Credit

1. 850 756 816 700 Credit 655 600 610 525 400

2. What do you know? Answer this question in at least 4 sentences: What should you use credit to purchase? Can you define these terms? • Credit • Character • Collateral • Capacity • Interest • Debt • Asset • Default

3. By the end of this lesson you should know…. Essential Questions • How do interest rates impact people’s saving and spending choices? • How should you personally use credit? • How can you maintain a good credit rating? • What should you look for when evaluating a credit offer? Terms Content Terms Credit Character Collateral Capacity Simple interest Compound interest Annual Percentage Rate Credit Score Academic Terms Asset Debt Default Georgia Performance Standard SSEPF4 The student will evaluate the costs and benefits of using credit. a. List factors that affect credit worthiness. b. Compare interest rates on loans and credit cards from different institutions. c. Explain the difference between simple and compound interest rates. Literacy Standards RH.11-12.3 Analyze a complete set of ideas or sequence of events and explain how specific individuals, ideas, or events interact and develop over the course of the text. RH.11-12.7 Integrate and evaluate multiple sources of information presented in different media or formats as well as in words in order to address a question or solve a problem. WH.11-12.1 Write arguments to support claims in an analysis of substantive topics or text using valid reasoning and relevant and sufficient evidence.

4. What is Credit anyway? • Credit is when you borrow money to make a purchase. When you pay back the money you borrowed (the loan) you pay a fee called interest. • How much interest you pay and whether or not you can get a loan is determined by several factors. Credit-borrowing money to make a purchase Interest-payments made in exchange for the ability to borrow money

5. Factors that affect CreditThe 3 C’s • Capacity- your capacity to pay is determined by your job and other sources of income. • Capacity to pay also takes into account how much money you owe. A ratio of how much debt you have versus how much money you make. • They ask questions like: How much money do you make annually or monthly? How long have you had your job? What is your job history? How much money do you owe?

6. The 3 C’s of Credit cont.. • Character- Your character is determined by your history of borrowing and paying back debt. • Lenders determine your character by checking your credit history. • There are 3 credit bureaus that maintain everyone’s credit history and determine your credit score. • Equifax • Experion • TransUnion Debt-the amount of money you owe Credit Score- a rating between 300 and 850 that is an estimation of how worthy you are to receive a loan

7. The 3 C’s of Credit cont..Your Credit Score • What does the score mean? • Between 700 and 850 – Very good or excellent credit score. • Between 680 and 699 – Good credit score. • Between 620 and 679 – Average or OK score. • Between 580 and 619 – Low credit score. • Between 500 and 579 – Poor credit score. • Between 300 and 499 – Bad credit score • How is your credit score determined? • The bureaus determine your score using a mathematical formula that takes several things into account • How long you have had credit • How many times you have applied for credit • Late payments • How many accounts you have open • Late payments and payments you have missed • Bankruptcies and charge-offs

8. The 3 C’s of Credit cont..Your Credit Score

9. The 3 C’s of Credit cont.. • Collateral- This is an asset that you own that the lender can take if you fail to make your payments or if you default on the loan. • If you plan to make a large purchase using credit like a house or a car, the lender will usually use the item you purchased as collateral. asset-a valuable thing that you own default- failure to fulfill an obligation or pay back a loan

10. So far can you… Answer this Question? • How can you maintain a good credit rating? Define these Terms? Content Terms Credit Character Collateral Capacity Interest Credit Score Academic Terms Asset Debt Default • We still need to… • Evaluate the costs and benefits of using credit. • Define Annual Percentage Rate (APR.) • Compare interest rates on loans and credit cards from different institutions. • Explain the difference between simple and compound interest rates.

11. Let’s Look Closer at Credit Basics • You pay Interest every time you borrow money. • Lenders usually give a 30 day grace period (a short time after your purchase when they do not charge interest.) • Lenders also require various Finance Charges. • These appear as annual membership fees, over limit fees, cash advance fees etc. • Some lenders give you an Introductory Rate as an incentive to apply. • This is a lower interest rate that lasts a limited amount of time • APR or Annual Percentage Rate is the interest you are charged each year for borrowing money. There are two types of APR: • Variable- this means that the interest rate you pay will change based on national economic indicators • Fixed- this means that the interest rate you pay will not change.

