Using Credit Cards Wisely Student Activity Packet
Learning Objectives for Credit Management
The primary goals of this educational unit are to equip students with a comprehensive understanding of how credit cards function as a financial tool. This includes explaining the mechanics of making purchases and managing subsequent payments. A significant focus is placed on the mechanisms of interest: how it is calculated, the circumstances under which it is charged, and specific strategies to minimize or entirely avoid interest expenses. Furthermore, the curriculum explores the sociopsychological aspects of finance, encouraging a discussion on the various perceptions of debt and the myriad reasons why individuals' personal experiences with debt can vary significantly based on lifestyle, values, and decision-making processes.
The Fundamental Mechanics of Credit Cards
A credit card operates through a financial arrangement where a credit card company extends a specific line of credit to a consumer. When a cardholder makes a purchase, they are using the company's funds up to a predetermined limit rather than their own immediate cash or checking account funds. At the end of a billing cycle, the consumer is presented with a choice: they can either pay the entire balance in full or make a minimum payment. If the consumer chooses to pay the balance in full and on time every month, they effectively avoid paying any interest or additional fees. In the industry, individuals who practice this—paying their bill in full and on time every month to avoid generating profit for the company through interest—are ironically referred to as "deadbeats."
Understanding Balances and Interest Charges
One of the most critical concepts in credit management is the "outstanding balance," which is defined as the total amount of money an individual still owes to the credit card company after their most recent payment has been processed. If a consumer does not pay the full balance, they are charged interest on the remaining amount. This is particularly dangerous for those who only make the minimum payment. For these individuals, getting out of debt becomes extremely difficult because the majority of that minimum payment is allocated toward interest and finance charges, leaving only a very small amount to be applied toward the principal balance. This leads to a cycle where the debt continues to compound, and the consumer's spending power may be misleadingly high because their credit limit resets.
The Economic and Psychological Impact of Debt
Attitudes toward debt are profoundly influenced by individual life circumstances, personal values, and the perceived utility of the purchase being financed. For example, some individuals may feel comfortable taking on substantial debt, such as in student loans, if they believe the long-term career benefits and earning potential make the investment "worth it." Conversely, others may prioritize a debt-free lifestyle, achieving this through strict budgeting, avoiding credit usage, or perhaps benefiting from different financial starting points. The feelings associated with debt are subjective; one person might feel an intense sense of worry or burden over a debt level that another person finds manageable or even strategically beneficial. Common reasons for carrying debt beyond credit cards include financing education, purchasing vehicles (both new and used), or funding vacations.
Questions & Discussion
1. The person at the very end of the video says he has in student loan debt and describes it as ‘worth it.’
a. Would you agree with him? Why or why not?
b. What are some other reasons an individual could have that much debt and still consider it worthwhile? Explain your thinking.
2. On the other hand, some people at the beginning of the video had absolutely no debt whatsoever. What are some possible ways they achieve a debt-free lifestyle while others do not or cannot?
3. Other than credit card usage, what are some other reasons people say they are in debt? Do their reasons for carrying debt seem valid to you? Why or why not?
4. Throughout the video, you can tell that individuals’ FEELINGS about their debt are quite different. What might cause one person to worry about the same level of debt that someone else feels quite comfortable having?