Debit and Credit Overview Students compare financial institutions and their services; examine the value of credit scores; and interpret the effect of creditworthiness. Three Required 45-Minute Lessons Plus Two Optional but Recommended Lessons Lesson One My Life: Financial Institutions...3 Lesson Two My Life: Cost of Credit...9 Lesson Three My Life: My Credit Score...13 Students will be able to: Describe the types of financial institutions and the services they provide. Explain debit and credit cards and their uses. Identify the advantages and disadvantages related to credit and debit cards. Give examples of the best ways to build credit. Demonstrate why credit scores are important. 1Debit and Credit PBL
JA Finance Park Common Core State Standards National Standards for Financial Literacy CCSS.ELA-Literacy.W.9-10.7. Conduct short as well as more sustained research projects to answer a question (including a self-generated question) or solve a problem; narrow or broaden the inquiry when appropriate; synthesize multiple sources on the subject, demonstrating understanding of the subject under investigation. CCSS.ELA-Literacy.W.11-12.1a. Introduce precise, knowledgeable claim(s), establish the significance of the claim(s), distinguish the claim(s) from alternate or opposing claims, and create an organization that logically sequences claim(s), counterclaims, reasons, and evidence. Benchmark by the end of Grade 12 At the completion of Grade 12, students will use this knowledge to: List factors from an individual s credit history or credit application that may cause a lender to deny credit. Explain what credit bureaus do. Benchmark by the end of Grade 12: At the completion of Grade 12, students will use this knowledge to: Use the APR, initial fees, late fees, nonpayment fees, and other relevant information to compare the cost of credit from various sources for the purchase of a product. Benchmark by the end of Grade 12: At the completion of Grade 12, students will use this knowledge to: Explain the concept of a credit score and what it indicates about a borrower. Explain why certain factors, such as having many credit cards with large lines of credit and large balances, might hurt a credit score. 21st Century Skills Collaboration, communication, and critical thinking 2
PBL Culminating Project: My Life Scenario During Debit and Credit activities and research, students will focus on answering questions related to the importance of obtaining and maintaining good credit. Students will consider what to save for to meet their short and long term goals and learn how to play it smart to avoid risks. Optional reading: The Money Book for the Young, Fabulous & Broke, by Suze Orman Lesson One Duration Debit and Credit My Life: Financial Institutions One required 45-minute lesson One recommended 45-minute lesson Overview There are many types of financial institutions providing a wide range of services. This lesson focuses on two banks and credit unions. Internet banks are becoming more attractive to consumers and also will be highlighted in this lesson. Online banking and mobile banking are financial services that also will be explored. Debit and Credit PBL Lesson One Objective Identify the types of financial institutions and the services they provide. 3
JA Finance Park Materials and Resources Personal finance websites that provide consumers with accurate and objective information to help make informed financial decisions: Financial rate information www.bankrate.com Comparing rates www.banks.com Credit Union National Association www.cuna.org Online piggy bank https://www.smartypig.com Internet Bank Accounts www.gobankingrates.com Prepaid credit cards www.consumerreports.org/cro/prepaid-cards/buying-guide.htm Computer access (classroom, lab, library, or BYOT (Bring Your Own Technology) Digital tool or pen and paper for note taking Copy of Venn diagram, Student Handout 1, Page 18, for each student Invite a guest speaker (from a local financial institution) 4
Teacher Introduction Nearly everyone who earns income, buys a car, rents an apartment, purchases a home, or buys food and clothes uses the services of a financial institution. Financial institutions help people complete financial transactions safely, quickly, and conveniently. Today s students need to be prepared to use these services as they move into the world on their own. A financial institution is a business, either for-profit or nonprofit, that helps people with their financial matters. Credit unions and banks are examples of financial institutions. They help consumers save for the future; hold and transfer money; handle credit, debit, and loan transactions; and provide mortgage and consumer loans for houses, cars, and home improvements. Many people now use tablets and smartphones to conduct their banking transactions. An Internet bank is an online bank in which transactions are performed exclusively online. In addition to faceto-face transactions, traditional banks and credit unions offer their customers the convenience of online banking. Online banking is a way to view account activity and pay bills. With a username (or email address) and password, customers have quick access to their financial accounts, including checking and savings accounts. Mobile banking is a wireless service that allows money transactions to be performed by an app or Web browser on a mobile device. Vocabulary Debit and Credit PBL Lesson One Bank: A for-profit institution that offers personal loans, mortgages, and other services. Credit union: A not-for-profit cooperative that offers bank services and is owned by its members. Financial institution: A business that provides money-related services. Internet bank: A Web-only bank. Mobile banking: A wireless service that allows financial transactions by using an app or Web browser from a mobile device. Online banking: An electronic way to view account activity and pay bills via the Internet and an institution s website. 5
