Planning Exercise
Planning Exercise
This Planning Exercise is a fun way to explore credit cards. You will need to create a word doc with the answers to the questions to submit for this assignment
DID YOU KNOW? The average student-loan debt of a four-year college student at graduation is $20,000.
19 years: the amount of time it takes to pay off a $2,000 credit card bill at 18% interest if you pay only the minimum due each month. By the time you’ve paid off the card, you’ll have paid $3,862 in interest.
LEARNING OBJECTIVES
Students will be able to: Understand the concept of credit
Understand the components of a credit score
Understand 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
Learn how to analyze different interest rates
Background You will be exploring a section on choosing and using a credit card, learning more about credit cards and a case study to understand why people pay different amount for the same purchase
| Emma, Byron, Kevin and Maria are four good friends. They all went to the electronics store and purchased the latest and greatest digital music player. The price of the music player was $350.00. . .but when all was said and done, each of the four friends ended up paying a different amount. How is that possible?! How can four people end up paying different amounts for the exact same thing? Well, it all has to do with those wacky pieces of plastic called credit cards. How much do you really know about how credit cards work? Are credit cards a bad thing? What does it mean to buy something with plastic? If you think you understand everything about credit cards, investigate the case files to puzzle out just what happened to Emma, Byron, Kevin, and Maria. If your credit card smarts need brushing up, take a crash course on how they work. If you’re in the market to get a credit card of your own, get some strategies for choosing wisely. |
First about Credit cards
So what is a credit card? People all over the world use them every day to buy everything under the sun. But where does all that money come from? Well, it’s pretty simple. Credit cards are a way for people to borrow money from a bank or other financial organization. When you’re approved for a credit card, it means a bank is willing to lend you some money. Remember: A credit card is a license to borrow money from a bank or other financial organization.
Every time a customer uses a credit card, they’re borrowing money from a bank in order to pay for a purchase. At the end of each month, the customer gets a statement from the bank listing everything he or she purchased with the credit card, along with the total debt owed to the bank. If a customer pays back all the money owed for that month (the balance), that’s it! Easy! But wait a second. If the customer DOESN’T pay back all the money owed, the bank starts charging interest on the debt. “Interest” is an extra amount that must be paid on top of the original debt. Remember: Interest is the cost of borrowing money. It is an extra amount that must be paid in addition to the original amount borrowed.
More on Credit cards
So… are credit cards a bad thing? Not always. They’re great for emergencies, or for large purchases where paying cash may not make sense. Also, it’s important to establish a track record of responsible credit card management. Your credit history, and the credit rating (or score) associated with it, is information that banks will consider when you try to buy or rent a home, buy a car, apply for student loans. . .possibly even when you apply for a job. By consistently using a credit card wisely, you can create a favorable financial situation for yourself for years to come. Remember: Credit cards aren’t necessarily bad, and good credit card management can actually help you in the long run!
Why do banks lend out so much money? Mostly, because it makes them more money… you don’t think they would give it out for free, do you? Using a credit card can be convenient, but it can also cause problems. It is very easy to buy items using a credit card, even if you don’t have enough cash on hand to cover the purchase. You can buy a trip to Hawaii and not have to worry about the price tag until later. But ultimately, you will have to pay for the purchases you make, along with the interest on those purchases. Unfortunately, many people use credit cards to buy things they cannot otherwise afford, and create mountains of debt. Remember: Any charges you make to a credit card must eventually be repaid. Watch out for credit card debt!
Now Answer this question
1.What happens when you buy something using a credit card?
You are taking money from your savings account to pay for the item.
You are getting the item and freeing yourself from full repayment.
You are taking a temporary loan from a bank, which must ultimately be repaid.
You are investing in a financial organization, from which you may get profits.
Answer the question
2.What is interest?
A penalty for making late credit card payments.
A charge for borrowing money, generally calculated as a percentage of the amount borrowed.
A reward for making credit card payments on time.
A written agreement describing the terms of use for a credit card.
3. What could lead you to end up with unmanageable credit card debt?
Buying things you cannot afford.
Carrying a large balance for a long period of time.
Losing track of purchases and payments
All of the above.
More questions
4.How can credit cards be helpful?
They are convenient, they free you from carrying around large amounts of cash, and using them wisely can help you establish a strong financial track record.
They can be used to purchase items you cannot afford, give you extra spending money, and enable you to borrow money you don’t have to repay.
They weigh less than cash, are a status symbol, and give you five years to repay any purchases you make with them.
They are tied into your checking account, can be used for necessities, and if you lose them, you don’t have to pay back any money you owe on them.
5.What is a credit history?
