Grade: 7 Lesson # 7

How does credit card interest multiply?

SS.8.FL.4.3 Examine the fact that borrowers who use credit cards for purchases and who do not pay the full balance when it is due pay much higher costs for their purchases because interest is charged monthly. Explain how a credit card user can avoid interest charges by paying the entire balance within the grace period specified by the financial institution.

SS.8.FL.4.3 Examine the fact that borrowers who use credit cards for purchases and who do not pay the full balance when it is due pay much higher costs for their purchases because interest is charged monthly. Explain how a credit card user can avoid interest charges by paying the entire balance within the grace period specified by the financial institution.

Credit Cards: Easy Money- Big Debt

Lesson Number (1-15): 7

Correlated Florida Standards (See Full Text on Cover Page)

LAFS.7.RI.2.4,LAFS.7.W.2.4, LAFS.7.W.3.7, LAFS.7.SL.1.2

Essential Questions

  • How does credit card interest multiply?
  • What costs and fees are associated with the use of credit cards?
  • What happens when you make only the minimum monthly payment on a credit card?

Learning Goals/Objectives

  • Understand credit card interest
  • Recognize the borrowing cost of credit cards
  • Explain the problems and costs of making only minimum monthly payments on credit cards
  • Learn ways to avoid paying interest on credit cards
  • Analyze ways to minimize credit card costs

Overview

In this lesson, students will explore the costs involved in using credit cards. They will investigate APR’s and credit card fess as well as the smartest ways to manage credit card debt. Through video and simulation activities, students will learn the monetary loss involved in: making late payments; not making payments; paying only minimum payments; not reading the credit card agreement; and accepting credit cards with high interest rates. Students will be able to identify the total cost of borrowing on a credit card.

Materials

  • Computer with internet access
  • Promethean or Smart Board
  • Video: Consumer Credit and Debt – It’s not FreeMoney
  • Attachment 1- Credit Card Statement (Included)
  • Video: Credit Card Debt Explained with a Glass of Water
  • Websites:
  • Worksheet-Decoding Credit Card Offers (Included)
  • Worksheet-Decoding Credit Card Offers Answer Key (Included)

Time

50 minutes

Activity Sequence

INTRODUCTION/HOOK (2 minutes)

Show pictures of different credit cards. Ask students: Do you think that all these cards offer the same benefits?Solicit answers from the students and discuss. Explain that although they all offer the consumer a credit line that allows them to buy products, not all credit cards are the same.

ACTIVITY (42 minutes)

  1. Ask: What is a credit card?

A credit card is a card given by a financial company giving the opportunity to borrow funds, for purchases or cash advances. It is a plastic card with an assigned account number, which enables the holder to purchase goods or services and receive cash on credit. Credit cards charge interest for “borrowing” the money and are intended to be used for short-termborrowing. Interest usually begins one month after a purchase is made (grace period). Spending limits are set so you cannot spend more than the amount for which you have been approved. Show video: Consumer Credit and Debt – It’s not FreeMoney (3:25). After viewing video ask students to identify the credit card costs and fees described in the video. (5 minutes)

