Cards, Cars And Currency Lesson 2: Credit Cards - A .

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Cards, Cars and Currency Lesson 2: Credit Cards—A Package DealLesson DescriptionStudents learn about credit card usage and credit card consumer protection laws throughclass discussion. Students analyze the terms of credit cards and learn about responsibleuse of credit cards by computing the cost of credit, analyzing credit card disclosures andcredit card statements. The students will debate a real-world scenario—the consumer vs.the credit card company—and conduct a credit-card-usage survey as an out-of-classactivity. The students use an online calculator to determine the cost of making the minimum payment on credit card accounts.ConceptsCollateralCreditCredit Card Act of 2009Credit cardFair Credit and Charge Card Disclosure ActFair Credit Billing ActIncentivesInterestTruth in Lending ActUnsecured loanObjectivesStudents will: Define the terms listed in the Concepts section of the lesson. Explain the importance of analyzing credit card disclosure statements. Explain the importance of reviewing credit card statements. Compare the advantages and disadvantages of using credit cards. Identify ways to avoid credit problems. Explain the importance of consumer protection laws. Identify ways to use a credit card responsibly.13 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package DealContent StandardsNational Standards in K-12 Personal FinanceFinancial Responsibility and Decision Making: Apply reliable information and systematic decision making to personal financial decisions. Standard 1: Take responsibility for personal financial decisions. Eighth-grade expectation 2: Give examples of the benefits of financial responsibility and the costs of financial irresponsibility. Twelfth-grade expectation 1: Explain how individuals demonstrate responsibilityfor financial well-being over a lifetime.Standard 4: Make financial decisions by systematically considering alternatives andconsequences. Eighth-grade expectation 4: Use a financial or online calculator to determinethe cost of achieving a medium-term goal.Planning and Money Management: Organize and plan personal finances and use abudget to manage cash flow. Standard 3: Describe how to use different payment methods. Eighth-grade expectation 1: Discuss the advantages and disadvantages of different payment methods, such as stored value cards, debit cards and online payment systemsStandard 4: Apply consumer skills to purchase decisions. Eighth-grade expectation 1: Explain the relationship between spendingpractices and achieving financial goals.Credit and Debt: Maintain creditworthiness, borrow at favorable terms and manage debt. Standard 1: Identify the costs and benefits of various types of credit. Eighth-grade expectation 2: Explain how interest rate and loan length affectthe cost of credit. Eighth-grade expectation 4: Give examples of “easy access” credit. Eighth-grade expectation 5: Discuss potential consequences of using “easyaccess” credit. Twelfth-grade expectation 2: Define all required credit card disclosure termsand complete a typical credit card application. Twelfth-grade expectation 3: Explain how credit card grace periods, methodson interest calculation, and fees affect borrowing costs.Standard 4: Summarize major consumer credit laws. Eighth-grade expectation 1: Give examples of protections derived fromconsumer credit law.14 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal Twelfth-grade expectation 1: Summarize consumer credit laws and theprotections that they provide.National Standards in Economics Standard 4: People respond predictably to positive and negative incentives. Benchmark 3, Grade 8: Incentives can be monetary or non-monetary. Benchmark 1, Grade 12: Acting as consumers, producers, workers, savers,investors and citizens, people respond to incentives in order to allocate theirscarce resources in ways that provide the highest possible returns to them.Standard 12: Interest rates, adjusted for inflation, rise and fall to balance theamount saved with the amount borrowed, thus affecting the allocation of scarceresources between present and future uses. Benchmark 1, Grade 12: An interest rate is a price of money that is borrowedor saved. Benchmark 6, Grade 12: Riskier loans command higher interest rates than saferloans because of the greater chance of default on the repayment of risky loans.Time Required180 – 240 minutesMaterials Visuals 2.1, 2.2, 2.3 and 2.4 One yellow highlighter for each student A copy of Handouts 2.1, 2.2 and 2.11 for each student A copy of Handouts 2.3, 2.4, 2.5, 2.6, 2.7 and 2.8 assembled as a Credit Card Package for each student Four copies of Handout 2.9 for each student Enough copies of Handout 2.10, cut in half to provide one half-sheet copy for eachstudent Computers with internet access One copy of Handouts 2.2, 2.3, 2.6, 2.7, 2.8 and 2.11— Answer Key for theteacher15 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package DealProcedures1.Define credit as the ability of a consumer to obtain goods or services before payment, based on an agreement to pay later. Explain that using a credit card is oneform of credit and choosing and using credit cards are important components ofpersonal finance. Explain that students will learn strategies for handling credit cardsresponsibly.2.Tell the students that credit card usage is a subject of much interest. The followinginformation is provided by Nellie Mae, a subsidiary of Sallie Mae, the nation’s largeststudent loan provider. In 2006, 92 percent of graduate students had at least one credit card: The average outstanding balance on graduate student credit cards was 8,612: 67 percent of graduate students obtained their first credit card as an undergraduate student.