MONEY MATTERS
LESSON 5: DO'S AND DON'TS OF CREDIT
A man wanted to borrow some money on credit from the Hodja 1.
The Hodja told him:
"I have no money; but I can give you credit.
How much do you want?"
I.
Literacy Objective: The students will be able to explain the advantages and
disadvantages to using credit cards and write personal resolutions for their use.
II.
Materials for Lesson:
"Credit Card Tips" - handout
"Basic Do's and Don'ts of Credit" - handout
by Sylvia Porter
III.
Suggested Readings:
Be Credit - Wise: A Guide to Credit
by Elsa Bruton
A Janus Money Matters Guide
Miles River Press
Alexandria, VA 22314
Using Credit
by Sharon Bywater
New Readers Press
Box 131
Syracuse, NY 13210
IV.
Additional Activities:
"Dear Abby" - optional handout
V.
Notes to Instructor: Bring in copies of credit applications if you can for practice in filling
them out.
Consider contacting your local Consumer Affairs Office to identify debt counselors to
come and speak to the class. You might also arrange a field trip to a local bank or
financial institution.
1Nasreddin
Hodja (Turkish: 1208 - 1284) is one of the most loved and celebrated
personalities of the Middle East. He was reputed to be very clever and cunning, as well as
humorous. He seemed to have an answer for every situation that was not only comical but also
had a note of encouragement. Collections of his jokes are in print.
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Journal Entry:
Is it important to establish a good credit history? Why or why not?
Review:
Ask the students to discuss their family members' ideas of what it means
to be "credit-wise".
INITIAL INQUIRY
Develop a discussion with the students on credit cards using the following questions:
1.
What does the term "plastic money" mean?
2.
Do you have a different attitude toward credit cards than your parents did? Than
your children do?
3.
Do credit cards make it easy to "overspend"? Why or why not?
4.
What do you do if a credit card is lost or stolen?
Record student responses on the chalkboard or overhead projector.
LEARNING ACTIVITY
Credit cards are a common form of credit. They are issued by banks, financial service
companies, and many retail stores. They can be used just about everywhere including stores,
gas stations, restaurants, hotels, and even some food stores. VISA and MasterCard alone are
accepted by over four million businesses in the U.S.
Discuss with the class advantages to credit cards:
1.
1.
2.
3.
4.
5.
They are convenient.
You can buy something now and pay for it later
You don't have to carry around a lot of cash.
You can purchase things over the telephone.
The bill is record of your purchases.
They are a way to pay for something in an emergency.
Discuss the disadvantages to using credit cards.
1.
2.
3.
4.
You may buy more than you can afford since you don't need cash to do it.
You have to pay interest on the unpaid balance you owe on the account.
You may have to pay an annual fee which is usually between $15 and $40.
You might be tempted to buy things impulsively or buy unnecessary things.
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Applying For a Credit Card
You can get applications for credit cards at banks or stores that offer the card. Applications
generally ask for :
Social Security Number
Date of Birth
Present Address
Length of Time at Present Address
Previous Address (if current address is less than 3 years)
Indication of whether or not you have checking and/or savings accounts
Employer
Time with present employer
Position
Annual Salary
Other annual income
Monthly housing payment
Total monthly credit payments
Other credit cards
Co-applicants' name, date of birth, social security number, and annual salary
After you fill out the application, the bank or store that issues the card has to approve the
application. Some cards are for one purpose such as buying gasoline or charging phone calls.
Others are for a specific store, such as Sears or J.C. Penneys. Others are for many purposes,
such as VISA, MasterCard, or American Express. You can use the card in place of cash at any
place that accepts your card. You can also usually get cash from an ATM or bank using your
card.
If you have copies of credit applications, discuss the applications and practice filling them out.
Correcting a Bad Credit Rating
If you are turned down for a credit card or loan, you can change it by:
1.
Paying every one of your bills.
2.
Using collateral to get an installment loan. Then pay the loan in full, making
payments on time.
3.
Getting an account at a department store. Charge only a small amount and pay
it off promptly.
Read and discuss the Credit Card Tips handout published by the U.S. Department of
Consumer Affairs.
Paying on Credit Cards
After a purchase on a credit card, the cost of the purchase is itemized on the next monthly bill
from the credit card company. The credit card owner then has two options:
*
pay less than what you owe and pay interest on the remaining amount that you
owe, or
*
pay all of the amount that you owe. Most credit card companies will not charge
you interest if you pay your bill in full every month.
