Lessons in LifeSmarts Online

A Lesson on Personal Finance

Purpose

To introduce high school students to credit cards and credit protection laws.

Introduction

Credit granters are interested in the high school market for two reasons: the teen segment of the population is growing and teens have more money to spend than ever. In 1999 teens spent $105 billion of their own money, according to Teen Research Unlimited. These teens also spent $48 billion of their parents' money. The first credit card for many teens may be a co-signed card or a secured credit card. But no matter what type of credit card they use, how much do teens know about using credit wisely?

Tiana Clemons got a Visa card five years ago when she was a senior at South High School in Minneapolis . "I signed right up, and so did all my friends," she said, sitting in the cramped, modest Maplewood apartment that she shares with her boyfriend, a school-bus driver, and their three children. "We thought, 'Wow, a thousand bucks!' But when we spent it, it didn't seem like real money."

So begins a newspaper story that ran in the Star Tribune on June 3, 2001. The article highlighted the skyrocketing number of young people who get into trouble using credit and end up declaring bankruptcy.

A poor credit history, difficulty getting a car loan or mortgage loan, and bankruptcy are all very real consequences when any of us get into financial difficulty. Credit is part of the American way of life. When high school students are smart about using credit, they will help themselves avoid future pitfalls.

Procedures

1. Give your LifeSmarts students a mini-quiz to see what they know, and how they stack up against other LifeSmarts players.
2. Distribute a copy of the list of Important Terms to each student and ask students to use traditional or Internet resources to come up with definitions for each term.
3. Distribute the Get to Know Consumer Protection Laws Activity for students to complete.
4. Ask students to create a list of five resources that they would recommend other students review to learn more about credit issues.
5. Using their new-found resources, ask each student to write five multiple-choice and five open-ended LifeSmarts questions.
6. Review the students' questions, and create a mini-quiz with 5-10 of the best multiple-choice questions.
7. Use the best 15-20 open-ended questions to run a LifeSmarts competition in class. Have two teams of four players compete to test their "Lifesmarts."

Mini-Quiz

1. If you make a purchase with a credit card, you have:
a. The same protection as if you used cash
b. Additional protection
c. Fewer responsibilities

2. After checking your monthly credit card statement, you notice a charge you didn't make. How many days do you have to submit a written dispute?
a. 30
b. 45
c. 60

3. Decisions on whether to lend you money are made by:
a. Credit bureaus
b. Credit clinics
c. Credit granters

4. A credit card is:
a. An extra form of cash
b. A type of loan
c. An informal agreement to pay money owed

5. John's credit card is co-signed by his mother. If he does not pay his bill:
a. John's credit record will not be affected
b. His mother's credit record will not be affected
c. Both of their credit records will be affected

6. The difference between a credit card and a charge card is:
a. A charge card must be paid in full each month
b. A charge card has a lower credit limit
c. There is no difference

7. As you figure your income and expenses, you realize your debt is approaching the limit of your credit card. To correct this situation:
a. Open another credit card account
b. Write a letter to advise the credit bureau
c. Cut your spending and pay off the balance

8. Banks, department stores, and credit card companies offer credit because:
a. Credit helps people buy at a lower price
b. Credit cards can be profitable to a business
c. The government requires them to offer and accept credit cards

9. Your father does not pay the balance in full each month when using credit for purchases. It is best for him to look for a credit card with the:
a. Highest annual percentage rate
b. Lowest annual percentage rate
c. Highest annual fee

10. If you pay your balance in full each month, it is best to choose a credit card that has:
a. No annual fee
b. A high APR
c. Cash advance option

Answers

1. Correct Answer: additional protection
64% of LifeSmarts players got the question correct

2. Correct Answer: 60
20% of LifeSmarts players got the question correct

3. Correct Answer: credit granters
36% of LifeSmarts players got the question correct

4. Correct Answer: a type of loan
65% of LifeSmarts players got the question correct

5. Correct Answer: both of their credit records will be affected
89% of LifeSmarts players got the question correct

6. Correct Answer: a charge card must be paid in full each month
32% of LifeSmarts players got the question correct

7. Correct Answer: cut your spending and pay off the balance
89% of LifeSmarts players got the question correct

8. Correct Answer: credit cards can be profitable to a business
82% of LifeSmarts players got the question correct

9. Correct Answer: lowest annual percentage rate
86% of LifeSmarts players got the question correct

10. Correct Answer: no annual fee
62% of LifeSmarts players got the question correct

Activity: Get to Know Consumer Protection Laws

Have students do a little investigation online to find at least two specific protections granted to consumers under each of these credit-related federal laws:

• Equal Credit Opportunity Act
• Fair Credit Billing Act
• Fair Credit Reporting Act

• Truth in Lending Act

• An excellent resource for this is the Federal Reserve Board's publication entitled, Consumer's Guide to Credit Cards.
• The Federal Trade Commission has many credit-related publications posted on their Web site as well.
• Specific publications of interest may be found on the FTC's Web site.

