Print this lesson
Giving Credit
Have you ever lent something to someone who didn’t give it back? Maybe a friend borrowed your skateboard or a favorite computer game and never returned it. Or maybe it was broken. Do you think you will let this friend borrow from you again?
In this lesson, you will analyze the credit worthiness of people who want to borrow. You will also learn how to identify ways to establish your creditworthiness.
ACTIVITY 1:
Vicki borrowed Tim’s shin guards for soccer and now she can’t find them. Read what happened in the story Giving Vicki Credit
.
THINK ABOUT IT
ACTIVITY 2:
Besides borrowing things, people borrow money. Have you ever borrowed money from someone – perhaps your brother, your sister, or a friend? If you have, you were given credit. When you are given credit, a lender trusts you to later repay the money you borrowed.
Lenders may also expect you to pay something extra to cover their cost of letting others use their money. This extra payment is called interest. While Money Mouse was borrowing Heather’s cheese maker, she had to buy cheese. Because Money Mouse understood that buying cheese cost Heather more than making it, he gave her some cheese when he returned the cheese maker. The cheese was the something extra-the interest--that Money Mouse paid Heather.
Grownups borrow money to buy big things-for example a house and car. They usually take out a loan from a bank or credit union. A loan is money to buy something now with a promise to pay back the money plus interest at a specific time in the future. Typically, the borrower promises to make a payment every month until the money owed has been paid in full.
Another way grownups borrow money is by using a credit card. You have probably seen people buy things with a plastic credit card. A credit card isn’t money. When people buy things with a credit card, they are borrowing money and promising to pay it back in the future.
While you're probably a few years away from your first bank loan or credit card, it's not too soon to learn about what it takes to be a good borrower. When deciding whether to loan money and what they will charge you for borrowing money, lenders will gather information to help them determine your credit-worthiness. In other words, they want to know whether you are able and willing to repay the money you borrow.
Lenders consider your '3 C's' of credit:
- Character is your willingness to pay back a loan. Your past history in paying back loans is the most important indicator a lender can use to judge your character. Mighty Mouse proved he is a responsible borrower when he returned Heather’s cheese maker. As a result, lenders will be more likely to loan him money in the future. On the other hand, lenders may be unwilling to lend money to Vicki because she has a poor history of returning what she has borrowed in the past.
- Capacity is your ability to pay back the money you have borrowed. The lender considers whether you will earn enough money in the future to pay back what you owe. For example, friends and family members are more likely to loan you money if you explain you can pay it back with your allowance or other money they know you will be getting in a few days.
- Collateral is property that can be taken to cover the amount owed if you fail to pay back a loan as promised. For example, if a borrower does not make loan payments on his or her car loan, a lender may take back the car.
Using what you have read, work in small groups, to assess the creditworthiness of the potential borrowers in each of the six situations on the Who Is Credit Worthy activity sheet.
Based on the ratings provided in the directions, decide which of the potential borrower’s requests you would grant.
Before lenders makes a loan, they consider a borrower’s ability and willingness to pay it back. When banks and other
financial institutions make credit decisions, they consider a borrower’s ability and willingness to pay it back. The lender considers a borrower’s past loan payment history (character), the borrower's income (capacity), and what property can be used to cover the loan if it is not paid back as promised (collateral). It is extremely rare for the value of a relationship to outweigh consideration of risk in these cases. Borrowers increase their chances of getting a loan if they can show a lender they meet these 3 C ’s of credit.
Pretend that friend has asked to borrow something from you.
MORE FUN
- Travel through a maze and help Vicki find Tim’s shin guards.
- Miss Ellie always returns the garden tools she borrows from Mrs. Fuentes. Color her garden tools .
- Make a door tag that tells people you are a responsible borrower.