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Many credit card users do not pay off their credit card bill every month which results in them
paying interest on the amount owed. Credit statements state:
*
Your previous balance
*
The monthly finance charge
*
New purchases
*
Your last payment amount
*
The minimum payment you can make
*
The due date
*
Your new balance
Comparing Charging to Saving
When you buy an item on credit, you pay more for it if you have to pay interest. Suppose you
pay 21% interest on your credit card on $650 worth of charges. Your interest for the month is
$11.38
Now imagine that you save $650 to buy what you needed. You kept the money in a savings
account that paid 5.25%. You earned $2.84 in simple interest and you did not pay $11.38 in
interest by charging. ($14.22 = amount saved)
The longer you leave savings in an account, the more you earn on your deposit. You also earn
interest on the interest your deposit earns. It can be figured once a year (annual), twice a year
(semi-annual), every three months (quarterly), or every day (daily).
Self-paced Activities
Activity 1:
Ask these students to explain in writing the purpose of a credit card statement.
Activity 2:
Ask these students to explain what they would do if they found a discrepancy on
their credit card statement.
Activity 3:
Ask these students to write their opinion on whether or not credit cards should be
sent to teen-agers.
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LANGUAGE EXPERIENCE
Read this situation to the class:
Beverly wants to buy a 2 head VCR with a remote control. An ad for a local rent club
store states that she can "rent-to-own" by paying only $30.85 for 15 months. (The rentto-own agreement states that she will acquire ownership of the VCR when she pays the
required number of payments for ownership.) The ad also indicates that this is quite a
bargain because similar stores charge $43.81 for 18 months for the same VCR model.
Beverly sees a similar model 2 head VCR with remote for sale at SEARS for $139.
However, her credit history is not good and she doubts that can get a credit card or
installment loan. She must save the money in order to purchase the VCR.
Divide the class into 2 groups. One is to write the advantages to the "rent-to-own" option for
purchasing the VCR, the other is to write the advantages to saving the money to purchase the
VCR.
Each group should also list the disadvantages to the other form of payment. Each group should
present their case for the best method of payment to the class.
Self-paced Activities
Activity 1:
Ask these students to write advice to Ralph who is 18 years old. He is $8000 in
debt. He makes $18,000 a year at his job. He bought a car on credit. Then he
furnished his apartment on credit. He buys most of his clothes on credit. Now he
needs help.
Activity 2:
Ask these students to discuss in writing the "warning signs" of getting into
financial trouble by using too much credit.
Activity 3:
Ask these students to write suggestions for using credit wisely.
READING IN CONTEXT
Read and discuss The Do's and Don'ts of Credit by Sylvia Porter.
Comprehension Questions:
1.
Which of the ideas were most meaningful to you personally?
2.
Were there any ideas you disagreed with?
3.
Are there any of the ideas you wish you had known earlier in your life?
4.
Do you know of any personal stories where others could have used the
information?
5.
Which ideas are important to teach your children?
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Ask the students to write their personal resolutions about credit cards. Sentences could begin
with: "I am resolved that I will...." or "I promise myself that I will not..."
PERSONAL DICTIONARY
You might wish to review the following words:
1. ANNUAL--each year
2. BALANCE--the amount you owe after payment; amount left
3. CO-APPLICANT--second person agreeing to credit terms; also co-signer, or co-borrower
4. CONDITIONS--terms; special circumstances
5. CONTRACT--legal agreement
6. CONSENT--agree to; give permission
7. CONSUMER--buyer or borrower
8. CREDIT--ability to buy or borrow and pay at a later date
9. CREDIT TERMS--how you are to pay for a credit purchase or repay a loan
10. CREDITOR--person or business giving you credit; lender; seller
11. DEBTS--bills you owe; obligations
12. DEFAULT--nonpayment; failure to pay as agreed
13. DELINQUENT--late
14. DISCLOSURE--to make known; to state in writing; a written statement of the terms of
a
loan or credit agreement
15. DOWN PAYMENT--money paid in advance on credit purchase
16. ENTITLE--give the right to; permit; allow
17. FINANCE CHARGE--cost of having credit; monthly charge on credit agreement, usually
used on charge card agreements
18. INSTALLMENT--monthly payment
19. INTEREST--cost of credit, usually used in loan agreements
20. LANDLORD--person who owns and rents out a house, apartment, or building
21. LEASE--a rent agreement
22. LIABILITY--legal responsibility
23. LIEN--a legal claim on your property for nonpayment of a debt
24. OPTION--choice
25. PERCENTAGE RATE--interest or finance charges stated as a percent of what you owe
26. RETAILER--seller or merchant; person or business giving credit
27. SUE--take to court
28. TENANT--person renting an apartment, a house, or a building
29. TITLE--legal document proving ownership
30. VIOLATE--fail to keep an agreement
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HOME ACTIVITY
Ask the students to bring in credit applications and find out the interest rates on credit accounts
at stores and banks in your area.
