In this lesson, students learn about credit cards while they investigate and comprehend the concepts of credit and credit ratings, or scores. They watch a segment from the PBS series What’s Up in Finance? to see how Anna, a small-business owner, is reviewed positively by a lending committee based on her strong credit rating. Students then play an online game to learn about the different costs of borrowing money on a credit card. Afterward, they complete a hands-on activity in which they examine a hypothetical credit-history scenario and learn how specific actions impact a person's credit score. As a culminating activity, students compare different credit card offers for young people, and determine which card offers the best deal. They use a chart to make a comparison of the different features of the cards, including annual fees, APRs, and rewards.
Students will be able to:
- Understand the concept of credit
- Identify the components of a credit score
- Recognize the importance of having good credit
- Learn techniques for building a strong credit history
- Understand the concept of interest
- Compute interest amounts on a loan
- Analyze different interest rates
(3) 45 minute class periods
Green Chic QuickTime Video
In this video from What’s Up in Finance? Anna needs a loan for her eco-friendly fashion start-up.
It Costs What?! Flash Interactive
The goal of this game is to compare the cost that interest and fees can add to a purchase when the purchase is made using a credit card.
Before The Lesson
Bookmark the Web site used in the lesson on each computer in your classroom. Using a social bookmarking tool such as del.icio.us or diigo (or an online bookmarking utility such as portaportal) will allow you to organize all the links in a central location.
- Preview all of the video segments and Web sites used in the lesson to make certain that they are appropriate for your students, currently available, and accessible from your classroom.
- Download the video segments used in this lesson onto your hard drive, or prepare to stream the clips from your classroom.
- Print out the "Credit Card Components" Teacher Organizer to copy the terms and definitions on the board.
- Print out the Student Organizers: "Credit Score," "Credit History," "Credit Card Offers," and "Credit Card Comparison," and make enough copies so that each student has one copy of each organizer.
Introductory Activity: Setting the Stage
- Open the discussion by asking if any of the students has a credit card, and if so, how often they use it. 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 about a fashion designer who is trying to expand her business and needs to take out a loan in order to do so. Ask students to pay attention to how Anna and her business are perceived by the group of lenders that review her request for a loan. How does her credit rating affect her loan request? Play the Green Chic segment for the class.
- Review the Green Chic segment, 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. Another credit score is the VantageScore.)
- Hand out the Credit Score Student Organizer. Ask students to read about how a strong credit score can help them. Discuss 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
Credit History Answer Key
- 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 game. There are three parts to this game: a credit card "Crash Course," a set of "Case Files," and a section on "Choosing Wisely." Ask students to go through the three sections of the game and to consider how they would make decisions about borrowing money on a credit card. Students then play It Costs What?! Flash Interactive to apply the concepts that they have learned.
- Ask students to report back on the four characters in the "Case Files" section of the game. 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 while playing "It Costs What?!" (Answer: The credit cards with high interest rates end 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, ask students to collect credit card offers that arrive at home or that they notice displayed in public places. Once offers have been compiled, do a similar activity to the above to analyze and evaluate real-world credit card offers.