CREDIT CARS: COSTS, RESPONSIBILITY, AND CONSEQUENCES
Overview
"Future Ready: Financial Literacy" is an educational resource that explores credit cards, emphasizing the importance of understanding their costs and potential hazards. Learners will develop rational thinking and decision-making skills through a cost-benefit analysis. The content focuses on financial responsibility, highlighting the benefits of wise money management and the costs of irresponsibility. The resource equips individuals with essential knowledge to make informed financial choices and maintain a healthy credit score.
WHAT ARE CREDIT CARDS?
Future Ready
FINANCIAL LITERACY
Learning about credit cards, their potential costs and hazards of using them
What are credit cards?
Photo by AVery Evans on Unsplash
LEARNING OBJECTIVES
Describe rational thinking and behavior
Demonstrate the process of making decisions using a cost-benefit analysis.
Identify ways to be a financially responsible individual.
Give examples of the benefits of financial responsibility.
Give examples of the costs of financial irresponsibility.
THE TRUE COST OF USING A CREDIT CARD
Credit cards allow you to borrow money from the issuer to buy things, but it's important to remember that if you don't pay back what you borrow each month, you'll have to pay extra money in the form of interest and other fees [1]. So, it's important to be careful when using credit cards and make sure to understand the rules and conditions of the card agreement, so you don't end up with a lot of debt that costs you more money in the long run.
THE BOTTOM LINE: Carrying a large balance on your credit card can result in paying a significant amount of interest, especially if the interest rate is high.
This is why it's important to keep your balances low and make timely payments to avoid paying more in interest and to maintain a good credit score.
VOCABULARY
ARP the annual percentage of interest a borrower pays to the lender
credit history a person’s individual history of paying bills
HOW CAN YOU BORROW MONEY WISELY?
To make smart choices when borrowing money, follow these steps:
Read and understand the loan details and what it's for.
Read and understand the loan details and pick the best one.
Read and understand the loan details, like the interest rate and how you have to pay it back.
Check if you can afford the monthly payments and the overall cost.
Keep track of your loan and make payments on time. By doing these things, you'll be able to borrow money smartly and handle it well
BENEFITS TO BEING FINANCIALLY RESPONSIBLE
Handling your cash wisely has tons of perks. For instance, if you're in college, you won't need to ask your parents for dough if you're good with your money. This gives you more freedom and independence. After college, you won't have to worry about paying off student loans, a car, or credit cards, giving you the ability to do what you want.
Earning more money is just one benefit. Other benefits include:
earning more money
having good credit
having more opportunities
gaining independence
being prepared for an emergency
THINKING CAREFULLY
Walk through the thinking process for understanding credit cards and being financially responsible.
Being careless with your money can also have consequences. Say you move into an apartment without considering if you can afford it. If you can't make rent, you might have to move back in with your folks. But, you'll owe the apartment company big bucks because you broke your lease. And, it can also hurt your credit score, making it tough to rent a place again for a while.
Let’s take a look at a couple of scenarios that demonstrate the importance of becoming financially literate.
Simon wants to get a credit card and he gets a form from his bank. He starts reading and sees some confusing terms like "annual percentage rate" and "transaction fee." He doesn't know what those mean and wants more info before deciding if it's the right card for him.
What can Simon do? He needs to learn more about money. He can read a book about finances, Google the terms, take a class, call the credit card company, or ask someone who knows a lot about it. Even a bank worker could be a great help. If Simon understands more about money, he can figure out what important financial information means.
Let's take a look at another example.
Robin got her credit card bill and was shocked to see she owed $100 even though she didn't buy anything and her balance was $0. She called the credit card company and found out it was her annual fee. She realized she read the terms, but didn't understand she'd have to pay a fee every year.
What should Robin have done? Before getting the credit card, she should have learned more about it. She should have found a credit card with no annual fee. Knowing more about money would have saved her money in this situation.
Lastly, take a look at this final scenario.
Anna wanted some new earrings but didn't have enough money. She used her credit card instead. When the bill came, she couldn't pay it all so she only paid part. The next month, the same thing happened. By the third month, she finally paid for the earrings but ended up paying an extra - $22.50 in interest.
Paying more money is just one cost of irresponsibility. Other consequences of irresponsibility include:
paying more money in fees, penalties, and interest;
earning less money in interest;
being dependent on others.
NOW IT’S YOUR TURN.
Use what you have learned to answer the question.
Select the items from the following list that are included in financial literacy.
using a credit card to make a purchase
applying for a credit card
selecting a college
deciding to rent an apartment
paying taxes
opening a checking account
CHOOSE THE RIGHT ANSWER.
Answer the question below. Then read why each answer is correct or incorrect.
Let’s say you decide you want to buy a new iPad or tablet that costs $300 but you haent’ had time to savvy up enough to buy it with cash. Your parents cosign the application, so you were able to get a credit card in your name. If the credit card company charges you 18% interest, and you only have to make a minimum payment of $15 a month, how long will it take you to pay off in full?
Check to see if you chose the right answer.
It sounds great, right? You just got a brand new tablet, didn’t have to spend any cash out of your pocket, and will only have to pay $15 a month. What a deal!
