Good Debt vs. Bad Debt

1. Good Debt vs. Bad Debt Middle School Financial Literacy #5

2. Pre-Test • What is usually a good debt? • What is usually a bad debt? • When credit card bills are paid off within a month, how much interest must be paid?

3. Objectives • Review Last Lesson • Good Debt • Created value or has the potential to create value • Bad Debt • Difficult paying money back or does not add meaningful value • Credit Card Problems

4. Review • Tool on the internet that provides information about income vs. expenses • Reality Check • What is the annual salary needed to cover your expenses? • Answers will vary • Average Range: $50,000-$60,000 • What careers of interest cover those expenses? • Answers will vary • Usually needs to be a high-skill career

5. Good and Bad Debt Video • Watch the Good and Bad Debt video • Pay close attention: what is good or bad debt? • Mixed opinions on whether borrowing money to buy a car is a good or bad debt

6. Good and Bad Debt • Good Debt • College Loans • A loan that can make you money • Bad Debt • Things that can be consumed fairly quickly with no or little cash or personal value • Buying something you really do not need • Cannot afford the monthly payments

7. Credit Card Interest • The average interest rate is 20% for credit cards • When credit card bills are paid off within a month, no interest is paid • The credit card company requires people to pay at least 3% of the principal every month

8. Credit Card Scenario #1 • Mai charges $1,000 to her credit card for a vacation • Her credit card interest rate is high: 20% • She only pays the minimum amount per month • How long do you think it takes Mai to pay off the debt? • 25 years • After adding interest, how much do you think the $1,000 vacation costs Mai? • $2,224.06

9. Credit Card Scenario #2 • Ed has bad credit rating for not paying previous loans • His interest rate is very bad because of this: 37% • He only pays the minimum amount per month • For the same $1,000 vacation loan, how much do you think Ed paid in interest • $24,040.81 • How long do you think it took Ed to pay off the debt? • 50 Years

10. Groups: Usually Good or Bad Debt? • Which of the loan items below are usually good or debts? • Give reasons why they are good or bad debts • Credit card finance charges • Buying a home • Paying for college • Buying clothes • Paying for a vacation

11. Groups Share With Class • Which of the loan items are usually good or debts? • Give reasons why they are good or bad debts • Credit card finance charges • Buying a home • Paying for college • Buying clothes • Paying for a vacation

12. Usually Good Debt • Buying a home • Most people need a loan to buy a home • Interest money is tax deductible • When it is bad: Monthly payments too high for income • Paying for college • Costs are often much less than increase in income • When it is bad: High tuition with few long-term financial or personal benefits

13. Usually Bad Debt • Credit Card Finance Charges • Often very high interest, Payments primarily going to interest • When it is good: Pay balance quickly, buy something important • Buying Clothes • Not recommended to borrow for items consumed fairly quickly • When it is good: Clothes essential for new job, pay back fast • Paying for a vacation • When costs creates payments you cannot afford, consumed quickly • When it is good: Cost slightly over your savings, rejuvenates you

14. Post-Test • What is usually a good debt? • What is usually a bad debt? • When credit card bills are paid off within a month, how much interest must be paid?

15. Review • A good debt is usually • Buying a home, Paying for college • A bad debt is usually • Credit card finance charges, buying clothes, paying for a vacation • Amount of interest when credit card bills are paid off within a month • $0.00