(www.nelliemae.com/pdf/ccstudy 2006.pdf) In 2004, 76 percent of undergraduates began the school year with credit cards; The average outstanding balance on undergraduate credit cards was 2,327; 56 percent of the undergraduates reported having obtained their first card atage 18. Undergraduates reported direct mail solicitation as the primary source for selecting a credit card(www.nelliemae.com/pdf/ccstudy 2005.pdf)3.Explain the following information about credit cards. A credit card represents an agreement between a lender—the institution issuing the card—and the cardholder. It is a convenient form of borrowing with arevolving line of credit. This means it can be used repeatedly to buy productsor services, up to a specific dollar amount. The credit card company determinesthis dollar amount based on a credit card holder’s credit history. Credit cards can be called “easy access” credit because they are relatively easyto acquire. Credit card holders receive a monthly statement from the credit card issuerthat includes a list of purchases and payment information from their credit cardissuer. Credit card holders must pay a minimum amount each month to avoidfees. The minimum payment required is determined by the credit card companyand is printed on the monthly statement. Interest is the price of using someone else’s money. Credit card holders use thecredit card issuer’s money to make purchases. If the cardholder does not paythe full statement amount by the due date, the credit card companies add interest to the balance the cardholder owes.16 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal A credit card is an unsecured loan. This means that it is a loan that is notbacked with collateral. Collateral is property required by a lender and offeredby a borrowee as a guarantee of payment on a loan. It is a borrower’s savings,investments or the value of the asset purchased, which the lender can seize ifthe borrower fails to repay a debt. From the lender’s perspective, an unsecured loan is quite risky. This means thatthe possibility that the borrower may not repay is very high. Therefore, theinterest rate on credit cards is often high.4.Explain that there are different kinds of credit cards. Some are major credit cardsand can be used at any business that accepts credit cards. These credit cards areissued by banks. The credit card companies manage credit card services for banks,such as accepting and approving credit card applications, approving credit cardpurchases and advertising credit cards and their features. Credit card companiesmake money from charging a fee with each credit card transaction. Mastercard andVisa are major credit card companies. Ask students to name some advantages ofthese cards. (Answers may vary but should include using one card for all purchases,having only one bill to pay, not having to carry a lot of money and still being able tomake purchases, being able to buy something now and pay for it later.)5.Explain that some retailers have a store-branded credit card. This is a strategy toencourage shoppers to spend more in their stores. These retail credit cards typicallycharge higher interest rates than other cards, but may give special discounts for cardusers. Ask students to name some retail credit cards. (Accept any major retail storesuch as Target, Sears, and J.C. Penney.)6.Display Visual 2.1: Did You Know. Discuss the facts displayed on the visual:7. Approximately what percentage of Americans “threw currency away” in 2007because of the way in which they used their credit cards? (the 40% that carrieda balance on their cards) Why has the total amount of money charged in credit card penalty feesincreased? (There has been a rise in credit card debt. More people have failedto pay their credit cards according to the terms of the card.) Why would credit card companies continue to send credit card offers to customers who were already deeply in debt? (Answers may vary but shouldinclude discussion about the fact that credit card companies earn a fee for eachcredit card transaction and they earn interest when cardholders fail to pay theentire balance each month.) Which group of customers do you think credit card companies prefer—the60 percent that pay the balance in full each month or the 40 percent that carrya balance from month to month? (Credit card companies prefer the 40 percentgroup because they earn revenue for the interest charged to those who don’tpay off their balances.)Define incentives as perceived benefits that encourage certain behaviors. Inform17 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Dealthe class that credit card companies are competitive, and they often offer incentivesto entice consumers. The incentives may be promotional low interest rates, specialstore discounts, reward programs that allow card holders to accumulate and redeempoints for merchandise, free air travel or cash rewards. Consumers have manychoices, and not all credit cards have incentives.8.Display Visual 2.2: Top Incentives for College Students to Use Credit Cards. Pointout the top four incentives for college students to use a credit card according to the2006 survey cited on the visual.9.Conduct a class survey of incentive preferences using the same four incentiveoptions. Record the results of the survey, convert the results into percentages andask the students how and why the results differ from those of the college survey.