Credit and Credit Cards
/Now that you’ve learned the basics about bank accounts and how to balance them, let’s move on to a new topic. To get started, think back to a time when you borrowed something from a friend or family member. Maybe it was a few crayons from your friend who had the huge 64 pack in elementary school. Maybe it was your parents’ laptop to play on cool math games. Regardless of what the item was, borrowing is very common. Now, think of a time you may have borrowed money from someone else. Maybe it was to buy ice cream from the ice cream truck at the pool, or McDonald’s on the way home from running errands. Did you decide how you were going to pay the money back? Did you ever actually give them their money back? Think of the reverse scenario as well. Have you ever loaned someone else your money? Did the two of you come to an agreement on how they would get that money back to you? Did you ever actually get your money back?
All of these questions connect to the concept of credit. Credit is the ability of someone who has borrowed money to pay it back to the lender, or the person who gave them that money. Two common examples of the usage of credit are loans and credit cards, where people are able to borrow money in order to buy things in the present. Credit is earned, not given. Those who loan you money want assurances that you will pay them back fully. This is true of friends and family members, but especially of credit card companies and banks. Personal responsibility is absolutely essential when it comes to credit. Taking responsibility means you are keeping your promise to pay back the money you owe when it’s due.
Not everyone can borrow money whenever they like. The ability to buy money is a privilege that’s earned through managing your money over time. This management is called your credit history. You can begin to establish credit by opening a savings or checking account, which we discussed in previous lessons. Carefully managing these accounts by not spending more money than you have will allow you to begin the process of building a good credit history. For instance, if you have $100 in your account, don’t buy a new laptop worth $750. This will damage your credit and make a bank or credit card company less likely to loan you money in the future. Maintaining a good credit history is key for making large purchases, like cars and houses, when you are an adult.
When you turn 18, you may be eligible to have a credit card under your own name. However, credit card companies will want to see your income and your history of payments to see if you manage your money responsibly. If you meet the company’s qualifications, they will open a lending account under your name and give you a credit card to use. There are fees associated with borrowing money from the credit card company. These fees are known as interest and they are one of the ways that the company makes money. When borrowing money, the annual percentage rate (APR) states the yearly cost of a loan. Using a credit card is a short term loan. If you pay back the full amount that you owe to the credit card company each month, they will not charge you interest. However, if you don’t pay the full amount you owe, the credit card will charge you interest on the unpaid portion, and this interest can accumulate very quickly. You may also be charged a late fee for not paying your full balance on time. Different financial institutions use different formulas for determining the amount of interest they charge on credit cards. Depending on the company, you may be given a time period to pay your unpaid balance in full before interest is charged. For these reasons, it is important to shop around to find the credit card with the lowest interest rate and with policies that you understand.
Missing a payment or making a late payment on your credit card will negativelywill, this negatively affectaffects your credit history and rating. Too many of these results in bad credit, at which point it will become is difficult to secure more loans or credit cards unless your payment history improves. For this reason, it is important for you to manage your money responsibly so that you can pay your balance in full on time and avoid these complications. This may seem like a scary process, but by knowing how much money you have and can afford to spend, credit cards and loans become useful resources to help you conveniently make purchases. Make sure to complete the attached worksheet for practice with these concepts. See you next week!
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Worksheet and Answer Key:
youth.handsonbanking.org/wp-content/uploads/2019/08/InstructorGuide_MiddleSchool.pdf (pages 75-76)
Image citations:
“How Many Credit Cards Should You Have?” Clark Howard, 2 Oct. 2019, clark.com/credit-cards/how-many-credit-cards-should-you-have/ - https://clark.com/credit-cards/how-many-credit-cards-should-you-have
Irby, LaToya. “The 3 Basic Steps You Need to Start Building Your Credit.” The Balance, www.thebalance.com/three-basic-steps-to-building-credit-960101.