Good Debt vs. Bad Debt Middle School Financial Literacy #5
Pre-Test 1. What is usually a good debt? 2. What is usually a bad debt? 3. When credit card bills are paid off within a month, how much interest must be paid?
Objectives • Review Last Lesson • Good Debt – Created value or has the potential to create value • Bad Debt – Difficult paying money back or does not add meaningful value • Credit Card Problems
Review 1. Tool on the internet that provides information about income vs. expenses • Reality Check 2. What is the annual salary needed to cover your expenses? • Answers will vary • Average Range: $50, 000 -$60, 000 3. What careers of interest cover those expenses? • Answers will vary • Usually needs to be a high-skill career
Good and Bad Debt Video • Watch the Good and Bad Debt video • Pay close attention: what is good or bad debt? • Mixed opinions on whether borrowing money to buy a car is a good or bad debt
Good and Bad Debt • Good Debt – College Loans – A loan that can make you money • Bad Debt – Things that can be consumed fairly quickly with no or little cash or personal value – Buying something you really do not need – Cannot afford the monthly payments
Credit Card Interest 1. The average interest rate is 20% for credit cards 2. When credit card bills are paid off within a month, no interest is paid 3. The credit card company requires people to pay at least 3% of the principal every month
Credit Card Scenario #1 1. Mai charges $1, 000 to her credit card for a vacation – – Her credit card interest rate is high: 20% She only pays the minimum amount per month 2. How long do you think it takes Mai to pay off the debt? – 25 years 3. After adding interest, how much do you think the $1, 000 vacation costs Mai? – $2, 224. 06
Credit Card Scenario #2 1. Ed has bad credit rating for not paying previous loans – – His interest rate is very bad because of this: 37% He only pays the minimum amount per month 2. For the same $1, 000 vacation loan, how much do you think Ed paid in interest – $24, 040. 81 3. How long do you think it took Ed to pay off the debt? – 50 Years
Groups: Usually Good or Bad Debt? • Which of the loan items below are usually good or debts? • Give reasons why they are good or bad debts – Credit card finance charges – Buying a home – Paying for college – Buying clothes – Paying for a vacation
Groups Share With Class • Which of the loan items are usually good or debts? • Give reasons why they are good or bad debts – Credit card finance charges – Buying a home – Paying for college – Buying clothes – Paying for a vacation
Usually Good Debt • Buying a home – Most people need a loan to buy a home – Interest money is tax deductible – When it is bad: Monthly payments too high for income • Paying for college – Costs are often much less than increase in income – When it is bad: High tuition with few long-term financial or personal benefits
Usually Bad Debt • Credit Card Finance Charges – Often very high interest, Payments primarily going to interest – When it is good: Pay balance quickly, buy something important • Buying Clothes – Not recommended to borrow for items consumed fairly quickly – When it is good: Clothes essential for new job, pay back fast • Paying for a vacation – When costs creates payments you cannot afford, consumed quickly – When it is good: Cost slightly over your savings, rejuvenates you
Post-Test 1. What is usually a good debt? 2. What is usually a bad debt? 3. When credit card bills are paid off within a month, how much interest must be paid?
Review • A good debt is usually – Buying a home, Paying for college • A bad debt is usually – Credit card finance charges, buying clothes, paying for a vacation • Amount of interest when credit card bills are paid off within a month – $0. 00
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