(Answers may vary but should include differences in personal preference. Forexample, one consumer may be interested in free airline tickets because of frequentvisits to family and friends in other cities, while another consumer never flies andwould prefer a discount at a local store.)10.Point out that incentives are a marketing technique for credit card companies andretail stores, and before choosing a credit card, it is very important for consumers toconsider the terms of credit as well as the incentives. All credit cards do not havethe same terms. It is the consumer’s responsibility to know and understand theterms.11.Ask the students how consumers can make wise decisions about which credit cardto choose when there are many credit cards being offered with different incentivesand terms. (Accept any answers given and close the discussion by stating that thislesson will provide answers.)12.Explain that the Truth in Lending Act helps consumers make credit card decisions.This federal law mandates disclosure of information about the cost (terms) of credit.Creditors must display both their finance charges and annual percentage rate onforms they use. The law provides criminal penalties for willful violators, as well ascivil remedies. It also protects consumers against unauthorized use of their creditcards. If a card is lost or stolen, the maximum amount a consumer must pay is 50.The Fair Credit and Charge Card Disclosure Act mandates a box on credit cardapplications that describes key features and costs. The Fair Credit Billing Act is anaddition to the Truth in Lending Act that requires prompt credit for payments made.It also allows consumers to dispute billing errors on a credit card and withhold payment for damaged goods.18 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal13.Tell the students that the Credit Card Act of 2009 established new credit card rulesand amended previous acts with regulations prohibiting unfair credit card practices.This law: requires changes on credit card disclosures, places restrictions on credit card companies with limits on fees and rateincreases, and requires consistency in payment dates and times.14.Explain that one issue addressed in the new rules is the over-the-credit limit fee. Therule states that consumers must tell the credit card company if they want the company to allow transactions that would take the consumers’ accounts over the creditlimit. The company may not charge an over-the-limit fee unless the cardholder hastold the credit card company to allow over-the-credit limit purchases on his or heraccount. If the cardholder has not told the credit card company to allow over-thelimit transactions, any transaction that would cause an account to go over the creditlimit will be rejected.15.Explain that another important change resulting from the Credit Card Act of 2009involves consumers under the age of 21. The law states that consumers under theage of 21 must demonstrate that they are able to make payments or they musthave a co-signer to open a credit card account.16.Explain that laws and practices regarding credit cards are subject to change basedon consumer demand and the competitive credit card market. Credit card holdersare responsible for knowing what the current laws are. When changes are made,credit card issuers notify cardholders of the changes. Consumers are responsible forreading the notifications and information and acting accordingly.17.Give each student a copy of Handout 2.1: Sample Credit Card Disclosure. Pointout that although the information in the handout is included with the credit cardinformation consumers receive with their credit cards; many consumers do not readthe information.18.Give each student a yellow highlighter. Tell students to read Handout 2.1 and highlight any information that would be important in choosing and using a credit card.19.After the students have finished highlighting their copies of the handout, ask themto share with the class what they highlighted and why.20.Distribute a copy of Handout 2.2: Credit Cards and Law to each student. Instructthe students to read the information in the box and answer the questions in thesecond page by writing their answers on the handout.19 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal21.After the students have finished answering the questions on Handout 2.2, ask students to share their answers. Use Handout 2.2—Answer Key to check their answers.22.Discuss the following questions about the terms of credit cards: What are the consequences to consumers if they neglect to read and understand the terms of their credit card? (Possible Answers: Without knowing theterms of a credit card, a consumer could end up paying a high interest rate andbe charged late fees and over-the-credit limit fees.) How can the terms of a credit card affect the amount of currency a consumerhas to spend on other things? (Possible Answers: High interest rates and feeswill add to the cost of the charges made. The end result