ADDITIONAL ACTIVITIES
1.
Nancy wants to buy a car. She will have to borrow money to do it. Her aunt tells her that
if she makes a big down payment, the loan will cost less. Ask the students to write an
explanation of why this is so.
2.
An advertisement for a new car in the paper says:
$142.88 per month for 60 months
Tax and license $598.56
Annual Percentage Rate (APR)2 12.74%
Down payment $2000
A.
How much does the car cost?
ANSWER:
$142.88 x 60 = $8572.80 (total payments) + $598.56 (tax and license) +
$2000 (down payment) = $11,171.36
B.
How much of the total cost is interest?
Note that the 12.74% APR has already been figured into the monthly terms and down
payment. To find out the cost of the loan (the interest), find the cost of the car without
the added tax and license fee, then multiply by the APR.
ANSWER:
$8572.80 + $2000 = $10,572.80 x .1274 = $1346.97 interest
3.
Read and discuss Dear Abby.
2
Annual Percentage Rate (APR) is the percent-per-year rate that is charged for using
credit. The U.S. Truth-in-Lending law says that the person who gives credit must tell the
borrower what the rate is.
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CREDIT CARDS TIPS
The following suggestions can help you when selecting a credit card
company or using credit cards.
1.
Keep in a safe place a list of your credit card numbers, expiration
dates, and the phone number of each card issuer.
2,
Credit card issuers offer a wide variety of terms (annual percentage
rate, methods of calculating the balance subject to the finance
charge, minimum monthly payments, and actual membership fees).
When selecting a card, compare the terms offered by several card
issuers to find the card that best suits your needs.
3.
When you use your credit card, watch your card after giving it to the
clerk. Promptly take back the card after the clerk is finished with it
and make sure it is yours.
4.
Tear up the carbons when you take your credit card receipt.
5.
Never sign a blank receipt; draw a line through any blank spaces
above the total when you sign receipts.
6.
Save your purchase receipts until the credit card bill arrives. Then,
open the bill promptly and compare it with your receipts to check for
possible unauthorized charges and billing errors.
7.
Write the card issuer promptly to report any questionable charges.
Telephoning the card issuer to discuss the billing problem does not
preserve your rights. Do not include written inquiries with your
payment. Instead, check the billing statement for the correct address
for billing questions. The inquiry must be in writing and must be sent
within 60 days to guarantee your rights under the Fair Credit Billing
Act.
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8.
Never give your credit card number over the phone unless you made
the call or have an account with the company calling. Never put your
card number on a post card or on the outside of an envelope.
9.
Sign new cards as soon as they arrive. Cut up and throw away
expired cards.
10.
If any of your credit cards are missing or stolen, report the loss as
soon as possible to the card issuer. Check your credit card statement
for a telephone number for reporting stolen cards. Follow up your
phone call with a letter to each card issuer. The letter should contain
your card number, the date the card was missing, and the date you
called in the loss.
11.
If you report the loss before a credit card is used, the issuer cannot
hold you responsible for any unauthorized charges. If a thief uses
your card before you report it missing, the most you will owe is $50 on
each card. A special note of warning: If an automatic teller machine
(ATM) card is lost or stolen, the consumer could lose as much as
$500 if the card issuer is not notified within two business days after
learning of the loss.
12.
When writing checks for retail purchases and to protect yourself
against fraud, you may refuse to allow a merchant to write your credit
card number. However, if you refuse, the merchant might legally
refuse to sell you the product. There is probably no harm in allowing
a merchant to verify that you hold a major credit card and to note the
issuer and the expiration date on the check.
13
If a merchant indicates he or she is using credit cards as back-ups for
bounced checks, or refuses your sale because you refuse to provide
personal information (including your phone number) on the bankcard
sales slip, report the store to the credit card company. The merchant
might be violating his or her agreement with the credit card
companies. In your letter to the credit card company, provide the
name and location of the merchant.
Source:
Consumer's Resource Handbook. U.S. Department of
Consumer Affairs, Washington, D.C.
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BASIC DO'S AND DON'TS OF CREDIT
Excerpt from Sylvia Porter's Money Book
No matter where you go for credit and no matter how many different types of loans you take out
in the years to come, the basic do's and don'ts of credit will remain the same. Below you'll find
them in the form of a simple check list to which you can refer again and again to make sure you
are obeying the most fundamental of all credit rules.