  1. Distribute Attachment 1 (or project on the Promethean/Smart Board). Explain to students that each month the credit card company sends a statement which lists all the credit card purchases made during the month. If you do not repay all the purchases at that time, then they begin to charge interest on the purchases made. Any charge you make must eventually be repaid. Point out the finance charges and discuss how this is based on the interest rate charged for using the credit card. Discuss each aspect of the statement: Date; Payment Due Date; Credit Limit; Credit Available: New Balance; Minimum Payment Due; Monthly Activity; Finance Charges; Interest Rate (APR) (5 minutes)
  2. Ask and discuss the following questions:
  • Is it better to have a 9% interest rate on your credit card or a 12% interest rate? Why? (9%-pay less)
  • What happens if you don’t make a payment or pay late? (late fee; possibility of having your interest rate increased
  • What is Jane Doe’s Annual Percentage Rate? ( 19.80%)
  • What is a credit limit? (The maximum amount of money ayou are approved to charge on your card)
  • What happens if you go over your credit limit? (can’t use your card plus you might be charged an over limit fee) (5 minutes)
  1. Explain to students that making only the minimum payment on credit cards ends up costing people a lot of money. Tell students to imagine that they have $10,000 in credit card debt with an interest rate of 17 years. If they choose to make the minimum monthly payment only of $142 per month, about how long do they think it will take them to get the debt paid? List answers on the board. Then ask them how much money do they think they will have paid the credit card company in that time period. Again, list responses. Now tell students that they will watch a video using the scenario just discussed (and see how close their ideas came to the actual numbers) Show Video: Credit Card Debt Explained with a Glass of Water (3:24) Compare the actual numbers to student’s ideas on board (It will take 36 years and you will pay $61,060) Ask students if they were surprised (shocked) by the numbers. What do they think about making minimum monthly payments? (6 minutes)
  2. Project the IT COSTS WHAT!! Case files Compare four people that shopped for the same article and the different ways they paid their credit card debt off. (Choose the case files section) ( 1 minute)
  3. Work your way through the case file with the students. (8 minutes)
  4. Discuss the case files with the students and the benefits of minimizing credit card costs and the borrowing costs of making minimum payments.(3 minutes)
  5. Discuss with students the importance of choosing credit cards wisely and using them wisely as well.( 2 minutes )
  6. Distribute worksheet: Decoding credit card offers (included) .Have students complete activity. Review and discuss answers (Answer Key included) (7 minutes)

CLOSURE (6 minutes)

  1. Revisit the lesson’s essential questions and discuss.
  2. Have students write a short explanation explaining to a friend what happens to the total cost of borrowing on a credit card when only the minimum payment is made each month. Show an example of 2 people buying the same article and choosing a credit card as a form of payment. Explain how one can pay their credit card payment quickly and how the other one would not.

OPTIONAL EXTENSION SUGGESTION/HOME LEARNING

  1. Have students look at different credit card offers and choose which credit card has a better offer.
  2. Have students choose an article to purchase. Look into credit card options for purchasing. Develop a plan for 2 credit cards that show how to minimize credit card costs for the article using the credit cards.

Sources/Bibliographic Information that contributed to this lesson:

Funny Money: Get it on Credit

(Attachment 1)

From:

Decoding Credit Card Offers

What is an APR?
  1. Which of these offers is a better long term deal?

A. 15% APR

B. 6% Introductory APR for 6 months and then 23%

C. 10% APR which goes up1% every month after 6 months

D. 19% APR with points earned towards a gift card at a retail store

  1. True or false

______If my balance is $1000.00 and I pay $999.00, I will not be charged any interest.

  1. ______Making the minimum payment on a credit card is a quick way to pay off your balance.
  1. Which is the best strategy for not paying interest?
  1. Pay off your balance the day after your grace period
  2. Pay half your balance during your grace period and the other half after the grace period
  3. Pay your entire balance during your grace period
  4. Do not make any purchases the few days before the statement closes
  1. What is a good strategy for dealing with a credit card minimum payment?
  1. Pay only the minimum payment
  2. Pay the minimum payment during the grace period
  3. Pay more than the minimum payment
  4. Pay less than the minimum payment

Make a plan with 3 ways that will allow you to keep credit card interest from multiplying

1.
2.
3.

Answer key:

APR: An annual percentage rate (APR) is the annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearlycost of fundsover the term of a loan. This includes any fees or additional costs associated with the transaction.

  1. A
  1. F
  1. T
  1. C
  1. C
  1. Sample Answers

Pay off complete balance, find a credit card with a low APR, pay more than the minimum payment, only buy products you can afford to pay at the end of the month, set up a payment plan and do not charge any more on the credit card,

1