Hold on a minute. At $15 a month and with an 18% interest rate, it will take you 24 months to pay off the balance in full. That means you will have paid $359 for the tablet ($300 for the original cost, plus $59 in interest). And if you happen to accidentally miss a payment, your interest rate will probably go up and you’ll be charged a late fee, maybe $25 or more.
Does it still seem like a good deal?
Now imagine that you only make the minimum monthly payment and continue to use your credit card for everyday purchases like lunch, clothes, and video games. Pretty soon you rack up a $3,000 balance. With an 18% interest rate - and even if you make no more purchases - it will take you nearly 22 years to pay off your credit card debt. If you were 18 when you make your first purchase, you will be 40 when you finally pay it off. You also will have paid $4,100 in interest charges during that time, well over the amount you originally spent.
WHY IT MATTERS: Pay off your credit card balance in full each month by the due date. That way
you won’t have to pay interest
and you’ll never get hit with a late fee
NOW IT’S YOUR TURN.
To do well on questions about a text, follow these tips:
Be a detective and gather information from the text, title, date, and author's background.
Be an active reader and ask questions as you go. Stop and reread things you don't understand.
Trust your first answer, but double check by looking back at the text to make sure it's right.
Think about what the author is saying, the conclusions they make, the arguments they give, and the details they use to support those arguments.
Find specific examples in the text that relate to the question.
Which of the following is an example of financial irresponsibility?
organizing financial documents
spending your entire paycheck
finding a new job before quitting your current job
paying car payments on time
Which of the following is an example of financial responsibility?
spending money before you have earned it
making impulse buys at the grocery store
having medical insurance
borrowing from your brother to make a car payment
2 more
WRITING THE BEST ANSWER POSSIBLE
Study the model below. It’s a good example of a written answer.
Linda and her husband would like to buy a house soon. She continuously pays bills late. How do her actions affect her and others?
Continuously paying bills late can have a negative impact on Lisa's credit score, which can make it more difficult and expensive for her to get a loan or a mortgage to buy a house. It can also affect her relationship with creditors and result in late fees or legal actions. Additionally, her actions may affect her husband's credit score as well if they plan to apply for a loan together. Late payments can also harm her reputation and credibility with utility companies, landlords, and other service providers. Overall, paying bills late can have far-reaching consequences for Lisa's financial well-being and her ability to achieve her goals.
NOW IT’S YOUR TURN.
Answer the question. Use what you have learned from the model.
Do you already demonstrate some ways of showing financial responsibility? In the text box below, write a brief statement about 3-5 ways you already show financial responsibility. Also mention 3-4 areas you would like to start working on.
GET READY FOR YOUR FUTURE!
As you answer the questions below, remember to:
Read each question carefully and consider your answer options.
Take as much time as you need to complete these questions.
When you finish, check your answers.
🤔Remember: Being financially responsible doesn't just affect you. It can also affect your family, neighbors, and even the world. For example, if you got a car loan and asked your parents to help you by signing for it, but then you kept missing payments, it would not only hurt your credit score, but also your parents' because they co-signed the loan.
Answer each question.
Read the following two descriptions. Decide who has better financial habits and attitudes.
Lindsay doesn't feel that she will ever get her credit card paid off. After seeing her new bill, she tosses it aside so she doesn't have to think about it.
Hillary receives a few bills in the mail. She takes out a piece of paper and starts figuring out a plan to pay these bills.
Financial literacy includes information about income, banking, loans, and credit cards.
True
False
Read the following actions and decide if they are responsible or irresponsible.
checking my credit score:
paying a credit card bill one day late:
listing expenses in a budget:
making decisions without all of the information:
purchasing something because it is on sale:
writing some goals:
researching what a mutual fund is:
making financial decisions without discussing it with your spouse:
finding a savings account with a great interest rate:
looking for the cheapest price for an item:
Choose all that apply.
A financially responsible person _____.
has a budget
pays bills on time
spends less than they make
sets goals
pays for everything with a credit card
saves their money
List three or four effects of financial irresponsibility.
REFERENCES, ATTRIBUTION, AND LICENSE
References
“Credit Card Glossary” by Bank of America
CashOnHand - Credit Cards - Brandon - English | CC BY-NC-ND
Credit Card Analysis by Stuart Boersma | CC BY-NC-SA
Cards, Cars, and Currency Curriculum Unit by Federal Reserve Bank of St. Louis | CC BY-NC-ND
Attribution
Lesson by
Benjamin Troutman, Griffin Bay School, San Juan Island School District
Portions of content adapted from
Credit Card Comparison Activity by Lexi Shafer | CC BY-NC
Credit Card Terms and Comparison Activity by Rebecca Kingsley | CC BY-NC
Credit Cards and Credit Scores by Lois Hixson | CC BY-NC-SA
License
Except where otherwise noted, Future Ready Financial Literacy Learning about Credit Cars, Their Potential Costs and Hazards of Using Them by San Juan Island School District is available under a Creative Commons Attribution 4.0 International License. All logos and trademarks are the property of their respective owners. Sections used under the fair use doctrine (17 U.S.C. § 107) are marked.