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Credit: Buy Now & Pay Later

Credit is money that is lent to you and that you pay back over time, usually with interest. Credit allows you to buy now and pay later.

Despite the widespread use of credit cards, many consumers do not fully understand the terms, interest rates, or added charges attached to their credit cards. To test your students' Credit Card IQ, you'll find a quiz at What's Your Credit Card IQ? (See Materials section.)

Students must understand that when they use a credit card, they are taking out a loan from the issuer of the card. If the amount owed on a credit card is paid in full each month, there is no cost for using the credit card. However, if the borrower is unable or unwilling to pay the credit card bill in full, the cardholder must pay interest (finance charge) on the unpaid balance. The finance charge increases the cost of goods and services purchased with a charge card.

Concepts

  • Credit
  • Decision-Making
  • Opportunity Cost
  • Interest

Content standard

Few choices are all-or-nothing propositions. They usually involve trade-offs, that is, getting a little more of one option in exchange for a little less of another.

Objectives

  • Determine the costs and benefits of using credit cards
  • Analyze the decision-making process when using credit cards
  • Identify ways and criteria needed to establish and obtain credit

Lesson description

Through a group activity, students analyze the costs and benefits of using credit cards to purchase goods and services.

Time required

3 class periods

Materials

If you are using computers in class, you will click on A Real-Life Decision. Otherwise, print out enough hard copies of this link for the entire class. Do the same if you are using What's Your Credit Card IQ? as a test at the end or beginning of the lesson.

Procedure

  1. Explain these terms:
    1. Opportunity cost. The opportunity cost is the value of whatever you give up when you purchase an item with a credit card - a) your future income is now reduced by the price of the item just purchased; you cannot use that portion of your future income to buy something else; b) your future income is now reduced by the cost of the interest too; that is more future money that you cannot use to buy something else.
    2. The collective cost of using credit. This phrase refers to the ongoing accumulation of interest on unpaid purchases. If you continue to purchase goods or services with a credit card without paying the entire balance each month, a finance charge is computed and added to next month's balance. Interest that piles onto an existing balance increases the cost of the items purchased.
    3. The use of credit cards for purchasing consumable goods. Generally, using credit cards to purchase consumable goods means that you could "use up" the purchase before you pay off the loan. This is true for living expenses such as groceries, gasoline, and restaurant meals. If you don't pay off your bill at the end of the month, you'll pay even more for something that's "gone already." However, if you pay off your bill at the end of each month, you won't be paying an additional cost for the consumed item.
    4. Durable goods. You should investigate installment loans to finance large purchases, such as automobiles or appliances. The interest rates on these loans are generally lower than rates for credit cards.
  2. Ask students, "Why don't people analyze all the cost(s) of using credit before they make a purchase?" List student responses on the board.
  3. Divide students into small groups. If you are not working online, distribute hard copies of A Real-Life Decision. Discuss the situation. Then ask students to create their own examples and ask each other to fill in the boxes in the decision-making process.
  4. Ask each group to present their situations and discuss them with the class.
  5. Summarize the benefits and costs of using credit cards.