What Is Credit? What Is a Credit Card?

Grade 5 Lesson 8

What is credit? What is a credit card?

SS.8.FL.4.3 Examine the fact that borrowers who use credit cards for purchases and who do not pay the full balance when it is due pay much higher costs for their purchases because interest is charged monthly. Explain how a credit card user can avoid interest charges by paying the entire balance within the grace period specked by the financial intuition.

Correlated Literacy Standards:

LAFS.5.SL.2.4 Report on a topic or text or present an opinion, sequencing ideas logically and using appropriate facts and relevant, descriptive details to support main ideas or themes;

speak clearly at an understandable pace.

LAFS.5.W.3.7 Conduct short research projects that use several sources to build knowledge through investigation of different aspects of a topic.

LAFS.5.W.3.8 Recall relevant information from experiences or gather relevant information from print and digital sources; summarize or paraphrase information in notes and finished

Using Credit Cards

Grade 5 Lesson #: 8

Correlated Florida Standards (See Full Text on Cover Page)

· LAFS.5.SL.2.4

· LAFS.5.W.3.7

· LAFS.5.W.3.8

Essential Question

What are the benefits and pitfalls of using credit cards? What can you do to develop and maintain creditworthiness?

Learning Goals/Objectives:

Students will:

· Compare/contrast credit cards with cash

· Understand that impact of spending habits on your creditworthiness and interest rates

· Explore how interest is calculated (APR and DPR)

· Practice calculating compound interest

· Learn how to read their credit card statement and how to identify the best credit card offers

Overview

In this lesson, students will explore how credit cards work and the benefits and dangers of credit card use. They will practice calculating compound interest. Students will review the credit card concepts and terminology from the lesson by playing “Credit Card Bingo”.

Materials

· Computer or Tablet

· Digital Whiteboard

· PowerPoint Presentation: Using Credit Cards (Included in Lesson 8 file)

· Handout: Credit Card Bingo (Included)

Time

· 30 Minutes

Activity Sequence

INTRODUCTION/HOOK

Discuss PowerPoint slides 2-3. (2 minutes)

· Say: Today we will explore credit cards. By the end of the lesson you will know the benefits and pitfalls of using credit cards and what you can do to develop and maintain your creditworthiness.

· Do: Have students analyze the cartoon and interpret its message. Encourage students to describe the humor of the cartoon. Select volunteers to share.

ACTIVITY

1. Discuss PowerPoint slides 4-8. (7 minutes)

· Say: Credit is the ability to obtain goods or services before payment, based on the trust that payment will be made in the future. Thanks to credit, you can walk out of the store with the big screen TV you wanted now and pay for it later – usually in small monthly installments. Borrowing money is not free. Each month as you are enjoying your big screen TV, you will be billed for a portion of the total amount borrowed plus interest. Keep in mind that the interest fees accumulate each day, therefore the longer you take to repay the balance on your credit card, the more money you will end up giving the credit card company. Miss a payment and you will be charged penalties which could result in higher interest rates or the decline of any future transactions.

· Say: Let’s look at the differences between paying with cash and credit. When you pay cash you are required to pay the full purchase price at the time of the transaction, while paying credit lets you buy now and pay later. Carrying large amounts of money is unsafe. If the money is lost or stolen, you will likely never see it again. Credit card companies provide customers with the added security that if your credit card is lost or stolen, fraudulent transactions can be disputed and you will not be responsible for the amount charged.

· Say: Just because you have a credit card does not mean you can go on a shopping spree and spend as much as you want. Though credit cards provide you with revolving loans you can use on an ongoing basis, they have spending limits. Your credit limit is how much you are allowed to spend, the maximum amount of money the credit card company is willing to loan you at a time. For example if you have a $500 spending limit and you currently owe $400, you can only borrow another $100 until you have paid down your balance. You want to try to avoid spending up to your credit limit as it negatively impacts your credit score. A good rule of thumb is to owe no more than half your credit limit. Which of the two examples below is following this rule?

· Do: Explain to students that in Sample A the individual owes more than half of his/her credit limit which is not desirable because it shows you are at a higher risk of overspending. In Sample B, the individual owes less than half his/her credit limit, which is the most desirable scenario to creditors.

· Say: Your credit history tells banks a lot about your creditworthiness.

o Is this your first credit card?

o Do you make your payments on time?

o How much do you pay?

o What kinds of purchases are you making?

o Are you spending too much?

· Say: When applying for credit, credit card companies will look at your credit report. A credit report is like a report card. You are assigned a number based on your credit history, the higher your credit score the more money you will be eligible to borrow at a lower interest rate. What do you think will happen to your credit worthiness if you decide to use your credit card and do not pay your debt?

· Say: When it comes to credit cards big brother is watching your every move and keeping score on your credit report. Miss a payment, pay too little, owe too much, and having too many credit inquiries can negatively impact your credit score. The day you want to apply for a credit card or other loan, the merchant will pull up your credit report to decide whether to approve or deny your application. Your credit report will also be used to determine how much interest to charge you.

· Do: Have students analyze the credit score graphic and identify good and poor credit ratings. Ask students who do they think will pay higher interest rates? Why?

· Review: Payment history (35%) and amounts owed (30%) are the most important elements of your credit report. This confirms the importance of managing your payments responsibly. Creditors are looking at how much of your balance you pay off each month and whether or not you pay on time consistently. Creditors are also looking at how much you are spending. Owing too much, especially if you have multiple credit cards and loans, puts you at greater risk of defaulting on your payment. The message is to use your credit wisely and responsibly.

