You Can BANK on This! (Part 4)
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Wouldn't you love to have a credit card? Instead of carrying money, you could just say those lovely words, "Charge it." In this lesson, you will find out about the advantages and disadvantages of using a credit card.
You will make a poster advertising a credit card. On your poster you will include at least one incentive to encourage people to pick your card. You will list reasons why your credit card is a good one for people to use, and you will also explain why it might be a bad idea for people to use your credit card.
What will it be like to have a credit card? What do you think you will do with it? What are the benefits in having a credit card? Do you know the costs?
Here is a question that will give you a clue to one of the costs of credit: If you charge $2,000 on a credit card that has about a 20 percent finance charge, how long might it take for you to pay back this debt? According to MSN Money, it could take about 31 years. If it did take that long you would eventually pay about $8,000 in finance charges. In other words, you would wind up paying $10,000 in order to charge $2,000 on your credit card!
Do you think you would stop charging after using the credit card just once? I bet the credit card company hopes you won't!
When you use a credit card, you borrow money. The money comes from financial institutions (like banks). But these financial institutions have to be paid back, with interest.
Credit-card companies can make a lot of money by providing their services to card holders. So, if credit card companies are in business to make money, they are going to do a lot of advertising and are going to provide incentives to encourage you to use their credit cards.
In this lesson we are going to talk about incentives. Incentives can be positive or negative. You can call positive incentives benefits or rewards. You might call negative incentives costs or penalties.
What sort of positive incentives do the credit card companies offer you to use their cards? Go to the Card Track website and check out all the benefits that you can get if you use certain credit cards.
What is the positive incentive for banks to offer credit cards? Their incentive is to make a profit. No one goes into business hoping to lose money. Businesses want to make a profit. Credit cards are a big profit-making business. So, the financial institutions want you to get and use credit cards.
Do banks have negative incentives for offering credit cards? People may not pay their bills on time, which would not be a positive thing. When that happens, banks add an extra charge on the next month's bill. If you had to pay extra, would you want to pay your bill on time? That is a negative incentive, which is called a penalty. Banks have a negative incentive if people do not pay their bills on time, so they make that person pay a penalty.
Other negative incentives can be found at the the Acceptable Uses of Credit website.
Paying high interest is a problem for a lot of people. To understand how this can be a problem, check out the minimum payment calculator . This calculator will tell you exactly what creditors don't want you to know. All you have to do is plug in the amount charged on the credit card and an annual interest rate. Assume that only minimum monthly payments are made. To do that insert 2.25% as the Minimum Payment Percent. This calculator will show you how long it will take you to pay off the balance, as well as how much more you'll pay in interest.
Finally, go to the site we have been using in this series Banking on Our Future and click on Credit. Follow Zing on his last stop.
Pretend you are head of the advertising agency representing a large bank. This bank wants to start offering a credit card. Make a poster advertising a credit card. Be sure to include some type of an incentive to encourage people to choose your credit card.
On the back of the poster, write suggestions about when people should use and should not use credit cards.
In this lesson, you found out that incentives can be positive and negative. You also found out that banks or other financial institutions have an economic incentive to offer credit cards. They also provide incentives to encourage people to use their cards. Finally, people who use credit cards have positive and negative incentives that affect them.
Complete this Drag and Drop Activity.