Understanding credit is challenging for young people. They see many examples around them of people who use credit as part of their daily transactions that they believe are the best (or only) ways to make purchases. But while credit is useful for large purchases, it can be a trap when used for smaller items. The basic take home message for this lesson is:
‘Only use credit when you can afford to pay it back’
Teachers are sometimes wary of teaching about credit cards. There are a few (very valid) reasons for this:
- They lack the knowledge and expertise to teach it thoroughly
- They feel they will expose their own lack of knowledge or their own credit management problems to their students
- They are concerned about a perception of bias towards a particular provider or lender, or a possible conflict of interest
- They are worried about accidentally revealing their own financial details to their students
As a teacher, think through these concerns carefully before developing your response. Decide if the implications for your students are worse if you don’t teach them about credit - they may learn poor management skills from others with much lower ethical standards than your own, or they may never learn about credit at all and fall into the trap of using one card to pay off another, and entering a cycle of debt.
One strategy that is useful for teachers with concerns about teaching credit is this one:
Develop a FAQ (frequently asked questions) board or box, where students and the teacher can write their questions and then work together to find answers. They can seek answers anywhere they feel is legitimate - banks, credit societies, consumer information services, financial planners, math or commerce teachers, school counselors, parents, friends, other members of the school community. Assign questions to small groups of students, then set a timeframe for them to find an answer. There are two important skills which occur here:
1. Students learn about where to look for answers to financial questions in their own community
2. Students learn facts and viewpoints about credit, and how to extract the most valuable information from a wide range of sources
This information could then be pulled into a class credit booklet, or transferred into a Powerpoint presentation and uploaded onto a school laptop for presentation to other groups or classes within the school.
Interest rates are a fundamental of understanding and managing credit. Like the lesson on budgets (see Money Skills Part 1 at the bottom of this page), it is important to consider the timeframe for managing credit. Students need to understand that credit means they are spending money they don’t currently have, and there is a cost which goes with that ability. The cost is in terms of an interest rate, which is based on the percentage borrowed (or in credit). Some interest rates can look very attractive until the calculations are done to work out the actual dollar value to be repaid. Add to that the annual fees, and the cost of credit can really add up.
For example, some credit cards may charge a fee (eg. $60) then charge 15% interest in purchases. ‘Ah yes’ say your students ‘but we’ll pay it off every month’.
‘Ah,’ says the informed teacher ‘what if you don’t - you forget, you make a purchase then forget you made it, you lose your statement, you don’t understand how the bank calculates the interest? Then every purchase you make without paying off your balance is accruing interest too.’
Encourage students to look online or in local newspapers for information about interest calculators, rates and the numbers of everyday people who get into credit problems through poor planning, a change in circumstance, not reading the fine print or becoming the victim of difficult times.
Try asking local banks for information (they may not be completely unbiased though!) or local financial planning groups. Even the school counselor may be able to help with useful support networks to manage debt and credit.
This post is part of the series: Money skills
Money skills, understanding personal finance, and having the ability to save and budget are important life skills. This series looks at how to teach young people who have never seen a recession before how to manage when financial times are tough.