A form the bank asks you to complete when you open a savings account.
The record of purchases and payments to a credit card during a one-month period.
A statement sent to you each year by the Internal Revenue Service.
A profile or report of a person’s debt and repayment habits, which is built up over the course of several years.
More questions You are doing a great Job!
5.Why is it important to establish a good credit rating?
A good credit rating enables you to buy things online.
A good credit rating can earn you college scholarships and tuition waivers.
A good credit rating can impact your ability to secure future loans, obtain housing, or get a job.
A good credit rating will give you more money for your retirement income.
New Topic: Choosing and using a Credit card
Introduction You may have noticed you can apply for a credit card practically everywhere. Offers may arrive in the mail, cashiers may ask you to sign up for a store credit card while shopping, or you may get opportunities via email. Credit card companies are also often seen at malls and on college campuses. How can you “decode” a credit card offer, and once you get a credit card, how can you manage your account wisely? In the next series of questions, you’ll learn some important things to keep in mind when you choose — and use — a credit card. If you get stuck, you can click on highlighted terms to go to the glossary.
A credit card’s APR, or Annual Percentage Rate, is a good way to see the total rate of interest the card charges when you borrow. Here’s an example: A typical APR is about 18.9%. If you charge $100 on a card with that APR, over the course of one year, you would be charged an additional $18.90 of interest. Your total debt would be $118.90. Different credit cards have different APRs, which means it can cost more or less to use each card. It’s usually better to have a low APR, but here are some things to keep in mind:
A “fixed” APR means that the rate shouldn’t change.
Many cards have a “variable” APR, which changes over time.
Be careful of cards that offer a very low, or even 0%, introductory APR. Introductory APRs usually only last for a short period of time, so pay attention to what the APR will become after that time is up.
Some cards offer other rewards, or “points,” that can be used for airline miles, gift certificates, or “cash back.” These rewards can be tempting, but make sure to evaluate all the aspects of the card, especially the APR.
Answer the Question
6. Which of these APRs offers the best long-term deal? A. 15% fixed APR
B. 2% introductory APR, which goes up to 23% after 6 months C. 10% APR, which goes up 1% every month for 10 months
D.19% fixed APR, with 1 airline mile earned for every dollar you spend
More about Choosing
The “balance” on your monthly credit card statement is the total amount you owe to the bank. The only way to avoid interest piling up is to pay off the ENTIRE balance each month, and not to carry any debt over to the next month. In other words, if you borrow $1000, and pay back $999 by the end of the month, you will still be charged interest the next month!
7.Which balance would mean you owe the LEAST amount of money? A. $10.00 B. $1000.00
C.$0.00
D. $563.25
More questions about using a credit card
When you first charge something to a credit card, you often have a period of time before the bank starts charging you interest. This is called the grace period, and it usually ranges from 10 to 55 days, depending on the credit card.
8. Which of the following is the best strategy for paying your credit card bill? A. Pay off your entire balance the day after the grace period ends.
B. Pay half of your balance during the grace period and half after.
C. Pay your entire balance during the grace period.
D. Don’t charge anything during the grace period.
More Questions
On the statement each month, there is a “minimum payment” that must be paid, which is usually just a small percentage of the total balance. If you don’t pay at least the minimum payment by the due date, the bank will charge a “late fee.” Keep in mind that paying just the minimum payment each month will generally not make much of a dent in your total balance owed. You can avoid late fees by paying the minimum payment, but you will still accumulate interest on all of your unpaid debt.
9. What is the best strategy for dealing with minimum payments? A. Pay exactly the minimum payment. B. Pay at least the minimum payment and more whenever possible. C. Pay less than the minimum payment whenever possible. D. Never pay the minimum payment.
More Questions
When you are issued a credit card, there is a “credit limit” attached to it. This is the maximum amount of money you can charge to the card (the maximum amount you can borrow from the bank).
Credit cards with small limits are often safer, because your amount of potential debt is limited.
10.Which of these credit limits is reasonable for a student? A. $100 B. $1,000 C. $10,000 D. $50,000
Great Job. Let’s see if we can our four friends understand why they each paid a different amount for the same purchase.
The Music Player
Think you want a credit card? Learn how to Choose one wisely. Are you ready to figure out how Emma, Byron, Kevin, and Maria used or misused their credit cards? Head into their Case Files to investigate their credit card activity and your understanding
Introduction The digital music player was on sale for $350.00… but Emma, Byron, Kevin and Maria all ended up paying different amounts. Emma paid $714.86. Byron paid $514.24. Kevin paid $360.28, and Maria paid $350.00. Each person bought the music player with a credit card. Each person used their credit card in a different way. Now, it’s up to you to put together the pieces of this mystery, and to figure out who did what and when.