1.
DO'S
Do always keep in mind that credit costs money. When you borrow you are renting
money.
2.
Do shop for credit as you shop for any other important purchase and buy your credit on
terms that are best for you.
3.
Do check with care the maximum amount of credit you can soundly and safely carry.
4.
Do ask lots of questions about the credit deal you are being offered. Insist on a written
statement showing all charges before you decide to buy.
5.
Do ask yourself: would you buy the item for this amount of money in cash if you had the
cash in your wallet right now? Would you buy as expensive an item as the one you are
considering if you had the cash right now?
6.
Do study your installment contract carefully and be sure you understand it before you
sign it. When you sign, get a copy of the contract and keep it in a safe place.
7.
Do keep receipts of your payment in a safe place.
8.
Do pay off one major installment debt obligation before you take on another. Stagger
your debts; don't pile them one on top of another.
9.
Do make sure that in the installment plan that you sign, all your monthly payments are
roughly equal and make sure this applies particularly to your last payment. Avoid the
danger that you'll be faced with a very big final installment ("balloon" payment).
10.
Do have the courage to say NO!! to an installment deal if any of the above warning
signals are flying - any of them.
11.
Do continue saving regularly as you buy on credit, even if you can save only a small
amount each week.
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1.
DON'TS
Don't buy any item or service from any seller unless you have checked his/her reputation and
have confidence that he is responsible. Use your common sense and make sure you are
dealing with a reputable businessperson that you can come back to if your purchase turns out
to be a lemon.
2.
Don't buy anything you don't need or want - certainly not for credit. Learn how to handle highpressure selling.
3.
Don't carry several charge accounts which are seldom or never paid up. Pay off each
account periodically or you will be permanently in debt.
4.
Don't use your debts to establish your budgeting "system".
5.
Don't ever buy anything on credit unless you consult with your spouse or other person with
whom you share financial responsibility. Make sure that both of you think the purchase is
worthwhile.
6.
Don't be in a hurry to sign any installment contract or agreement.
7.
Don't make the mistake of thinking you can get out of an installment debt simply by returning
the merchandise you bought from the seller. You probably signed two contracts: one was for
the actual purchase and the second was for the money to finance the purchase. In most
cases, your loan contract will be sold by the retailer at once to a bank or finance company and
it is to this bank or finance company that you will have to continue making your payments in
full - even though your TV set may not show a picture, or your dishwasher may not wash a
dish, or your car may not move a mile.
8.
Don't rely on verbal warranties or pledges of the salesperson or his/her boss. Get the
warranties and pledges in writing.
9.
Don't buy any item on credit which does not have a value that will outlast the installment
payments. The key word is "value".
10.
Don't buy anything on credit of which you will tire before you finish the installment payments.
11.
Don't ever borrow money from a loan shark - even if you are desperate for cash. In fact, the
more desperate you are for the money, the more insane it is for you to commit yourself to pay
back interest rates ranging to 1,000 per cent a year and more for the money. This way lies
financial disaster.
12.
Don't sign any loan contract which contains blank spaces that could be filled in to your
disadvantage.
13.
Don't co-sign a loan for anyone unless you have complete faith in that person's ability and
willingness to repay the loan. For, if the borrower whose note you co-sign defaults on the
loan, you are responsible for paying off the entire indebtedness.
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DEAR ABBY1
Dear Abby,
The following incident just happened, and it occurred to me you could publicize it to warn others.
One recent afternoon, a man phoned and asked if I was "Mrs. G." living at (my address). I
verified the facts. Then he said he handles my account at the bank and asked me if I would be
so kind as to get my Visa and MasterCard so he could check the numbers and expiration dates,
as the bank is issuing new cards and he wanted the information to be correct.
I laughed and told him he must be out of his mind to think I would give that kind of information
over the telephone. Then I hung up.
I called the police department and reported the incident, and I was transferred to the bunco
squad, who happily took all the information and said I was a "smart lady" because, since the
caller already had my name, address and telephone number, all he needed were my credit card
numbers to make purchases by phone.
Abby, please let people know that if they ever get a telephone call (supposedly from a bank
employee) asking to "verify" their credit card numbers, they should get the person's name and
call the bank to verify it.
June G. in Del Mar, CA
Dear June G.,
You are, indeed, a "smart lady" - and thanks for a valuable tip! You deserve a lot of credit.
Do you know of other "scams"? Write an example here.
1
Abigail Van Buren is the most widely read advice columnist in the world. This column
is dated Feb. 10, 1990.
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