Credit Cards

1. Credit Cards Unit 1 Lesson 3

2. Introduction • Consumer use of credit for purchasing goods and services is growing at a staggering rate. Once used primarily for large-ticket items, credit is now used for virtually everything. What is credit? Credit is the amount of financial trust extended to a person or business by a lender. Credit is a loan. It can be of great help to a smart money manager and serve as a building block to establishing a great credit history. It also can be a trap leading to financial ruin. Credit must be used with caution and managed carefully. It is essential that students understand how to use credit wisely. • Credit cards, such as department store charge cards, are the most widely used form of credit. In this activity, students will decide on credit card use for various purchases that will be presented.

3. Key Terms • Credit • The amount of financial trust extended to a person or business by a lender; a loan. • Credit Card • A card authorizing the holder to buy goods and services that can be paid for later.

4. View of Credit Cards • Is safe. If your card is lost or stolen and used by a thief, the most you can be held liable for is usually $50. • Provides emergency buying power. The car broke down? A trip to the emergency room? With a credit card, you can cover those emergencies and pay the bill later. • Offers protection. You may be able to use credit card regulations to dispute a charge if there is a problem with merchandise or services you bought with your card.

5. View of Credit Cards • Is convenient. When you’re shopping with a credit card, you don’t need to make sure you have enough cash on hand, or hope that a merchant accepts your check. There’s hardly a merchant these days who won’t accept a major credit card for payment, and they’re always an accepted method of payment for telephone and Internet purchases. Personal checks, on the other hand, may not be accepted by all retailers. However, credit cards can support impulse buying – buying before you can afford the item.

6. View of Credit Cards • Can build your credit card rating. Pay your bills on time, and a major credit card can help you build an excellent credit rating. In fact, the single strongest reference on a credit report is a major credit card, paid on time over time. • Travels well. In many countries, major credit cards are widely accepted. You’ll often get a favorable exchange rate, as well. Some cards offer benefits like emergency card replacement or free car insurance on a car rented with your card.

7. View of Credit Cards • Is flexible. With credit card, you have the option of paying your bill in full (and usually avoiding any interest charges that way), or making smaller payments. If not paid off monthly, interest is accrued on the balance. • May have park benefits – ranging from free frequent-flier miles extended warranties on merchandise you buy with the card and free movies or gasoline.

8. View of Credit Cards • Can be used to withdraw cash at ATM machines using the card’s PIN (personal identification number). However, cash withdrawals are usually calculated at a higher interest rate than purchases. Credit cards often have an annual fee. Cards with benefits almost always have an annual fee.

9. Questions on Credit Cards • How many different credit cards can you name? • Do these cards represent cash or a loan? • How many credit cards do you think that the average cardholder has and why? • Why do you think banks want college students to have credit cards?

10. Gotta Have It Game • Game Objective • To be the first team to pay for three items listed on the worksheet. • Game Instructions • Teams will compete four rounds of the game. • A round ends after each team is shown a Card and makes a decision. • Teams must select a member to record transactions on the Check Register. • Each team starts with $125.

11. Teams must make a choice • Pay Cash • The team announces its choice. The amount is deducted from the team’s Check Register and an “X” is marked on the text of the item in the Wordbook indicating the item is paid for in full. • Use Credit • The team announces its choice and circles the item in the Wordbook, indicating the item is not yet paid for. During subsequent rounds, the team can decide to pay for the item by announcing its intentions, deducting the amount of the item plus interest from its check register, and marking an “X” over the text to indicate that the item is now paid in full.

12. After the Game • Have your opinions about credit changed? • Does it make sense to pay certain items with credit? • What recommendations would you give someone interested in acquiring a credit card?

13. Credit Decisions - Scenario 1- Page 14 • Megan will start college soon. She will move out of her parents’ house and move into a dormitory on the college campus. Megan will have many bills to take care of while at college. Her parents want to be able to keep track of her expenses while making spending convenient for her. Megan’s parents have cosigned on a credit card for her use. They expect her to use the card to pay tuition, books, and living expenses.

14. Credit Decisions - Scenario 1- Page 14 • Megan is enjoying school and has made several new friends. Megan’s friends in the dorm invite her to go to dinner at local restaurants a couple of times a week. She goes shopping with her roommate on the weekends. Megan also joined a movie club with some other students. They go see the latest movie once a week.

15. Credit Decisions - Scenario 1- Page 14 • Megan doesn’t have a job to earn her own money, but is given a monthly allowance from her parents. The allowance isn’t always enough to cover the things she wants to buy. Megan has begun to use the credit card her parents gave her. Megan’s parents gave her the card to use for college expenses, but did not expect her to use the card for entertainment and shopping. Before long, Megan has spent more on the card than allowed by the bank. Her parents receive the bill and are concerned about the hundreds of dollars on the card that they did not expect. Megan and her parents meet to discuss the situation.

16. Scenario 1 Questions – Page 14 • What does it mean to cosign for a credit card? • It means to take joint responsibility for any debt. • Why did Megan’s parents have to cosign on the credit card for her? • Because Megan is too young or doesn’t have a job (no credit history) • Why was it easy for Megan to spend using the credit card, but not realize she had spent so much money? • Because it was easy to forget or not keep track of all charges when you’re not paying with cash • What will happen if Megan or her parents do not pay the credit card bill on time? • They will be charged interest and late penalties. • How will the large credit card affect other spending by Megan and her parents? • They will need to cut their spending until the debt is paid off.

17. Scenario 2 • James is in eighth grade. He earns money during the summer by mowing lawns and caring for neighbors’ homes when they go on vacation. James will be out of school for the summer in just four weeks. He is beginning to line up work for the summer. With the jobs he has secured around the neighborhood, James expects to earn about $150 a month. That amount likely will increase as he gets more jobs.

18. Scenario 2 • James wants to buy a new bicycle, but he needs $100 more than he has in his savings account at this time. James wants to use the bike to call on customers and build his business. James thinks he could acquire even more customers if getting around the neighborhood was made easier by riding his bike rather than walking.

19. Scenario 2 • James asked his parents for a loan so he can buy the bike now. His parents have agreed to help him with the expense. They told James they would buy the bike on their credit card, but that James must pay back the amount of the loan, plus interest owed on the purchase. Including interest, James will pay his parents $125.

20. Scenario 2 Questions – Page 15 • What benefits would James receive from buying the bike on credit now, rather than waiting to earn the cash himself? • He would be able to use the bike now to build his business. • What benefits would James receive by waiting to earn the cash, rather than buying the bike on credit now? • He would save $25 in interest (the amount he’d have to pay for the credit)

21. Classwork/Homework • Complete Scenario 3