Equal Credit Opportunity Act
Protections under this law include:

• Requiring all credit applicants be considered on the basis of their actual qualifications for credit and not be rejected because of certain personal characteristics.
• Giving women a way to start their own credit history and identity.
• Ensuring that all consumers are given an equal chance to obtain credit. This doesn't mean all consumers who apply for credit get it: Factors such as income, expenses, debt, and credit history are considerations for creditworthiness.
• Requiring creditors to give applicants a written notification when an application is rejected, including a statement of the applicant's rights under the Equal Credit Opportunity Act, and a statement either of the reasons for the rejection or of the applicant's right to request the reasons.
• Requiring creditors who furnish credit information, when reporting information on married borrowers, must report information in the names of each spouse.

Fair Credit Billing Act
This law specifically targets creditors who grant open-end credit. Protections under this law include:

• Providing procedures requiring creditors to promptly credit your payments.
• Requiring creditors to correct billing mistakes.
• Allowing you to withhold payments on defective goods.
• Requiring that you receive statements each time you owe more than $1 on an open-end credit account.
• Requiring creditors to send your bill at least 14 days before payment is due (if your account has a grace period).

• Requiring creditors to credit your account the day your payment is received, unless no extra charges would result if they fail to do so.
• Requiring creditors to promptly refund overpayments and other amounts owed to you on your account.

Fair Credit Reporting Act
Protections under this law include:

• Providing procedures for correcting mistakes on your credit record.
• Requiring that others may only access your credit report with legitimate business purposes.
• Requiring that when you are denied credit you may request a free credit report within 30 days.
• Allowing negative information to remain in your credit report for 7 years, and bankruptcies for 10.
• Requiring that credit reports be kept confidential.

Truth in Lending Act
Protections under this law include:

• Requiring that open-end creditors tell you the terms of the credit plan so that you can shop and compare costs.
• Giving you three days to change your mind about certain credit transactions that use your home as collateral
• Limiting your risk on lost or stolen credit cards.
• Creating certain requirements that creditors must follow when advertising credit.
• Requiring creditors to respond to consumer complaints about billing errors within a certain amount of time.

Important Terms to Know About Credit Cards

Annual fee: The annual membership fee, if any, of a credit card or charge card.

Annual Percentage Rate: This is the percentage cost of credit on a yearly basis.

Billing error: Any mistake in your monthly statement as defined by the Fair Credit Billing Act.

Cash advance: A loan taken out by charging an amount of cash to a credit card.

Charge card: A type of credit card which requires full payment of the bill each month; no interest is charged.

Co-signer: A person with an acceptable credit rating who promises to repay a debt if the borrower fails to do so.

Credit: The right granted by a creditor to you to pay in the future for items or services you buy or borrow in the present.

Creditor: A person or business from whom you borrow or to whom you owe money.

Credit-scoring system: A statistical system used to rate credit applicants according to various characteristics relevant to creditworthiness.

Credit card: A card used repeatedly to borrow money or buy goods or services on credit.

Credit limit: The amount of credit you are authorized to use.

Equal Credit Opportunity Act: This requires that all credit applicants be considered on the basis of their actual qualifications for credit and not be rejected because of certain personal characteristics.

Fair Credit Billing Act: This sets up procedures requiring creditors to promptly credit your payments and correct billing mistakes and allows you to withhold payments on defective goods.

Finance charge: This is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges and some credit-related insurance premiums.

Grace period: The period of time from the billing date of your credit card statement to the due date of your current bill, when you can pay in full without being charged interest.

Joint account: A credit account held by two or more people so that all can use the account and all assume legal responsibility to repay.

Open-end credit: A line of credit that may be used repeatedly, including credit cards, overdraft credit accounts, and home equity lines.

Truth in Lending Act: TILA requires creditors to give you certain basic information about the cost of buying on credit or taking out a loan.

Resources Related to Credit Cards

• Federal Deposit Insurance Corporation
• Federal Reserve Board
• Federal Trade Commission
• National Foundation for Credit Counseling

Additional resources include: financial-related Web sites; the daily newspaper; specialized publications (or the online equivalents); local bank publications; and your local banker.

Updated August 2010