your first credit card can be very exciting, but unfortunately some
people do not take the time to consider the costs associated with
buying on credit. A credit card can make it easier to buy on impulse,
and we do not always take the time to consider the hidden costs of
buying on credit. This lesson will help kids understand the perils of
making impulse purchases on credit, paying only the minimum each month,
and/or making late payments.
In this lesson, students will work individually or with a
partner to answer a series of questions related to buying on credit.
They will first work under the assumption that they are not paying off
the balance but will make the minimum payment and revolve the debt.
Once they have seem how much the cost of borrowing on credit and making
minimum payments effects their overall cost of the items purchased on
credit, they will rework the scenario to formulate an optimal payment
plan for paying off the debt within a time from of six to twelve
There are two options for working through this lesson. Option one is to use the Compound Interest Simulator and the second option is to use the Cost of Being Late
spreadsheet to compute the interest each month. Regardless of the
method chosen, you may want to walk through some practice scenarios to
ensure your students have a working understanding of how interest is
calculated. An alternative approach would be to divide the class in two
and have one half of the students use the simulator and the other half
a spreadsheet. As part of your post activity discussion you can have
students discuss the benefits of one method over the other.
The primary goal of this lesson is to understand that the costs
associated with buying on credit and that making only minimum payments
is problematic to long-term financial health. The secondary goal is to
formulate a plan to extinguish the debt quicker. This lesson will help
them see the real cost of purchasing an item when interest and fees are
added to the purchase price. The scenario that will be used for this
lesson is based on the first year of the life of a new credit card. The
student handout describes the scenario and posses a series of questions
based on the use of either the simulator or the spreadsheet
In order to assess the level of consumer finance knowledge your
students posses, consider asking students to discuss the following
questions in small groups or as a whole class:
As a whole class, ask students to share what they knew about credit
cards. Expect that they may share family experience or repeat what they
have heard in the media. If it does not come out in the class
discussion, make sure students understand that the use of a credit card
creates debt and a legal obligation to pay while a debit card takes
money from an existing checking or savings account to pay for purchases
and does not result in a debt obligation. The terms debit card and
credit card are often times mixed up by students and even some adults.
If you have not already done so, this would also be a good time to
share some the ads offering teaser rates or extended payment options.
Be sure to point out the fine print that is usually at the bottom of
these ads. The fine print will often disclose the true cost of credit
based on a simple scenario.
The scenario we will use for this activity includes the
charging of three retail purchases and a dinner for friends. Distribute
either the Cost of Being Late: Compound Interest Simulator or Cost of Being Late: Spreadsheet Application activity sheet, depending on which method students will use.
For simplicity, no additional charges will be made over the next
twelve months. The scenario will be based on a teaser rate of 10% for
six months and a default rate of 22% thereafter. (The default rate is
the published rate without benefit of any promotional offers. It is
sometimes referred to as the posted rate.) One payment will be made
late resulting in a late fee of $40 plus an increase in the APR from
22% to 28%. Our goal will be to determine the balance due at the end of
one year along with the cost of using credit for that twelve-month
period. If your students are struggling with the concept of compound
interest you may want to consider having them work with a partner
pairing a weaker student with a stronger student.
Compound Interest Simulator Option
Before you have the students begin work on the scenario you
might want to walk through an example using the simulator. I would
recommend using the following mp3 purchase as an example.
Have students consider the purchase of an mp3 player at a cost
of $200 with payments of $20 per month and an interest rate of 22% APR.
Have students enter the information into the simulator as follows (Note:
Only whole numbers can be entered into the dollar fields, which means
kids will need to round up or down using standard rounding rules):
It will take twelve months to pay for the player for a true cost
of $222.98. That true cost will be even higher if payments are not made
on time and late charges are assessed or if interest rates are
increased before the debt is paid in full. In this example the cost of
buying the player on credit was $22.98. Consider asking students what
they could have done with that $22.98 if they had not bought the player
on credit and instead waited to pay cash.
A minimum payment of 4% or $20, which ever is greater is
standard but since it is an open field you can have the kids work with
a variety of scenarios. You might consider having them see how long it
will take to pay off if they make minimum payments of $10 or if the
rate were higher or lower. Depending on the skill level of your
students and time constraints you might ask the students to pose an
additional example that they could use the calculator for such as a new
game system or some other consumer purchase that may be of interest to
them. Some students may want to simulate the purchase of a car which
can be done but I would recommend using the purchase of a big ticket
item such as a car as an extension activity.
Your students should now be ready to work through the scenario using the Compound Interest Simulator.
I would recommend that you walk around and spot check student’s work to
insure their calculations are correct and that they understand how to
use the simulator.
Spreadsheet Application Option
In option two instead of using the simulator use the Cost of Being Late
spreadsheet. The application provided with this activity has the
formulas built in and is based on a twelve month scenario using the mp3
example described in Option 1.
| Retail Credit Card Purchase of an mp3 Player Example |
| Payment # || Initial Balance || Purchases || Fees || Monthly Payment || Annual Interest Rate || Interest Charges |
| ||–||$200.00||–|| ||22%||$3.67|
|Totals|| || ||–||$222.98|| ||$22.98|
The benefits of using a spreadsheet over the simulator are that
the spreadsheet provides a monthly amortization (payment plan) where
the simulator does not. If time permits, you may consider having
students use both methods.
| || Simulator || Spreadsheet |
Note: Some values differ because the Compound Interest Simulator only accepts input values in whole dollar amounts.