Bank at School - Lesson 8           Previous Lesson          Next Lesson
What is Credit?                         

Introduction
In the previous lesson, we explored how budgets can help people manage their money and plan for upcoming or desired expenditures. This lesson studies credit: what it is and how it can be a useful tool to help us obtain things we want.
{Teachers: This lesson may require two sessions.}

Objective
Introduce students to the principle of credit.
Point out the possible dangers of spending money we don't have.
Reinforce the need to manage our spending.

Lesson Material
What is credit? Credit comes from the latin word "creditus" which means "to believe." Credit entails someone lending you money in good faith that you will repay their loan. The lender will usually charge a fee, commonly referred to as interest, for the use of his money. Many people think of credit as a right. Credit is actually a privilege that must be earned.

People use credit every day. Credit provides another way for us to obtain the things we want without having to carry cash around. Credit also allows us to buy things we might not be able to afford all at once, by allowing us to pay for the item over a period of time.
Let's suppose you want to buy a car. You shop around and find a car that you like. The car costs $1000 but you only have $100 saved. The car dealer offers you this proposal: you may drive the car home today if, you give the dealer $100 dollars now. The dealer will lend you the remaining $900 provided you agree to pay a certain amount every month until the $900 is paid in full. The dealer also asks you to pay him an additional $100 for the use of his money (the $100 represents the dealer's interest fee). If you agree to the terms the car dealer offers, you could drive the car home today. You have just witnessed credit in action!

Now, before the car dealer offers you a loan, she will check to see if your "credit history" is good. A credit history is a record of all the credit transactions a person has made. If the record shows you didn't make your payments on time, or abused your credit privileges, she may decide you are a poor "credit risk." In other words, based upon your history, she is ensuring you will pay her the money you owe her. Because of your history, she may decide to not lend you the money. You would then need to pay her $1000 immediately, or leave without the car.
 
Where do you go to get credit? Credit usually is available through two vehicles: a credit card or a loan. Most credit cards are issued by department stores, and other financial service companies. A store may issue clients a credit card to make it easier for them to make purchases in the store. Most stores only honor their own credit card. (In other words you could not use your Sears credit card at K-Mart.) Some credit cards are accepted at several stores. These credit cards are usually issued by a financial company (examples: Mastercard, VISA, Discover, American Express).

Most credit cards have limits as to how much a person may owe at one time. Most credit cards also have a maximum amount you can charge at one time. In certain cases, a purchase may require another form of credit. Buying a house or a car can cost thousands of dollars. When people need to borrow a significant amount of money, they will usually look to a financial institution for a loan. types of loans available from a financial institution will be discussed in Lesson 9.

Checking accounts are another form of credit. Because a check allows us to spend money we don't physically have with us, the merchant is selling us the item in good faith. The merchant is counting on us actually having the money for the cost of the item in our checking account. To ensure we always have money to cover the checks we write, it's essential we keep track of how much money is in our checking account. We also need to record how much each check was written for and to whom it was written. This is called balancing our check book.

If you write more checks than you have money to cover, some checks will not be paid. This is referred to as "bouncing a check." If you bounce too many checks, your credit history could suffer. You also might have your checking account privileges revoked. Therefore, to avoid getting ourselves in trouble, it's important to always write down what you spend and where (like you do when preparing a budget).
Remember, credit is a privilege, to be used wisely. If you purchase something with a credit card or loan and plan to pay for it over an extended period of time, it's a good idea to include your credit payments in your weekly budget.

You should also keep in mind that if you use credit to pay for something over time, the total cost of the item will be more than if you pay cash. This is because you must pay the credit card company or financial institution interest on the money they advance you to buy the item.

Credit provides people with greater financial flexibility. Without it, most people would not be able to afford to buy their homes or cars or pay for their children's education. Nonetheless, credit places a tremendous amount of responsibility on the user. Keeping your credit purchases in line with your budget will help you maximize all the advantages credit has to offer.

Suggested Activity

• Start a discussion on where and how credit cards are used. {Teachers: If you have a credit card you could show them what it looks like, or ask them to look at their parents.}
• Talk about the advantages of credit - how it makes it easier for us to pay for things we want.
• Discuss how credit expenses fit in a budget. Are these expenses which need to be planned for?
• Explain how spending more than we have might get us into financial trouble. How can we avoid overspending?
• Discuss how to fill out a check. Practice filling out blank checks and recording them in a mock check register.

Suggested Homework 

• Ask family members if they use credit and if so, what credit cards they have and why. How frequently do they use them? (The idea here is not to invade upon anyone's financial privacy, but to become aware of how credit is used around you.)
• Identify and list 6-10 different kinds of credit cards (i.e. names of financial institution cards, department store cards, gas station cards, etc.)
• Call a financial institution to research current interest rates for credit cards and for buying a house and a car. Discuss how interest charges increase the cost of a purchase. {Teachers: Give children a stack of blank checks and a list of dollar amounts to write out in word form (i.e., $123.50 = one hundred twenty-three and 50/100 dollars)}.

Credit - Money which is loaned, most often for a fee, and must be paid back.

Credit Card - A card which allows the holder to purchase an item or service today but pay for it tomorrow.

Credit History - Record which lists a person's past credit transactions to illustrate whether a person is financially reliable.

Credit Limit - Maximum amount a person may charge at one time on a card or at a store.

Check Register - Book in which to record the amount of all checks written and to whom they were given.

Balance a Check Book - A checkbook is "balanced" when the amount of money in the checking account equals or exceeds the total amount of checks written against the account.

Bouncing a Check - Writing a check on an account for more money than is currently in the account.

Interest - The fee for borrowing money.

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