JA Finance Park Step 1 5 minutes Lesson Presentation Set the Stage In previous lessons, you learned about savings accounts and ways for your money to grow. You also learned that in order for your money to grow, it has to be in a financial institution. What happens if that financial institution fails? Is your money insured? By whom? (Answers should include FDIC, or Federal Deposit Insurance Corporation, for banks and NCUSIF, or National Credit Union Share Insurance Fund, for credit unions.) Step 2 15 minutes Note that these organizations insure deposits up to $250,000. www.fdic.gov/deposit/deposits/ www.mycreditunion.gov Not All Financial Institutions Are Created Equal In this lesson, students will work in teams to comparison shop by researching, comparing, and deciding on a financial institution that provides services to meet their needs and goals for saving. Divide students into teams based on their savings goal. Students divide research responsibility for each team member. Students use the Venn diagram, Student Handout 1, found on Page 18 of this guide, to note similarities and differences between a bank, credit union, and Internet bank. 6
Step 3 15 minutes Step 4 10 minutes Comparison Shopping Students research and identify a financial institution that best meets their needs and goals (local bank, local credit union, or Internet bank). Features to consider: Savings account Checking account Certificate of deposit Convenience Fees Free checks Required minimum balance Interest rates Any other unique features (Optional: Students interview a local bank employee.) Students record answers either digitally or on a notepad. Minutes of Need to Know Student informational session: Take a poll of the different financial institutions students chose in Step 3. Ask students to present their findings. Allow time for questions and answers between students. Debit and Credit PBL Lesson One 7
JA Finance Park Talk Show 45 minutes Optional Additional Class Time or Extra-Credit Homework Activity Comparatively Speaking Talk Show Students will use the data collected in Steps 2 and 3 to prepare for a talk show. The objective of the talk show will be to inform the audience of the types of financial institutions and the services they provide. Divide students into teams. Each team decides which student will be the talk show host. Each team decides a format for the talk show. Each team performs to the audience. ( The audience may include classmates, administrators, and financial institution representatives.) 8
Lesson Two Duration My Life: Cost of Credit One required 45-minute lesson Lesson Overview There is good debt and bad debt. Some debt, such as a mortgage or auto loan, can show stability, but having more debt than can be paid may affect business relationships and employment. Objectives Students will be able to explain debit and credit cards and their uses. Students will identify the advantages and disadvantages of credit and debit cards. Materials and Resources Compare credit cards www.creditcards.com/?aid=af90b3b8 Online calculators www.practicalmoneyskills.com/calculators/calculate/costofcredit. php?calccategory=debt Handheld calculators Computer access (classroom, lab, library, or BYOT) Debit and Credit PBL Lesson Two Digital tool or pen and paper for note taking Invite a guest speaker (from a local financial institution) 9
JA Finance Park Teacher Introduction For many Americans, debit and credit cards have surpassed cash and checks as forms of payment, as consumers look for convenient ways to make purchases. A debit card operates like cash or a personal check. With a debit card, a consumer buys now and pays now. The money is a debit, or a deduction, from a checking or savings account. A credit card, on the other hand, is credit loaned to a consumer by a bank or other financial institution. A credit card is used with the understanding that the money will be repaid with interest if the debt is not paid in full each month. Credit can be a helpful tool when used responsibly. Credit offers many advantages: the freedom to carry small amounts of cash, the opportunity to establish a good credit history, and the ability to track expenditures. Credit increases financial flexibility, allowing users to enjoy goods and services now and pay for them at a later date. Students need to know, however, that credit is not additional income that allows them to buy more. Credit is a loan that allows people to make purchases while postponing payments, thereby enjoying the benefit now and paying what s owed later. Credit is not free. If the loan is not paid off, it becomes a debt. Also, extra charges for its use increase the cost of each item purchased. Credit terms such as APR, credit limit, finance charges, minimum payment due, and previous balance will be explained in this lesson. Vocabulary Cash: Money in the form of bills or coins. Check: A written order for a bank to pay money. Credit: The amount of financial trust extended to a person or a business by a lender; a loan. Credit card: A card authorizing the holder to buy goods and services that can be paid for later. Debit: An amount deducted from a bank account. Debt: Money owed. Debit card: A card that looks like a credit card but operates like cash; money is immediately subtracted from the cardholder s bank account when a purchase is made. 10
Step 1 5 minutes Step 2 20 minutes Lesson Presentation Set the Stage The Federal Reserve Bank of New York reported recently that 35 percent of Americans under 30 were seriously late on student loan payments, compared with 21 percent in 2004. With that said, what is the number one mistake young people make in the financial world? (Answer: Misuse of credit cards not paying back the loan.) What if In Lesson One of Saving, Investing, and Risk Management, students decided on a personal goal for which they would save money ( car, college, prom, or trip). If they were unable to save the money, the next alternative might be to borrow the money. Students research the pros and cons of credit card and debit card use. They record answers either digitally or using paper and pen. To pay back the loan, students use the website below or library resources to calculate monthly payments for each of the following situations: Debit and Credit PBL Lesson Two 1. Only pay the minimum monthly payment (2.5 percent). 2. Pay more than the minimum payment (students decide). 3. Use three different interest rates (varying from 9 to 24 percent). www.practicalmoneyskills.com/calculators/calculate/ costofcredit.php?calccategory=debt 11
