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PAY CREDIT WHEN CREDIT IS DUE
INTRODUCTORY ACTIVITY: SETTING THE STAGE
- Open the discussion by asking if any of the students has a credit card, and if so, if they use it very much. Also, ask students if their parents have credit cards and if they understand how credit cards work.
- Next, using the "Credit Card Components" Teacher Organizer, write the following terms relating to credit on the board: credit, credit card, credit risk, interest, APR, and credit limit. Discuss each of the terms with the class.
- Explain how credit cards work. Clarify that credit cards allow you to purchase something, but put off the payment until the payment is due on the card, usually sometime within a month of making the purchase. However, if you leave your payment on the card for more than a month, you have to pay interest on the balance, or the amount still owed to the credit card. It is important for students to understand that the percentage of interest can vary widely, depending on the credit card.
- Discuss the difference between credit cards, debit cards, and cash. Both credit cards and debit cards allow you to use a plastic card to pay for a purchase, but debit cards actually take the money directly from your savings or checking account within a couple of days.
- Next, ask students if they have any ideas about how banks and credit card companies make decisions about granting credit cards to individuals.
- Explain to the students that the most important issue for a bank or credit card company is how likely is it that the money owed to the card will be repaid on time. Tell the students that banks use a numerical score called a "credit score" or a "credit rating" to help them predict a person's future behavior with a credit card. The credit rating takes into account a variety of behaviors made in the past -- it is a way to numerically represent a person's history of using credit cards and other loans.
- Explain to the class that they will be watching a short video on a fashion designer who is trying to expand her business, and needs to take out a loan in order to do so.
- Provide students with a FOCUS FOR MEDIA INTERACTION, asking them to think about how a good credit rating, or score, could help you in life. Play the "Green Chic" segment for the class.
- Review the "Green Chic" segment that was viewed, discussing with students why a strong personal credit rating would help Anna get a loan for her business. (Answer: Because her strong personal credit rating, or score, showed that Anna has a history of using credit wisely -- e.g., repaying loans and credit cards on time).
- Begin a discussion about credit scores, how lenders use them, and what makes up an individual's credit score. Explain that a credit score is a number calculated using a number of different variables. The resulting score helps lenders determine how likely a borrower is to pay a loan or credit card back on time. In other words, a score is a snapshot of "credit risk" at a given time.
- Ask students if they know which organizations calculate credit scores: is it the banks, the government, or private organizations? (Answer: Private organizations calculate credit scores. One well-known organization is the Fair Isaac Corporation, which produces the "FICO score" -- the most widely used credit score. Other scores include NextGen, VantageScore, and the CE Score.)
- Hand out the "Credit Score" Student Organizer. Ask students to read about how a strong credit score can help them. Discuss about why it is important to have a good credit score (Answer: A good credit score facilitates the process of borrowing money for much-needed items like homes or cars, and also helps with credit card approvals, apartment approvals, etc. It also allows borrowing with lower interest rates, which saves money.)
- Using the "Credit Score" Student Organizer, write the percentages that make up a credit score on the board. Have students read about each on their "Credit Score" Student Organizers.
- Next, explain to students that they will be analyzing a credit history scenario, looking at the actions that one person made and how they affected her credit score.
- Hand out the "Credit History" Student Organizer. Ask students to complete the grid for Part 1, filling in the "Why Does Her Action Affect Her Score?" column (they should refer to the "Credit Score" Student Organizer).
- Review Part 1 as a class, and discuss why each of Angela's behaviors had an impact on her credit score. Compute how much the credit score fell as a result of the behaviors. Refer to the "Credit History" Answer Key for solutions.
- Next, ask students to complete the grid for Part 2, filling in the "Follow-up Action" and "Score" columns. The information for this is listed on the "Credit Score" student organizer.
- Discuss Part 2 as a class, looking at the different ways a person can improve a credit score. Compute how much the credit score rose with these behaviors. Refer to the "Credit History" Answer Key for answers.
- Introduce the "It Costs What?!" online interactivity. There are three parts to this interactivity: a credit card "Crash Course," a set of "Case Files," and a section on "Choosing Wisely." Provide students with a FOCUS FOR MEDIA INTERACTION, asking them to go through the three sections of the interactivity and to consider how they would make decisions about borrowing money on a credit card. Students will then play the online interactivity "It Costs What?!" to apply the concepts that they have learned.
- Ask students to report back on the four characters in the "Case Files" section of the interactivity. How did the various credit cards, and the different ways the cards were used by the players, affect how much the characters paid for the digital music players?
- Hand out the "Credit Card Offers" Student Organizer. Ask students to read through each of the five different credit card offers.
- Discuss which offers look good and why. Ask students to compare the offers to the terms of the credit cards they learned about in the "It Costs What?!" interactivity. (Answer: The credit cards with high interest rates ends up costing students much more money).
- Next, hand out the "Credit Card Comparison" Student Organizer. Ask students to fill out the grid given the information from the "Credit Card Offers" Student Organizer. Advise them that the offers may be described in ways that make them look attractive, but they should carefully read the details of each offer.
- Now, ask students to take a good look at the grid. Which card actually offers the best overall deal? (Answer: For ongoing balances, #3, because the interest rate is the lowest and the rewards of the other two are not worth much. The best option overall is the ATM card, because there is no concern for rates or fees.)
- As an extension activity, have the students collect credit card offers that arrive at home or that they notice displayed in public places. Once some offers have been compiled, do a similar activity to the above to analyze and evaluate real-world credit card offers.
Lesson plan written by Melissa Donohue