2. Discuss PowerPoint slides 9-12. (8 minutes)

· Say: The pie graph shows elements that contribute to your credit score. According to the graph, what two factors have the greatest impact on your credit score and overall creditworthiness? What message does this send to credit card users?

· Review Graph: Payment history (35%) and amounts owed (30%) are the most important elements of your credit report. This confirms the importance of managing your payments responsibly. Creditors are looking at how much of your balance you pay off each month and whether or not you pay on time consistently. Creditors are also looking at how much you are spending. Owing too much, especially if you have multiple credit cards and loans, puts you at greater risk of defaulting on your payment. The message is to use your credit wisely and responsibly.

· Say: Understanding credit card offers will help you decide which credit card is best for you. Remember, borrowing money comes at a price. with every swipe you are committing yourself to repay the amount borrowed plus interest. Interest is a fee credit card companies charge for lending money. Interest rates can range from 10-25%, your interest rate is dependent on they type of credit card and your creditworthiness. Here are what sets credit cards apart:

o Interest Rates: When it comes to borrowing money, the lower the interest rate the better. But in the case of credit cards, that’s not always true. In fact, most credit cards have a grace period that if you pay off your balance not interest is charged.

o Rewards: Credit cards come with a variety of rewards, ranging from cash back to travel rewards togas rebates.

o Introductory Interest Rates: Credit cards with temporary zero or lowered interest rates. These credit cards are increasingly hard to find.

o Annual Fees: Every credit card charges fees of some kind. Some of the cards, particularly American Express and many travel reward cards, charge an annual fee. Whether the fee is worth paying depends on why you want the card. Some of the best travel rewards cards charge a fee, but the rewards make the card worth the price of admission.

· Say: You are not alone if you find understanding how credit card companies determine your interest each month. Most credit cards advertise an “annual percentage rate” or APR. However, credit cards charge interest daily. Some of your APR is fixed and some varies from month to month as it is based on national rates or other economic factors. It’s also important to understand that although credit card companies advertise interest as APR – interest is not charged annually, it is actually charged daily.

When applying for a credit card be sure to look at your daily periodic rate which is the APR divided by 365. (Note that some banks use 360.)

· Say: Did you know that credit cards charge have compounding interest? The term “compound interest” means that any interest charges are added to the principal (which is the amount you originally borrowed) and you will continue to be charged interest on the interest you now owe.

3. Discuss PowerPoint slides 13-14 (2 minutes)

· Say: It’s important to know how to read your credit card bill each month.

· Do: Guide students through identify parts A-J of the statement pictured on slide 13. Remind students of the importance paying more than the minimum in order to pay off the balance.

· Say: Now that you’ve learned the truth about credit cards, don’t despair! Understanding how credit cards work is the first step in learning how to use them responsibly.

· Do: Guide students in reading the five tips about wise credit card holders:

o Pay off the entire balance within your billing cycle to avoid interest fees.

o Read the fine print. They understand how interest rates impact the total cost of their purchase.

o Limit their credit card purchases, avoiding impulse buys, and are careful about overspending.

o Keep an eye on their spending so that they do not max out their credit cards.

o Pay on time and always send more than the credit card minimum payment.

4. Discuss PowerPoint slide 15. (12 minutes)

· Do: Distribute copies of Credit Card Bingo handout. Have students write the following terms in each square randomly. Then randomly read the descriptions below and have students put an X over the corresponding word on their BINGO card.

o A fee for borrowing money (interest)

o Annual Percentage Rate (APR)

o Amount of interest credit card companies charge daily (DPR)

o The amount of money you owe (balance)

o Your monthly bill (statement)

o A number you are assigned based on your credit history (credit score)

o Like a report card (credit report)

o Pay off your entire balance within this time frame to avoid interest charges (grace period)

o The maximum amount of money you can borrow (credit limit)

o If you cannot pay your entire balance at the end of the month you can pay in ______(installments)

o Another word for the act of buying something (transaction)

o When you buy now and pay later (credit)

o Credit cards that offer incentives for using such as travel miles or gas (rewards)

o When you are charged interest on interest (compounding)

o Carrying large amounts can be dangerous (cash)

o Fees that certain credit cards charge their customers each year (annual fees)

o Temporary low interest rates (introductory offers)

o Fees credit card companies charge for not paying on time (late fees)

o The date when your payment must be received by the credit card company (due date)

o If you pay this amount you will never get out of debt (minimum)

o Be careful! Credit cards make ____ easy! (overspending)

o This term refers to how worthy you are of obtaining credit (creditworthiness)

o If you do not pay your bill, your credit card may be ____ the next time you try to use it. (declined)

o Always check your monthly bills for any _____ activity that might be fraud. (suspicious)

CLOSURE (1 minute)

Revisit the essential questions and the cartoon on slide 16. Have students discuss how their initial interpretation has changed. Encourage students to support their answers with evidence from the lesson.

OPTIONAL EXTENSION SUGGESTION/HOME LEARNING

· Debit or Credit Lesson Plan http://www.vamentoring.org/images/uploads/resources/FRB_Debit_or_Credit_Lesson.pdf

· Practical Money Skills Teacher Resource Guide

https://www.practicalmoneyskills.com/foreducators/lesson_plans/lev_3/L3TeachersGuide8.pdf