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You Can BANK on This! (Part 4)

Key Economic Concepts:

• Credit
• Interest
• Profit

Description:

This lesson deals with credit and wraps up this unit on finance.

Lesson Objectives:

Students will:

• Assess both negative and positive incentives associated with credit-card use.
• Identify profit as an economic incentive for banks to offer credit cards.

Introduction:

As consumers, we have a responsibility to ourselves and others to handle our finances wisely. That means making good decisions about how to use our money. This lesson will deal with who is making a profit by offering credit cards, and what are the incentives are that influence people in choices they make about using credit cards.The students will make a poster advertising a credit card. In their posters they will include at least one incentive to encourage people to pick their card. They will list reasons why their credit card is a good one for people to use and they will also explain it might be a bad idea for people to use their credit card.

Resources:

• www.bankingonourfuture.org/master.cfm/main/home ^[5] is the main site this series uses. This site has many resources for the student and teacher alike. There is a math component in this site that is an added benefit.
  Note: The students will have to go through a free sign-up process in order to use the website. Here are the fields that students will be required to fill out: Name, Title, Gender, User Name, Password, Secret Question, How You Heard About the Site, and Why You Picked the Site.

• www.cardweb.com/cardincentives/ ^[6] is a site that lists various cards and the incentives being offered to apply for each card. This site will show students that the credit-card companies are trying to get their business and make a profit from them.
   
• www.financial-education-icfe.org/credit_card_spending_tips/acceptable_uses_of_credit.asp ^[2] is a site that lists credit-card tips. On this site, the students can learn about acceptable ways to use a credit card.
   
• www.webwinder.com ^[7] The calculator on this site will tell students exactly what creditors don't want them to know. Visitors to the site may plug in the amount charged on the credit card and an annual interest rate. With an assumption that only minimum monthly payments are made, this site will then show you how long it will take you to pay off the purchase price, as well as how much more the credit-card holder will pay in interest.

Process:

In "Banking: Part 1" the students learned about the characteristics of money. In "Banking: Part 2" they found out that budgeting is important and that budgeting means we have to make choices. In "Banking: Part 3" they discovered that interest is a benefit savers earn when they save money. In this lesson they will discuss how to be a wise consumer--especially when it comes to credit!

Back to [Banking: Part 1]: In the survey of what makes up our money supply, credit cards are not included. Why? They are not classified as money because they don't meet the criteria. People are actually paying for the privilege of using a financial institution's money when they use a credit card. So, how can we get kids to look at credit cards and think before using them? First, they need to understand them.

This lesson involves the term "incentives." Incentives can be positive or negative. In this lesson, positive incentives can also be called benefits or rewards, and negative incentives can also be referred to as costs or penalties. People respond predictably to incentives.

To get started, ask the students what positive incentives we have for obeying the speed limit. We are safer when we drive within the speed limit. We can make better decisions about pulling out or over if we have an idea of how fast people are going. We know how long it takes to stop at a certain speed, etc.

What are the negative incentives that influence us in choices we make about how fast to drive? We can be ticketed if we speed. Our insurance rates might go up if we are ticketed. And we might get in a wreck. These incentives (keeping safe, avoiding tickets, saving money on insurance rates) help to explain why most people will drive pretty close to the speed limit--especially if they see a police officer! People respond to incentives, predictably.

What does predictable mean, and how can society predict people's actions?

Explain the rewards are positive incentives that make people better off. Penalties are negative incentives that make people worse off. Both positive and negative incentives affect people's choices and behavior. However, people's views of rewards and penalties differ because people have different values.

This lesson deals with incentives related to using credit cards. It is a known fact that high school students are inundated with credit cards arriving in the mail. A lesser-known fact is that 8 percent of all bankruptcies are now being declared by people under 25 years old.

The students probably know of many credit card names. Discuss what rewards people gain by using credit cards. Show them www.cardtrak.com/incentives ^[1] and discuss the many incentives provided to encourage people to use credit cards.

Go to www.financial-education-icfe.org/credit_card_spending_tips/acceptable_uses_of_credit.asp ^[2] and read the "good" reasons to use a credit card.

Then you should explain the negative incentives associated with credit. See the "bad" reasons for using a credit card at www.financial-education-icfe.org/credit_card_spending_tips/acceptable_uses_of_credit.asp ^[2] . You might want to define the word "emergency." A noteworthy phrase is: If you can eat it, drink it, or wear it it is not an emergency!

Check out: www.webwinder.com/ww_stm_calcs.php ^[3] and show the students how interest becomes a financial problem for people who only pay the minimum payment each month on their credit card account. Students will need to assume that only minimum monthly payments are made. Inform them that they will need to insert 2.25% as the Minimum Payment Percent.

Look at www.responsiblecredit.com/index.php ^[4] and get a few examples for helping the students understand a little about credit.

So, why do we have credit cards? I bet I don't have to tell you! They are easy to use, great to have in emergencies, and sometimes you can even get extras, called incentives, if you use them.

Banks respond to incentives, too. Banks and other financial institutions offer credit cards because they have a great economic incentive to do so. The incentive is to earn a profit! The students might understand more about credit cards if they know that they are the ones who are going to be paying the banks the fees and service charges that enable banks to make a profit by offering credit-card services.

Conclusion:

Positive incentives for students to use credit cards can be found everywhere. Negative incentives include high interest charges and a long-term financial burden for those who run up big balances and pay them off slowly.

Positive incentives for banks include profit. Negative incentives include people not paying their bills.

Assessment Activity:

Assess what the students have learned by having them complete this Drag and Drop Activity.

Links Used:

1. ^{^} "www.cardtrak.com/incentives" - (www.cardtrak.com)
2. ^{^ ^ ^} "www.financial-education-icfe.org/credit_card_spending_tips/acceptable_uses_of_credit.asp" - (www.financial-education-icfe.org)
3. ^{^} "www.webwinder.com/ww_stm_calcs.php" - (www.webwinder.com)
4. ^{^} "www.responsiblecredit.com/index.php" - (www.responsiblecredit.com)
5. ^{^} "www.bankingonourfuture.org/master.cfm/main/home" - (www.bankingonourfuture.org)
6. ^{^} "www.cardweb.com/cardincentives/" - (www.cardweb.com)
7. ^{^} "www.webwinder.com" - (www.webwinder.com)

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