The purpose of this lesson is to introduce middle school learners to the complex economic world of responsible credit use, including installment credit and credit cards. The learners will identify the uses as well as the abuses of various forms of credit, including installment loans and credit cards.  They will explore ways to effectively use credit cards so that they will be better able to spend, save, invest, and donate to meet their needs and wants.

The learner will:

• define the terms mortgage; credit; credit report/score; net income; simple, installment and revolving credit; credit card; debit card.
• identify the pros and cons/uses and abuses of credit and credit cards, and apply this information to the use of money.
• calculate a “safe” debt load using the 20/10 Rule.
• calculate interest and on installment loans.
• decipher the language in credit card offers.
• make an informed decision after comparing credit card offers.
• locate relevant information from a credit card statement.

Day One - Using Credit Wisely/Installment Credit

Anticipatory Set:
While shuffling an assortment of Credit Cards, read the following opinion concerning credit cards. Have the learners share the pros and cons of this statement:

"With a credit card I don't have to delay getting what I want. What I mean by that is: I don't have to ask myself the questions, 'Do I really want or need this?'  ‘Do I have enough money to buy this?' I can buy anything I want or need! It's great!"

Start a list of pros and cons on a display board.  Continue the discussion by asking the learners to share some problems with credit cards that either they have personally encountered or problems that they have heard others have had with credit, and list these comments on the display board.

• Review the definition of credit: the opportunity to borrow money or receive goods or services in return for a promise to pay later such as credit cards.  Have the students express opinions about whether having and using credit cards is good or bad.
• Using Attachment One: Using Credit Wisely - the 20/10 Rule, review the three types of credit, Single-Payment, Installment Credit, and Revolving Credit.  Define the word mortgage as a long-term loan for a house or other property.
• Explain to students that credit reports are like your school transcripts, they have a way of following you throughout your life and are used by other people to make judgements about you, in this case, about your credit-worthiness.  Emphasize to students the importance of maintaining a good credit rating/score for the benefits one can achieve as a result.
  Optional web activity:  Show students examples of a sample credit report at one or more of the following sites:

http://www.truecredit.com/pdf/learnCenter/Reading_Your_Report.pdf

http://www.experian.com/credit_report_basics/pdf/
samplecreditreport.pdf

http://www.mortgage-investments.com/Credit_reports/
sample_credit_report.htm

• When introducing the 20/10 rule, explain that net income is income remaining after all necessary taxes are paid, whether calculated yearly or monthly.  Also remind students that mortgages do not count when working with the 20/10 Rule because home mortgage loans are in a different category with certain rules that apply for safe mortgage debt load.  The 20/10 Rule applies to all other loans and credit-card borrowing.
• If appropriate for your students, assign the learners to groups of three or four, and have them apply the 20/10 rule to the problems in page 2 of Attachment One. Otherwise, using an overhead transparency, work through the practice problems as a class, calling on students to do the calculations and show their work to justify their answers.

Answers to 20/10 Rule problems:

Annual net income would be $12,000

Problem #1 -assuming no other debt, it is still NOT within the safe debt load which is $2,400 { 20% of $12,000= $2,400}.

Problem #2 -assuming no other debt, it IS within the safe debt load calculation which is $100 {10% of $1,000 is $100}.

• Ask students if they think at some time in the future, they believe that they will be able to buy either their dream house or car?  Will they probably use cash or credit to pay for the purchase?  Have them share the reasons that they believe as they do.  Explain that buying on credit, such as an installment loan or credit card usually means paying interest, and that a wise borrower knows what interest amount they will be paying before signing a contract.
• Using board space or overhead, explain that how much interest a person must pay and the interest rate (percentage) a person pays can be calculated using the Interest Formula, (I=PRT).  This method works well for installment loans (like mortgage and car loans), but credit card companies use more complex and sometimes confusing rules and formulas to calculate interest.
• Demonstrate the basic installment credit math problem calculations described below:

Write the formula :
Interest = Principal x Interest Rate x Time (in years) on the board and show and explain Examples 1 and 2 posing the questions to the class along the way.  Ask students to assist with the calculations on the board. (A calculator may be used for Example 2, but long division practice of the interest rate calculation is also recommended also.)