12. Credit Offers Would you apply for this credit card? American Capital Credit is pleased to offer you access to purchasing power up to $1,000! This card will allow you to make purchases with no interest for the first 30 days and after that you will only pay 9.9% interest for the first 6 months! Act now before this offer ends! *All offers include an $75 annual fee; 30% fee on cash advances; after 6 months APR reverts to 29.9% variable rate American Capital Credit Could B. You

13. Can you Identify the Basic Features? Find the following information in this credit offer • What is the credit limit? • How long is the grace period? • What is the an introductory rate? • What is the APR? (% and fixed or variable) • What are the finance charges? American Capital Credit is pleased to offer you access to purchasing power up to $1,000! This card will allow you to make purchases with no interest for the first 30 days and after that you will only pay 9.9% interest for the first 6 months! Act now before this offer ends! *All offers include an $75 annual fee; 30% fee on cash advances; after 6 months APR reverts to 29.9% variable rate American Capital Credit Could B. You

14. Can you Identify the Basic Features? answers • What is the credit limit? $1000 • How long is the grace period? 30 days • What is the an introductory rate? 9.9% APR for 6 months • What is the APR? (% and fixed or variable) after 6 months 29.9% variable • What are the finance charges? 30% fee on cash advances; $75 annual fee Would you still apply for this credit card? American Capital Credit is pleased to offer you access to purchasing power up to $1,000! This card will allow you to make purchases with no interest for the first 30 days and after that you will only pay 9.9% interest for the first 6 months! Act now before this offer ends! *All offers include an $75 annual fee; 30% fee on cash advances; after 6 months APR reverts to 29.9% variable rate American Capital Credit Could B. You

15. Let’s Compare Offers City Credit Could B. You Are you a student? Do you want to be able to make financial decisions without calling your parents? Act now, City Credit is offering a student credit card with a $1000 limit and a 0% introductory rate for the first 7 months on qualifying purchases which reverts to a variable rate of 13.00-22.99% after the introductory period. After a year, when you use credit wisely we offer APR reduction. Our card has a low annual fee of $25 per year. This student card can alleviate the pressure of expensive books and assist you with living expenses by giving you the purchasing power you need. We offer a beginning limit of $500 and a 0% APR for the first 6 months then a low variable rate of 12.00-18.99% and there is no annual fee! Apply today! Discount Credit Could B. You Which offer would you apply for?

16. City Credit Could B. You Discount Credit In 2 paragraphs using the basic features of credit: Explain to the class which credit card is the best choice for students, City or Discount Credit. Be sure to use details to explain why the card you chose is better than the other Could B. You

17. Let’s Compare Offers City Credit Could B. You City Credit Summary • $1000 limit • 0% introductory rate for the first 7 months on qualifying purchases • After 7 months APR is 13.00-22.99% variable rate • APR reduction after a year of good credit use • $25 annual fee Discount Credit Summary • $500 limit • 0% APR for the first 6 months • After 6 months APR is 12.00-18.99% variable rate • no annual fee Discount Credit Could B. You Which one is right for you?

18. What will Credit Cost me? It depends on what you are buying and how much you borrow. Let’s do a simple comparison You use a credit card to buy a 60 inch flat screen TV for $1,000.00 at 9.9% interest . You pay off the loan at the end of 12 months including the principal and interest. What did it cost you? Principal – original amount of money borrowed

19. Answer the following questions regarding this spreadsheet How long did it take you to pay off the loan? How much did you pay in interest? Between the 1st and 2nd month, how much of your payment went to the principal? Between the 10th and 11th? So what did it cost you? (think opportunity cost)

20. Answer the following questions regarding this spreadsheet…answers How long did it take you to pay off the loan? 12 months How much did you pay in interest? $715.93 Between the 1st and 2nd month, how much of your payment went to the principal? $51.00 Between the 10th and 11th? $119.27 So what did it cost you? (think opportunity cost)

21. What will Credit Cost me? Principal=$15,000 Loan Term=48 months Interest Rate=9.9% Monthly Payments=$379.72 Total amount paid= $18,226.56 Total Interest=$3,226.56 You get a bank loan to buy a new car for $15,000.00 at 9.9% interest . You pay off the loan at the end of 48 months or 4 years.

22. Sometimes using credit is unavoidable, sometimes you would rather pay the interest to have the good or service now. Brainstorm: How can you reduce the amount you pay in interest, even if you cannot find a better credit offer?

