ years, to pay off the $5,000.
Defend your decision to do this.
On the same $5,000 purchase, if you paid $200 a month at 18% annual interest (1.5% monthly), it would
take you 32 months, or over 2 ½ years, to pay off your credit card. Explain why you would choose one
payment plan over the other.

4. You want to buy a used car that costs $10,000. The bank will give you an auto loan for 36 months at
7% interest, and you will pay $308.78 every month to repay the loan. If you take the loan for 60 months,
you will pay $198.02 a month.
• What is the difference in the amount of interest you will pay between the two options?
($308.78 * 36 months = $ 11,116.08
198.02 * 60 months = $ 11,881.20
$11,881.20 – 11,116.08 = $765.12)
• Why might you choose each of these options?

5. A friend decides to take a loan out to help pay for home improvements. She qualifies for a $10,000
loan at 15% yearly interest. If she pays the loan back over 10 years, she will pay $161.34 a month. If she
pays the loan back over 15 years, she will pay $139.96 a month.
• How much interest will she pay if she pays the loan over 10 years?
($9,360.80)
• How much interest will she pay if she pays the loan over 15 years?
($15,192.80)

6. You decide to use your credit to purchase some new furniture. You charge $5,000 on your credit card
that charges 18% annual interest. The minimum payment to pay off the $5,000 in 5 years is $126.97 a
month.
The chart below shows the amount of interest and the amount paid toward the principal amount if you pay
$126.97 for each month in the first year. Use this chart to answer the questions below.

Month                        1              2            3             4             5            6
Payment                     126.97       126.97       126.97        126.97        126.97       126.97
Interest paid this month    75.00        74.22        73.43         72.63         71.81        70.98
Total interest paid          75.00       149.22       222.65        295.28        367.09       438.07
Principal paid this month   51.97        52.75         53.54         54.34        55.16        55.98
Total principal paid        51.97        104.72       158.26        212.60        267.76       323.74
Balance                     4948.03      4895.29       4841.75      4787.41       4732.25      4676.27
Month                        7              8            9            10            11           12
Payment                     126.97        126.97      126.97        126.97        126.97       126.97
Interest paid this month    70.14         69.29       68.43          67.55         66.66       65.75
Total interest paid         508.21       577.51       645.93         713.48        780.14       845.89
Principal paid this month 56.82           57.68        58.54           59.42        60.31     61.21
Total principal paid       380.56         438.24        496.78          556.20      616.51    677.72
Balance                    4619.44        4561.77       4503.23         4443.81     4383.50   4322.28
a. What do you notice about the amount of interest paid in subsequent months?
(The monthly interest amount decreases over time.)
b. What do you notice about the amount paid toward the principal in subsequent months?
(The monthly amount paid toward the principal increases over time.)
c. How much of the principal balance of $5,000 would you pay off in one year paying $126.97 a month?
($677.72)
d. How much interest would you pay in one year paying $126.97 a month?
($845.89)
e. How much interest would you pay in month 13?
($64.83)
f. How much interest will you pay over the 5-year life of the loan if you pay $126.97 each month? To do
this computation, use the credit calculator found on the User Options panel of the Hands on Banking
program.
($2,618.03)

				
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