Example: How much interest does he pay?
Arthur wants to buy an entertainment center. The cash price is $2850.  It can also be purchased in 24 monthly payments of $140 each, with a down payment of $250. 
How much interest would he pay if he purchased the item on the installment plan?
Total cost = Down payment + Monthly payment total
      =       $250 + (24 x $140)
      =  $3610 total cost of $2850 entertainment center

Interest = Total amount paid – Cash price
         =  $3610 – $2850
         =  $760 interest paid

By choosing to pay by installment, Arthur paid $760 more (in interest) for the entertainment center.

• After modeling the computations above, place the learners in groups of three, distribute and assign each group the Installment Math and 20/10 Rule Problems (Attachment Two). The students will work together as a group to solve the problems. Tell them that they will not only need to find the correct solutions to the problems, they will also need to make a determination of how the 20/10 rule would apply, giving the rationale and calculations to support their position. (As an alternative, this can be given as a homework assignment.)

Answers:

Problem 1: The full installment price is $1,000 (down payment) plus 6 X $200 = $1200 (monthly payments total) = $2200.  The annual interest rate is found by dividing the Interest amount ($200) by the principal (Full installment price – Down payment = $2000 - $1000 = $1000 Principal.  Therefore, dividing $200 interest amount by $1000 principal = 20% annual interest rate.
20/10 Rule application: If net monthly income is $1,400, Clare’s safe debt load, using the 20/10 rule, should not be more than 10% of this total, which is $140 (excluding any mortgage).  Since she is already paying $100 per month for a furniture installment loan, it would NOT be advisable to add $200 per month more for the wide-screen TV loan.

Problem 2:  The full installment price ($400) minus the down payment ($50) leaves a principal of $350 to be paid in 12 equal installments.  Dividing $350 by 12 (months) = $29.17 per month.  To calculate interest rate, calculate total interest first. (Total installment amount paid $400 minus the cash price $325= $75 interest.  Then divide interest ($75) by the principal $350=21.43%.
20/10 rule application:  At $8000 net income per year, Miguel should not have more than 20% of  $8000 in installment and credit card debt, not counting mortgages.  $8000 times .20 (20%) = $1,600 per year.  Miguel’s car loan costs 12 times $100 or $1200 per year, leaving $400 to still be within safe debt load limits. ($1,600 minus $1200=$400.  The GPS would cost Miguel $350 after the down payment, so it would just fit in under the safe debt load limit.

• Conclude by asking students to comment on what could happen to spending, saving, investing, and donating if a person had too much debt?  (Money spent on interest for borrowing could have been spent, saved, invested, or donated in other ways with more freedom and control.) Explain that in the next segment we will go beyond installment credit and consider revolving credit with the use of credit cards.
• Ask learners to do an informal survey of their family members before the next class session to discover how many credit cards they have and how many credit cards are actually being used.  (Information from this informal survey will be used in the Anticipatory Set for Day Two of this lesson.)

Day Two - Choosing and Using Credit Cards Responsibly

Teacher Note: If internet access is not available to the learners, provide three sample credit card applications to each group. They can be downloaded using the URL’s below.  Applications could also be obtained in local retail stores.
http://www.creditcards.com/

http://www.credit-land.com/

http://www.creditcardguide.com/

Anticipatory Set:
Ask learners to share some results of the informal survey of credit card use in their families.  List their responses on the board, including how many they have and how many are actually in use.

Ask the learners to guess the average number of credit cards and annual credit debt in every household in American.  (The Federal Reserve Board in 2007 and Consumer reports indicate that there is an average of seven credit cards and an average credit debt of $9,840 in every household in the United States.)  Indicate that today they will identify ways to responsibly select and use credit in order to more easily proportion their use of money, follow their spending plan, and avoid huge credit debts.