of paying high interestrates and fees is less currency available for other things.)23.Tell students that using a credit card and making payments on the card are a package deal—charging and paying.24.Distribute a “Credit Card Package” to each student. Divide the class into pairs.Instruct each pair of students to work together to complete the Credit Card Package.25.When all pairs of students have completed their Credit Card Packages, discuss theirresults: How could John Doe have avoided problems with fees and charges on hisaccount? (He could have paid his account by the due date.) What were some advantages of using a credit card? (convenience, a loan thatallows consumers to buy now and pay later, paying one bill instead of several) What were some disadvantages of using a credit card? (If the full amount is notpaid by the due date, interest charges are added to the balance. If the terms ofthe credit card are not met, late fees and penalties are added.) How does using a credit card compare with using cash? (A credit card is moreconvenient to carry and use than cash. There are times when a credit card isrequired. For example, renting a car and making a hotel reservation require acredit card.) Did John end up throwing currency away? (Yes, John threw money awaybecause of interest charges, late fees and over-the-credit limit fees.)20 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal26.After discussing the completed Credit Card Packages, ask each student to refer totheir completed copy of Handout 2.7: Number Search.Example:NUMBER SEARCH27. 3530 35 27 0210.99%14.99%258.99%T 1.50 19FREE 6415.99% 47521.99%60 500 2928.99% 25 10061Explain that they will use this handout to play a game similar to bingo. Review therules as follows: Listen to the questions read from Handout 2.6. Refer to your completed Handout 2.6 to identify the correct answer to thequestion and then mark an ”X” through the answer on your Number Searchgrid. To win the game, you must have a vertical, horizontal or diagonal row of“X” answers on the grid.28.Play several rounds. (Optional: Give small prizes to winners.)29.Tell students as a homework project, they will be collecting data related to creditcard usage by people they know. Provide each student four survey forms fromHandout 2.9: Credit Card Survey. Tell the students that each of them should collectdata by interviewing four adults, using a separate survey form for each interview,and asking each adult all of the questions on the handout. Tell the students that toprotect the adults’ confidentiality, they should not put the adults’ names on thesurvey forms. Tell the students to bring their completed surveys to class on aspecific date.30.When the students return to class with their completed survey forms, display Visual2.3: Credit Card Survey Results. Divide the class into small groups. Have the members of each group combine the data from their surveys and report the results to theclass. As results are reported, record the data on Visual 2.3.21 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal31.Ask students to assume the role of a news reporter. Tell them their assignment isto use data and information the entire class collected in the survey to write a newsstory on the use of credit cards in their local area. The students should convert thedata to percentages for their report. Stress the importance of objectivity and confidentiality in this news story to protect the survey participants.32.Explain that people have different views about credit cards. Some consumers maythink the terms of a credit card are fair and accept the responsibility to abide bythose terms. Others may argue that the disclosures are too complicated to understand and credit card issuers charge unfairly high interest rates and fees. Emphasizethat regardless of an individual consumer’s point of view, credit card companies arein business to make a profit, and a company’s views may not always coincide withthat of credit card users.33.Distribute copies of the Consumer’s Side column of Handout 2.10: Different Viewsto half the class and copies of the Other Side column of the handout to the remaining half of the class. Ask the students to refer to the source at the bottom of theircolumn and explain to the students that the columns were adapted from an actualnewspaper article.34.Ask each student to assume the role of the author of the column he or she hasbeen given. Tell the students to read the column silently and use highlighters tohighlight facts important in defending the viewpoint expressed in their column.35.Divide the class into groups of four, so that two students in each group have theConsumer’s Side column and the other two students in each group have the OtherSide column. Each student should discuss the column information with the groupand defend the views in his or her column.36.Display Visual 2.4: Different Views. Allow each group of students to present onefact or statement for each side of the visual. Record the facts and statements thegroups present on the visual as they are shared. (Optional: To do this activity as asimulation, call on two or three students to represent each side. Assign a studentto serve as a judge or choose several students to serve as an arbitration panel. Tellthe students to present their view or case in front of the judge or panel, who willdetermine which side presents the most persuasive case.)37.Give