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Morningstar
Early Investor Education

Using Credit

Harron Young, Jessica Gibson

Welcome to Using Credit, the fourth course in a six-part curriculum focused on personal finance and financial literacy. For directions on how to teach this curriculum, see How to Use This Curriculum.

Goals and Outcomes

These are concepts students should understand upon completion of this course and the final project. All outcomes are taken straight from—and expand upon—those of the National Standards for Financial Literacy:

The basics of credit

  • Credit allows people to purchase goods and services that they can use today and pay for in the future with interest.
  • People choose among different credit options that have different costs. Lenders approve or deny applications for loans based on an evaluation of the borrower’s past credit history and expected ability to pay in the future.
  • Higher-risk borrowers are charged higher interest rates; lower-risk borrowers are charged lower interest rates.

Credit cards and scores

  • When evaluating which credit card is best for them, consumers can compare introductory rates, the annual percentage rate (APR), initial fees charged, and additional fees for late or missed payments.
  • Credit bureaus record borrowers’ payment histories, assess their overall credit risk, and collect that information in credit reports.
  • Credit reports may be used by employers in hiring decisions, landlords in granting leases, and insurance companies in charging premiums.
  • A credit score is a number based on information in a credit report and assesses a person’s credit risk. Lenders can pay to receive a borrower’s credit score.
  • Consumers are entitled to a free annual copy of their credit report. It’s important to review one’s report to ensure it’s free of errors.
  • Be aware of the laws in place to protect credit card users from discrimination and abusive marketing or collection practices. These laws also require full disclosure of credit terms, such as APR and fees.

Loans

  • There are two primary types of loans: unsecured loans, and loans secured with collateral. Collateral is money or property that protects lenders from potential loss; if a borrower defaults on their loan, lenders can keep or sell the collateral to recoup their losses.
  • In order to reduce the total amount owed on large purchases, such as homes, many people often make a cash payment as they negotiate their loan. (This is also known as a down payment.)
  • Because secured loans pose less of a risk to lenders’ return on investment, they typically carry a lower interest rate than unsecured loans.

Repaying debt

  • It’s imperative to pay back your loans according to the terms you and your lender agreed upon.
  • Failure to repay a loan has significant consequences, such as negative entries on one’s credit report, repossession of property (collateral), garnishment of wages, and the inability to obtain loans in the future.
  • Consumers who have difficulty repaying debt can seek assistance through credit counseling services and by negotiating directly with creditors.
  • In extreme cases, bankruptcy may be an option for consumers who are unable to repay their debt. Although filing for bankruptcy provides some benefits, such as forgiving unsecured loans, it also carries considerable costs, including a ten-year notice of bankruptcy on your credit report.

Launch

This is the first introduction to the topic. It’s meant to get students thinking and asking questions. Before you dive into the outline and requirements for the final project, facilitate an open discussion with your students based on How to Pay Down Debt by Ruth Saldahna.

In this article, Saldahna provides advice for a young reader who feels anxious about accruing debt in the future. After reading, ask students if they feel any anxieties about their current or potential future debt. Take the time to have a group or partnered discussion with students. Kick off the conversation with the questions below:

  1. What are the pros and cons of taking on debt in order to access an expensive product or service, such as a car or student loan?
  2. What two debt payment methods did the author highlight? Which method resonated with you the most?
  3. What did Saldahna mean when she said, “Debt is often more than money. The psychological aspect of debt is extremely important”?
  4. Are you planning to make a purchase using credit or a loan? What do you intend to buy?

Pre-Assessment

To gauge students’ baseline understanding of the topics outlined in this course’s goals and outcomes—and to serve as a benchmark for your lesson plans—have students complete this question-based activity on their own. This activity shouldn’t be graded.

Download the Worksheet
Get the Using Credit Pre-Assessment Worksheet PDF.

Final Project

Students will design a financial plan around a projected future income, as well as a theoretical loan for their choice of a car or college. They’ll include additional costs associated with their loans, such as interest or down payments, as they calculate what percentage of their budget is devoted to repaying debt. Students should also identify the binding nature of their loans and the consequences of late or missed payments.

Download the Worksheet
Get the Using Credit Final Project Worksheet PDF.

Checks for Understanding

To be able to complete the final project (and the course itself), students must be able to answer these questions through personal research and lessons provided in class. These questions are in order of how they should be researched and “checked” by the teacher/facilitator. We’ve provided articles as a starting point, but students can do additional research on these concepts as they see fit.

  1. When purchasing a product, how can you compare the cost of using credit to buy it? What quantitative (objective, numbers-based data) and qualitative (subjective data, like opinions and attitudes) aspects should you consider?

    Resources:

  2. Why may a bank offer low-rate introductory credit offers?

    Resource:

  3. What are examples of collateral used to secure a loan? Why do lenders charge lower interest rates on mortgages as compared to unsecured loans?

    Resources:

  4. What is a down payment? How does a down payment affect the payment or length of a loan? Why would a borrower who has made a down payment want to repay a loan or make their payments on time?

    Resources:

  5. What factors from an individual’s credit history or credit application may cause a lender to deny a line of credit? What do credit bureaus do? What is the concept of a credit score and what does it indicate about a borrower? What factors might negatively impact one’s credit score?

    Resource:

  6. What are some examples of how a good credit score can benefit a person financially? Why may employers find it useful to hire someone with a better credit score?

    Resources:

  7. What future opportunities may a person lose by failing to repay loans as agreed?

    Resource:

  8. What are the costs and benefits associated with using different credit counseling services?

    Resource:

  9. What steps can you take to correct errors on a credit report and why is this important?

    Resource:

  10. What are student loans? How do you apply for them and pay them back?

    Resources:


About the Authors

Harron Young is a strategy analyst for Morningstar and a former third-grade math teacher with Teach for America. She has a master’s degree in business administration.
Jessica Gibson is an early career programs lead for Morningstar and former first- and second-grade teacher with Teach for America. She has a master’s degree in urban education, with a focus on administration and policy.

Contributors

Lead content strategist: Courey Gruszauskas
Editor: Amelia Buzzell



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