Pose this statement for class discussion: "People typically tend to cut back on their donating to charity--become less philanthropic with their treasures--when their desires and wants exceed their budgets." (Be sure that the learners know and understand that while philanthropy is shown by giving time and talent, it also includes the donating of treasures--money--for the common good.) Have the learners share their thinking about why this statement may or may not be true.

• Ask students to brainstorm different methods of payment (barter, cash, check, credit/debit cards, rent to own, etc.).  Explain that there are advantages and disadvantages for all kinds of payment methods.  Explain that cash, checks, gift certificates and debit cards are forms of money and can be used as a medium of exchange in most transactions.
• Explain that credit is not money and is really a loan. Define the two basic card options: credit cards and debit cards using the “buy now, pay later” and “buy now, pay now” descriptors below to help learners compare them. Show examples of each card while explaining the information below.

Credit Card:  is a small plastic card with built in codes, issued by banks or businesses, for authorizing the cardholder to buy goods and services on credit so you can “buy now, pay later”.  Using a credit card is a loan that must be repaid, usually with interest. It is provided as a payment convenience to you by the bank or business.  When you use it, you agree to repay the amount of purchase plus interest if you do not repay the balance each month.

Debit Card:  is a similar, small, coded, plastic card issued by a bank that allows the cardholder to transfer funds electronically and immediately from his or her checking account.  This is a “buy now, pay now” situation and is the same as if the cardholder were writing a check for the purchase.  It is not a loan.
Deciding if and when to use these cards, and which kind to use in a given situation, are important decisions.

• Using available display space, create a T-chart to ask students to list possible advantages and disadvantages of using a credit card, leading them to the following:

• Distribute copies of Attachment Three: Choosing and Using A Credit Card Responsibly. Explain to the students that choosing a particular credit card is a not the only complex decision to make, but that even deciding how to personally use a credit card (such as whether to pay off credit card loan balances monthly or deciding to maintain a balance and have interest charged to you) are complex and important economic decisions.  Read and discuss the contents of Attachment Three as a class.
• Arrange the class into groups of three to complete the second part of Attachment Three: Comparing Credit Cards. Tell the class to go on-line at http://www.creditcards.com/ , http://www.credit-land.com/, or http://www.creditcardguide.com/  (If internet is not available to the learners, provide three Credit Card applications to each group) and select three different credit card options.  Using the information found at each credit card site the learners are to fill out the Comparing Credit Cards sheet.  Define and explain credit card vocabulary as needed or use an online glossary of terms available at the site.
  In a whole group discussion or in small groups, ask learners to share and discuss their findings and draw some conclusions based upon what they discovered.
• Optional Activity If appropriate to the learners, and time permits, access a sample credit card statement at: www.practicalmoneyskills.com/english/resources/
  tutor/statements/credit_state.php 
  (Note: If internet is not available to the learners download the tutorial, duplicate, and distribute a copy to each learner.)  Pose questions concerning the statement. Have the learners locate the information and respond appropriately.
• Summarize the importance of responsibly choosing and using credit. Indicate to the learners that by now they should realize that huge credit debt can be the result of not only misusing credit, but also of not fully understanding it.  Reinforce the impact that misusing credit can have on well-intentioned plans for spending, saving, investing, and donating.
• Assign homework to be completed before the next lesson.  Distribute copies of the Credit Survey for each student to informally survey 5 people (teachers and school staff, family members, other adults in school and community) with questions about financial literacy and credit cards.  Students should record individual survey data and report back the next day to assess community need in preparation for generating ideas for a service project.
   

Day One: Ask students to do an informal survey family members as to how many credit cards are owned and how many are actually used. Their findings can be reported at the start of Day Two of this lesson.
Day Two: Students will survey 5 people about their knowledge of personal finance and use of credit.