23. Possible Answers Make a down payment, or save part of the cost so you borrow less. Make extra payments or add additional money to each month’s payment. Consider the Car Purchase. Look what happens when you add only an extra $20.28 a month. Original Payments $379.72 for 48 months Total Interest Paid=$3,226.50 Total Cost=$18,226.50 New Payments $400.00 for 46 months Total Interest Paid=$3,020.92 Total Cost=$18,020.92 Consider the TV Purchase. Look what happens when you add only an extra $10 a month. Original payments $150mo for 12 months. Total interest= $715.93 Total cost=$1,716 New payments $160mo for 11 months. Total interest=$635.68 Total Cost=$1,636

24. There are different types of interest! Which type of interest would you like if you are borrowing money? Which type of interest would you like if you are saving money? Simple interest- interest paid based on the amount of money you borrowed. Compound Interest- interest paid based on the amount of money your borrowed plus the amount of interest you still owe or have earned.

25. Would you use credit to… • Buy gas and food? • Buy household appliances? • Pay for college? • Buy an Xbox? • Buy something because it is on sale? • Pay for a vacation? • Buy something that would take you 3 months to save for? Discuss as a class

26. So what should you use credit for? There is no hard and fast answer to this questions. But here are some helpful tips: • Buying Durable Goods ensures that your purchase outlasts your payment plan • Emergencies • Things you need/want now that are difficult to save up for • Large Purchases like a house or a car • If you need something but do not have the cash to buy it • Things that will help you make money (suit for an interview, college costs, capital goods etc) As a general rule: Use it, don’t abuse it.

27. In your own words tell me… What are the costs and benefits of using credit? (answer with a minimum of 5 sentences using at least 6 facts)

28. You made it to the end of this lesson!! Can you…. Answer these Questions? • How do interest rates impact people’s saving and spending choices? • How should you personally use credit? • How can you maintain a good credit rating? • What should you look for when evaluating a credit offer? Define these Terms? Content Terms Credit Character Collateral Capacity Simple interest Compound interest Annual Percentage Rate Credit Score Academic Terms Asset Debt Default Sample Questions

29. Try these Questions 2. Eric received a $2,000 bonus from his employer. He deposited the entire amount in a one-year certificate of deposit with a simple interest rate of 5%. When the CD matured, how much interest had Eric earned? • $10 • $20 • $50 • $100 1. Loans extended for longer periods of time often involve higher interest rates in order to • compensate the lender for greater risk • compensate the buyer for using savings to make a purchase • encourage consumers to buy durable goods for extended periods of time • encourage savings

30. 4. Tom’s recent credit application was rejected.  Based on his credit report, what is the MOST LIKELY reason his application was declined? A      he still owes money for his car. B      he only makes $80,000 a year. C      his payment history is questionable D      he has large balances on his credit cards Use the information to answer the following question. Gloria recently graduated from college and has accepted a job as an accountant at a firm located in an Atlanta suburb. A summary of Gloria’s financial situation for a single month is shown below. After considerable thought, Gloria decided to purchase a new refrigerator on an installment credit plan. Under the conditions of the installment loan, Gloria will repay the loan in twelve monthly payments of $150 each, starting in May. 3. Which of the following statements BEST describes Gloria’s current financial situation? A Gloria can afford to make the additional $150 monthly payments without changing her current income or expenses. B Gloria’s variable expenses will increase by $150 per month over the next twelve months. C Gloria will have to increase her income or reduce her flexible expenses in order to pay all of her bills in May. D Gloria’s income and current expenses do not allow her to purchase the refrigerator at this time.

31. Check your answers • A (this is a question from the released EOCT) • D (this is a question from the released EOCT) • C (this is a question from the released EOCT) • D

32. Additional Resources You can get 1 free credit report each year from these 3 credit bureaus. • Experian • http://www.experian.com/ • TransUnion • http://www.transunion.com/ • Equifax • http://www.equifax.com/home/en_us

33. Additional Resources • Economics GPS Frameworks: Unit 6- “Let’s make It Personal” • https://www.georgiastandards.org/Frameworks/GSO%20Frameworks/Economics%20Unit%206.pdf • Georgia Department of Education’s Economics/Business/Free Enterprise EOC Assessment Guide • http://www.gadoe.org/Curriculum-Instruction-and-Assessment/Assessment/Documents/Milestones/Assessment%20Guides/GM%20Economics%20EOC%20Assessment%20Guide%20081715.pdf • Georgia Department of Education Released EOCT’s and answer keys • http://www.doe.k12.ga.us/Curriculum-Instruction-and-Assessment/Assessment/Pages/EOCT-Released-Tests.aspx