Title: Unit 2: Credit & Debt (Teacher Only)
Course: Kentucky Sample Personal Finance Curriculum > Section: Unit 2: Credit & Debt

Unit 2: Credit & Debt
Description
Credit allows people to purchase and use goods and services today but pay for them in the future at an additional cost. Students will learn about the criteria used by lenders to determine creditworthiness. They will weigh the costs and benefits of choosing to use different types of credit and about the impact of interest on the overall cost of using credit. They will also learn about the importance of meeting credit obligations and about the potential for financial trouble from the misuse of credit.

Talking Points
1. People receive credit when they obtain the use of someone else’s money to purchase goods or services.
2. People who obtain credit are given a loan of money in exchange for their promise to repay the money later plus additional money called interest.
3. Common types of credit include mortgage loans, car loans, student loans, personal loans, and credit cards.
4. Interest is the price borrowers pay for using someone else’s money and the price lenders receive for letting someone else use their money.
5. Using credit has both benefits and costs.
6. Benefits of credit include the following:

- Acquiring assets to increase your net worth over time,

- The ability to finance emergency purchases,

- Payment convenience (purchasing goods and services now as opposed to later),

- A lower cost than using your own invested funds, and

- The ability to take advantage of a lower price for some good or service (to get a good deal).

7. Costs of credit include the following:

- Creating a liability that lowers your net worth,

- Paying interest and fees,

- Purchasing fewer goods and services in the future,

- Less available credit for emergencies, and

- Increased exposure to identify theft.

8. Credit providers consider the three Cs in deciding to whom they will extend credit:

- Capacity—the ability of the creditor to repay the loan,

- Character—how honest and reliable the creditor is in paying debts, and

- Collateral—assets the creditor has that could be sold later to pay off the loan.

9. People’s credit scores are a measure of their character because credit scores are based largely on their payment history—for example, whether or not they

- Pay bills on time,

- Pay bills in full,

- Stay below their credit limits, or

- Have declared bankruptcy.

10. When considering whether credit or a loan is desirable, it is important for people to consider the likely impact of the choice on their personal net worth over time. Net worth is what people own--their assets minus what they owe--their liabilities.

Standard and Benchmarks
Kentucky Academic Studies for Career Studies- Financial Literacy Standards

FL.H.6 Develop strategies to control and mange credit and debt.

1. Interpret the components of a credit report.
2. Investigate ways that credit scores can affect a consumer’s financial options.
3. Compare the organizations providing credit counseling services.
4. Understand the causes of and implications of bankruptcy.

FL.H. 7Analyze the costs and benefits of using credit.

1. Discuss the purpose and role of credit and explain the value of building and maintaining a healthy credit rating, including elements of creditworthiness: character, capacity, capital, collateral and conditions.
2. Identify the advantages and disadvantages of basic types of credit (e.g. unsecured versus secured credit, credit cards, installment loans, revolving credit, student loans and predatory lenders.
3. Describe the risks, responsibilities and rights associated with using credit (e.g. annual percentage rate (APR), grace period, late fees, finance charges, default rates, interest and closing costs)