Case #1
Case File #1 Here the facts of this case. One person did all of the following: Bought the $350 digital music player using a credit card with a 12% APR;
Paid much more than the minimum payment towards the credit card balance each month,
Didn’t use credit card again until the digital music player was paid off;
Carefully monitored credit card statements, sent in payments on time, and did not use the credit card for cash advances.
11.Which of the people listed below used their credit card in this way?
Byron, who paid a total of $514.24
Emma, who paid a total of $714.86
Kevin, who paid a total of $360.28
Maria, who paid a total of $350.00
Case #2
Here the facts of this case. One person did all of the following: Bought the $350 digital music player using a brand new credit card with a 0% introductory APR;
Began using the credit card for cash advances at the ATM, which immediately raised the APR to 24%;
Forgot to make the minimum payment the first month after the purchase, and regularly sent in payments late during the following months (and years);
Used the credit card whenever cash was low, and didn’t carefully monitor credit card statements.
12.Which of the people listed below used their credit card in this way?
Byron, who paid a total of $514.24
Emma, who paid a total of $714.86
Kevin, who paid a total of $360.28
Maria, who paid a total of $350.00
Case #3
Here the facts of this case. One person did all of the following: Bought the $350 digital music player using a credit card with a 17% APR;
Saved $350 cash in a savings account before purchasing the digital music player;
At the end of the month, paid off the $350 balance on the credit card in full;
Usually pays cash, and uses credit cards only for large purchases or emergencies
13.Which of the people listed below used their credit card in this way?
Byron, who paid a total of $514.24
Emma, who paid a total of $714.86
Kevin, who paid a total of $360.28
Maria, who paid a total of $350.00
Case #4
Here the facts of this case. One person did all of the following: Bought the $350 digital music player using a credit card with a 19% APR;
Consistently paid the exact minimum payment of $10 a month toward their credit card balance;
Never sent in payments late or missed a payment to the credit card company;
Regularly used the credit card for other purchases, both large and small.
14.Which of the people listed below used their credit card in this way?
Byron, who paid a total of $514.24
Emma, who paid a total of $714.86
Kevin, who paid a total of $360.28
Maria, who paid a total of $350.00
Fun facts
There are enough credit cards in circulation to span the earth over 3.5 times.
According to the financial reports of the three largest credit card companies in the world, there were over 1,635 million cards in circulation in 2013: Visa had 800 million, Mastercard had 731 million, and American Express® had 104 million. If you placed all those cards side by side, you could span 86,981 miles: the equivalent of three and a half trips around the world. Sources: Mastercard, Visa, CreditCards
Sears is one of the founding fathers of plastic.
It is hard to believe now, but Sears was once American’s golden retailer. The arrival of Sears catalogue was a special day in many households and the Christmas catalogue was what children’s dreams were made of. According to Charles R. Geisst’s book, “Collateral Damaged: The Marketing of Consumer Debt to America,” Sears devised the first retail store card back in 1911. The card continued in service until 2003, when Citigroup bought Sears’ card and its membership list. Sears also launched the Discover Card. It was announced during the 1986 Super Bowl. That was one year before American Express® launched its first credit card, when Mastercard and Visa controlled the entire credit card business.
More fun facts
The first two digits on your credit card identification number identify the type of industry that issued the card.
If your credit card number starts with a 1 or a 2, it was issued by an airline. Number 3 is for companies in the travel and entertainment industry; all American Express® and Diners Club cards start with a 3. Numbers 4 and 5 are for banking institutions. If it starts with a 4, you have a Visa card. Number 5 is for Mastercard. Number 6 is for merchandising and banking; 7 is for gas cards; 8 is for telecommunication companies; and 9 is used for national assignments.
Check out this handy little infographic for what all those numbers on your card mean https://www.supermoney.com/2014/04/creditcard-numbers-meaning/
The first general-purpose credit card was sent as junk mail.
In 1958, Joseph P. Williams, a Bank of America employee, had the bright idea of mailing 60,000 genuine BankAmericard credit cards to people in Fresno, California. The cards, which were made of paper and had a preapproved credit limit of $300, were totally unsolicited. By October 1959, Williams had managed to distribute 2 million credit cards to people all over California. Unfortunately for Williams and Bank of America, 20% of all credit accounts became delinquent, which meant Bank of America lost $8.8 million during the launch of the new card and Williams lost his job. Today, mailing unsolicited credit cards is illegal, although sending pre-approved applications is just fine.
Watch for it
The explanation/correct answers of the various Questions will be sent to you after grading.