JA Finance Park Step 3 20 minutes Debit Card and PayPal Jeopardy-Style Game Show Students write their answers to the following questions; those answers become clues in this game. What is PayPal? How is it used? What is a debit card? How is it used? Invite an administrator to observe the Debit Card and PayPal game show. Teacher collects the answers from the students. One student volunteers to be the game show host. Game show host reads an answer. A student who knows the clue raises his hand and, once recognized, responds in question form. 12
Lesson Three Duration My Life: My Credit Score One required 45-minute lesson One recommended 45-minute lesson Lesson Overview Responsible borrowers have a good credit rating. Whether to use credit is an important decision. It is essential for students to understand how to build a good credit reputation. Objectives Students can explain the best ways to build credit. Students understand what a credit score is and why it is important. Materials and Resources Credit report information: https://www.annualcreditreport.com/cra/index.action Computer access (classroom, lab, library, or BYOT) Digital tool or pen and paper for note taking Debit and Credit PBL Lesson Three 13
JA Finance Park Teacher Introduction Credit reporting agencies keep records of a consumer s credit history. A credit report includes information on where you live, how you pay your bills, and whether you ve been sued, arrested, or filed for bankruptcy. Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers (with written consent), and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. Lenders need some way of understanding the financial risk of giving a consumer a line of credit. Credit reports and credit scores are two ways prospective lenders assess the likelihood of a loan being paid on time and in full. A credit report determines a consumer s creditworthiness. It details personal and financial information about a person, including existing loans and credit accounts, any late payments, and recent inquiries from other creditors. It can only be obtained by prospective lenders with the borrower s permission. A credit score measures lender risk using a standard formula and is based on information in a credit report. The factors that determine the credit score are referred to as the 3Cs of credit. Vocabulary 3Cs of credit: The factors that determine a credit score: character; capacity to repay; and capital, or what a person owns. Credit report: A record of a person s financial information, including previous addresses, Social Security number, current and previous employers, estimated income, credit card accounts with amount owed and payment history, and loan information. Credit score: A standardized measurement of the potential to repay a debt. 14
Step 1 3 minutes Step 2 10 minutes Lesson Presentation Set the Stage If you are late on a credit card payment, go over your credit limit, or miss a payment, which of these are possible? You may not be able to rent an apartment. You may not get hired for a job. You may not be able to get a cell phone. You may not be able to get a student loan. You may have a lower credit score. (Answer: All of the above.) Allow time for discussion. Students individually perform an online search for the three consumer credit reporting agencies. A class discussion will follow. Their search results should include: The name and purpose of each agency. The answer to this question: Why are three reporting companies necessary? (Possible answer: The information on each of the three credit reports Experian, Equifax, and TransUnion can be very different. A comprehensive report provides a side-by-side format, making it easy to review a credit history for inaccuracies.) Debit and Credit PBL Lesson Three Students record answers either digitally or using paper and pen. 15
JA Finance Park Step 3 15 minutes Before credit is given, consumers must prove to be creditworthy. The guidelines used to determine creditworthiness are expressed with the 3Cs of credit: Character refers to how a person has handled past debt obligations and his or her living habits, including where the person has lived and how long he or she has worked for an employer. Capacity refers to the ability of a person to earn enough income to repay a loan. Capital refers to what is owned by a person who wants credit, such as real estate, savings, or investments that could be used to repay the debt if income is not available. Inform students of the 3Cs of credit (Student Handout 2 on Page 19 of this guide). Organize students into teams to discuss the following topic: Using the 3Cs of credit as a guide, students discuss their current lifestyles and predict the credit score they will achieve in their 20s. Students volunteer to share predictions with the class. Step 4 2 minutes Minutes of Need to Know Check for understanding of the importance of the 3Cs of credit. 16
Step 5 15 minutes Step 6 45 minutes Interpreting FAQs of a Credit Report https://www.annualcreditreport.com/cra/index.action Students read and interpret the general and special situations frequently asked questions (FAQs). Students decide which FAQs are most important to them. Students create an informational presentation that includes answers to the FAQs. (Welcome creativity.) Optional Additional Class Time or Extra-Credit Homework Activity My Credit Report Presentation Students present the informational presentation to a younger class. Students summarize key valuable points they will share with others (family members, friends, etc.). Debit and Credit PBL Lesson Three 17
Venn Diagram Instructions: Use the Venn diagram to illustrate the similarities and differences between Internet Banks, Banks, and Credit Unions. Write the similarities between the three financial institutions in the intersecting portions of the circles (shaded spaces). Write their differences in the non-intersecting portions of the circles (larger spaces). Internet Banks Banks Credit Unions
The 3Cs of Credit PBL Debit and Credit Student Handout 2 Before credit is given, consumers must prove to be credit worthy. The guidelines used to determine creditworthiness are contained within the 3Cs of Credit: 3Cs of Credit: Character Refers to how a person has handled past debt obligations and his or her living habits, including where the person has lived and how long he or she has worked for an employer. Capacity Refers to the ability of a person to earn enough income to repay a loan. Capital Refers to what is owned by a person who wants credit, such as real estate, savings, or investments that could be used to repay the debt if income is not available.