each student a copy of Handout 2.11: Minimum or Fixed. Tell the students touse an online calculator to complete the chart and determine the effects of payingdifferent amounts on a credit card account. An online calculator can be found 2 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal38.After the students have completed the chart in Handout 2.11, discuss their findings using the answer key. The discussion should include the length of the loan andtotal interest paid on the loan.Closure39.Review the important content in the lesson by asking the following questions: What is credit? (the ability of a consumer to obtain goods or services beforepayment, based on an agreement to pay later) What are credit cards? (a convenient form of borrowing with a revolving line ofcredit) What is interest? (Interest is the price of using someone else’s money.) When do credit card holders pay interest? (when they don’t pay the balance onthe card in full each month) Why do credit card holders pay interest? (because they are borrowing fromcredit card conpanies, they are using someone else’s money—the credit cardcompanies’.) What are incentives? (Incentives are perceived benefits that encourage certainbehaviors.) What is an unsecured loan? (a loan not backed by collateral) What is collateral? (property required and offered as a guarantee of paymenton a loan) Is a credit card a secured or unsecured loan? (unsecured) Why are interest rates higher for unsecured loans? (These are riskier loans. Thelender has no guarantee of property if the loan isn’t repaid.) Why is it important to analyze credit card disclosure statements? (to be aware ofinterest rates charged and any penalties or fees that might be charged; so thatyou know whether or not your interest rate might change and when and why) Why is it important to review credit card statements? (to make sure that transactions listed are accurate, to ensure that payments are credited, to ensure thatany interest or fees charged are appropriate) What are the advantages and disadvantages of using credit cards? (Advantages: convenience, a loan to buy now and pay later, paying one bill instead ofseveral. Disadvantages: If the full amount is not paid by the due date, interestcharges are added to the balance. If the terms of the credit card are not met,late fees and over-the-credit limit fees are added.) Why are there laws regarding credit cards? (to protect consumers)23 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal How can consumers avoid credit problems? (by being responsible, by readingthe information provided about the credit card, by charging only what they canafford to pay in full when the statement arrives)Assessment40.Tell students that they will again take the role of news reporters. Tell them that theirassignment is to write an article titled “Tips on Using Credit Cards without Throwing Away Your Currency.” In the article, students should emphasize that usingcredit cards is a package deal—charging and paying.41.Ask students to find information about the new credit card rules at www.federalreserve.gov/consumerinfo/wyntk creditcard rules.html.Divide the class into four groups and give each group a different topic: New statements New disclosures Increase in rates or other fees Changes to billing and paymentsAfter students have found information, each group will become the “expert” groupand teach the class the information learned.Extension Activities1.Instruct the class to make a collage on a bulletin board in the classroom, using thedisclosure information from credit card offers. Tell the students to place the caption“READ BEFORE USING” on the bulletin-board collage.24 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package DealVisual 2.1: Did You KnowDid you know that: The average American’s credit card debt has risen from 2,966 in 1990to 9,840 in 2007?Most Americans have four credit cards in their wallet?About 60 percent of all U.S. consumers always or usually pay off theircredit card bills in full each month?About 40 percent of Americans carry a balance on their cards frommonth to month?In 2007, credit card issuers imposed 18.1 billion in penalty fees oncredit card holders—up more than 50 percent since 2003?During the first quarter of 2008, 30 percent of credit card mailings werespecifically targeted to customers who already were deeply in debt?There are more than 6,000 major credit card issuers?SOURCE: Weiss, Gary. “Don’t Get Clobbered by Credit Cards!” Parade Magazine, August 10 2008.25 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package DealVisual 2.2: Top Incentives for College Students To Use Credit CardsSpecial StoreDiscountsCash BackLow Interest RateReward Program8%22%24%28%SOURCE: Incentive data from Yang, Jan and Simmons, Keith. Experience.com 2006 College Life—Finances & Banking survey of4,891 college students, USA TODAY.26 2010, Federal Reserve Bank of St. Louis Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the usercredits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education

Cards, Cars and Currency Lesson 2: Credit Cards—A Package DealVisual 2.3: C

Cards, Cars and Currency Lesson 2: Credit Cards—A Package Deal . teacher. 16 Cards, Cars and Currency . 4. Explain that there are different kinds of credit cards. Some are major credit cards and can be used at any business that accepts credit cards. These credit cards are issued b