Unit 4: Money Management

Lesson 4: Credit

OBJECTIVES

1. Define credit and different types of credit.

2. Identify two positive things about using credit properly.

3. Identify two negative things about using credit improperly.

4. Identify where to obtain a credit report.

SUPPLEMENTAL RESOURCES
Using Credit – A computer-based learning tutorial for $49.95 by Jostens Learning (1800 247-1380).

Money Management – A $13.95 book by Educational Design, Inc. (1800 221-9372).

Consumer Loans & Credit Cards: An Easy-to-Use Guide to Credit and Loans – A $6.95 book by JIST Works, Inc. (1800 648-578).

INSTRUCTIONAL FORMAT
This lesson will provide the student basic information about using credit. The supplemental resources provide information on credit in much greater detail. Using credit appropriately relies more on cognitive skills than behavior skills. Even if a person can fill out a credit application and pay bills, it does not mean that they will be able to understand the concept of credit and how interest is figured. Use this lesson to try to give students the facts about using credit and how it can hurt a person or help a person depending on how they use it.

1. Credit provides the opportunity to purchase items and pay the cost over a period of time at a later date. Credit is available in the form of loans to make large purchases such as a home, car, and a college education. It is also available in the form of credit cards (Visa, MasterCard, gas, retail, etc.) that allow a person to make purchases at a variety of businesses. The basic process for getting credit is applying for it, getting approved, borrowing the money, and paying it back.
   
   

2. There are both positive and negative aspects of using credit. Some positive aspects of using credit include:
   
   

   • You can purchase something that is nearly impossible to save all of the money for, such as a car, house, or college education.
     
     

   • Using credit builds a good credit history. Before a bank will loan a person $5,000-$10,000 for a car loan, the loan officer will to want to see that the applicant has a history of re-paying loans on the terms agreed upon. If a person has never used a credit card or taken out a loan, it is unclear whether he is a good credit risk. The best way to begin a good credit history is to get a credit card with a moderate interest rate (10-15 percent) and make small purchases that can be paid off at the end of each month. By doing this, you are building a credit rating without paying the interest rates.
     
     

   • Credit cards are useful in emergencies. If the furnace goes out in the middle of winter, and you do not have enough savings to buy a new one, you cannot wait to save up enough money. A credit card allows a person to get the furnace when he needs it and pay it off later. The only problem is that furnace will cost even more because the person has to pay interest.
     
     
     Some negative aspects of using credit include:
     

   • Unless you can pay off the whole amount borrowed before interest is accumulated, you end up paying more for the item than it really costs. Of course, this is impossible when you get a loan for a house or car. However, if you make a few small purchases during the month with a credit card, and pay off your balance at the end of the month, there will be no interest charged. Some retail stores (furniture, electronics, etc.) are now offering interest-free credit for a period of time. For example you may be able to buy a $800 stereo with a store credit plan of no interest for six months. This sounds like a good deal, but it is only good if you pay the $800 dollars back before the six months is up. If you don't, the interest has been accumulating over that 6 months, and even if you paid $750, you are going to have to pay the interest accumulated over the six months. While it may look like a good deal, lenders have found that most people don't pay off the balance within the specified time, so the lenders end up with the best deal.
     
     

   • Even though getting loans is difficult, getting a credit card is easy. The ease of a credit card lures people into getting things they don't need and spending money that is over their budget. Once this happens, people often find themselves in debt. The ease of using credit can lead to money problems.
     
     

   • Be wary of loan programs that may be too good to be true. Some retailers offer loans that make expensive products such as cars, furniture, and appliances easy to afford on a monthly payment plan. Even though the monthly payment may be low, the total amount that needs to be paid back far exceeds the actual cost of the item. These "good deals" can lead to extra debt that a person cannot afford. Whenever purchasing an item using credit, remember to compare the total cost of paying back the loan with the actual cost of the item. If the two are significantly different, it would be best to avoid the purchase.
     
     

   • Using credit does not allow a person to develop financial discipline. What is meant by financial discipline is spending less than you earn and saving money for the future. As mentioned previously, a person is going to have to use credit for expensive things such as a car or a house. But using credit to purchase things that you cannot afford, such as clothes, electronic equipment, and eating out, makes spending over your budget too easy.
     
     

   • Some "credit"dealers are not regulated by the government. Borrowing money from a pawn shop can cause significant problems because they can charge up to 300 percent interest per year on "loans."
     
     

3. Discuss the basic concept of interest or finance charge. The interest charge to a loan or a credit balance is the cost for borrowing that money. There are many different ways to calculate the finance charge. It depends on three basic factors: interest rate, amount of money borrowed, and the length of time before the money will be paid off. Thus, a person will pay more if a bank charges a 9 percent interest rate versus a 8 percent rate. Furthermore, if you pay a loan off in one year instead of two years, you will pay less of a finance charge. There is a more detailed discussion of this material in the Transportation unit. It is in Topic 2 of the "Owning a Car" lesson.
   
   

4. Indicate that banks and credit card companies obtain information about your credit history through credit bureaus. The three largest credit bureaus are listed below. Obtaining a credit report for a small fee is a good way to ensure you have a good credit rating. If there is a mistake in your credit history, you can contact the bureau to have the incorrect information changed. If an accurate credit report indicates a poor credit history you have some time to repair it before applying for a loan or credit card. If you are denied credit, the lender must tell you where they obtained the credit history. You can obtain this credit history from that bureau for free if you contact the bureau within 30 days of the denied credit notice.
   

Equifax Credit Information Services
Wildwood Plaza Suite 500
Marietta, GA 30067
1800 685-1111

TRW Consumer Assistance Center
PO Box 749029
Dallas, TX 75374
1800 392-1122

Trans Union Credit Consumer Relations
PO Box 7000
North Olmstead, OH 44070
1800 851-2674

SIGNS OF GENERALIZATION
Students have a basic understanding about credit. They understand that paying interest on money borrowed will cost them more than if they paid cash. They build a good credit history by using a credit card wisely and taking small bank loans and paying them back in full.

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