10 PERSONAL FINANCE
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WHAT YOUR CHILD LEARNS
Your student learns some cold, hard truths about credit cards
and debt:
• Americans pay $90 billion per year in penalties and fees.
• 12% -18% more is spent when we pay by credit card vs.
cash. In other words we tend to buy more when we’re
swiping a card and less when we take actual cash out of
our wallets.
• College students are a key target of credit card companies.
•
The fastest growing group of bankruptcy filers are people
under 25 years of age.
Students also learn:
• There are ways to avoid debt.
• There are ways to correct and get out from under debt
Specifically, students’ gain a better understanding of credit cards
so that they can make informed decisions when the time comes
and a method for paying down bills if they find themselves in debt.
ACTIVITIES FOR HOME
Typically this section of the home edition focuses on activities to keep the dialogue going at home. However, some of the information
presented to students may be new to you as well (I know some of it was new to me), so this time around the focus will be on defining terms
and giving you examples of the activities your child did in class to help them make good financial decisions in the future. There were 3
lessons on this topic.
LESSON 1: MAKING THE MINIMUM
In this lesson students’ learned about the cost of carrying a balance on a credit card. They’re presented with the case of a
freshman college student named Zach. For two weeks in December he stopped working to focus on finishing some semester
projects and studying for finals. During that time he charges $910 for a few items he considers emergencies (gas to get home
for Christmas break=$55, food=$45, Christmas gifts for his family=$225, and books for the next semester = $585).
Each month he plans to make the minimum payment asked for in the box on his statement. His 1st month’s minimum payment
is $22.75, the 2nd month is $22.54, and it will slowly become less with each month. Students are given information about each
payment and are presented with questions.
Here are a few of the questions. Before looking at the answers, write down your best guess based on what you know so far.
1. How long will it take Zach to pay his credit card debt making minimum payments? ______________
2. How much total interest (the amount charged by the bank each month for carrying a balance) will Zach pay?
_____________
3. During the first year (first 12 payments) how much of Zach’s payment will go towards the principal or the $910 he borrowed
(yes, a credit card is a loan)? _________
Answers (Question 1: Making just the minimum payment stretches the debt to155 months of payments or more than 12 years;
Question 2: Zach will pay $1,119.57 in interest (the interest will be more than what he originally borrowed!). His credit card
purchases of $910 will actually cost $2029.57. He may have paid $3.59 per gallon for gas at the time he swiped his card, but
it will cost him over $8 per gallon in the end. Ouch!; Question 3: In the first year over 60% of what he will pay will go towards
interest. When we make any debt payment a portion goes to the interest and a portion goes to the principal. In the first year
Zach minimum payments total just over $260. Of that, $164 will go to interest and $96 towards the $910 (original principal). It is
not until the 111th payment or year 9 that more or his payment would go to the principal than to interest).
G E A R U P - 2 - C O L L E G E & C A R E E R H O M E E D I T I O N : HIGH SCHOOL
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D E B T : AV O
IDING & CO
R R E CT I N
10 PERSONAL FINANCE
LESSON 2: THE HIDDEN COST OF CREDIT
In this lesson, students reviewed a sample credit card disclosure form to better understand the “other” costs associated with
credit cards. The form is a part of any credit card application and
is typically included in the monthly bill. The sample your child
reviewed included typical fee amounts. After reviewing the form,
students answered several questions. Here’s what they learned.
• Annual Percentage Rate on Purchases: The cost of the
loan expressed as a percentage. Other APRs will include
lender charges on balance transfers, cash advances, and
defaults. APRs for these transactions are typically higher.
A default includes late payments, exceeding the credit limit,
and when payments are bounced.
• Annual Fee: The fee a credit card company charges for the
use of their credit card.
• Grace Period: The length of time that the lender charges no
interest on money borrowed when paying off your balance in
full each month.
• Introductory Rate: Lower interest rate offered by credit card
companies, usually for a short period of time, to entice you
to sign up for credit with them. Eventually, the rate expires
and a new “increased” rate takes effect.
• Late Payment Fee: The fee assessed when payments are
not made by the due date and time.
• Over the Credit Limit Fee: The fee assessed for exceeding
the credit limit.
• Transaction Fee for Balance Transfers or Cash Advances:
Typically a percentage of the amount of the transactions.
Often there are minimum and maximum fee amounts.
WHAT DO YOU THINK?
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ÎÎ What surprised you most about Making the Minimum?
G E A R U P - 2 - C O L L E G E & C A R E E R H O M E E D I T I O N : HIGH SCHOOL
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LESSON 3: THE DEBT SNOWBALL
In this lesson, students learn a method for paying down debt.
Even with better understanding about savings, budgeting and
credit cards, there is still the chance students may find themselves in debt in the future. The Debt Snowball is a method
to pay off debt. Steps one and two are done first so you know
exactly what your financial picture is so you can create a plan
to get rid of debt.
Debt Snowball Method Steps:
1. Determine monthly net income (how much is brought
home each week). Also think about ways to gain extra
income, like a garage sale, a second job, or overtime
hours.
2. Total monthly expenses. This must include all minimum payments and basic expenses. Also think about
ways to decrease expenses (changing to a cheaper
cable option or cell phone plan).
3. List the debts owed including total amount and
minimum payment for each in the order of the smallest
balance to the largest. (if there was a case of identical
balances, the one with the highest interest rate goes
first). Here is an example:
Debt
Interest
Rate
Current
Balance
Minimum
Payment
MasterCard
19.9%
$600
$22
Electronics Store
23.65%
$1,015
$29
Visa
20.65%
$1,015
$29
Student loan
6.8%
$18,400
$220
Car
4.8%
$16,800
$465
4. Create a snowball effect. The idea of the debt snowball is to gather speed as debt is paid down. As one
debt is paid down to $0, the money used to pay that
debt is added to the minimum payment of the next.
5. Pay minimum payments on all debts except the
smallest one--attack that one! Every extra dollar
should be thrown at that smallest debt until it is gone,
then attack the next one.
6. In the example above once the MasterCard balance is
paid off, the Electronics Store payment would become $51 ($29 + $22). With more money being paid
towards the principal that debt will decrease faster.
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