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Giving Credit

Key Economic Concepts:

• Credit
• Decision Making
• Risk

Description:

This lesson introduces the role and importance of the 3 C’s -- capacity, character, and collateral – to being granted credit. An online story about a girl who fails to return soccer shin guards borrowed from a friend is used to spark discussion on responsible borrowing. In a second activity, students are introduced to the 3 C’s used by lenders to determine creditworthiness. Given everyday scenarios where they might be asked to make a loan, students must make a decision whether to grant credit based on what they know about the creditworthiness of the potential lender. The culminating activity asks students to identify ways they can establish and maintain their personal credit worthiness – principles that will be important throughout their lives.

Lesson Objectives:

Students will:

•  Provide examples of capacity, character, and collateral as applied to determining credit worthiness.
• Analyze the credit worthiness of loan applicants.
• Identify ways to establish and maintain personal credit worthiness.

Introduction:

Ask students if they have ever loaned something to a sibling, friend or parent. Besides money, common items that people their age might lend include video games, sports equipment, and clothing. Tell students that they are going to read a story about two characters who loaned items to friends. One borrower returned the borrowed property but the other did not. This story and the activities associated with it will show why it is important to be a responsible borrower and how to tell whether people who want to borrow are likely to be responsible borrowers.

Resources:

Wise Pockets activities developed by the Center for Economics and Entrepreneurship at the University of Missouri-St. Louis:

• "Giving Vicki Credit": A story about Vicki who borrows Tim’s shin guards for soccer and loses them.
  www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/01.htm ^[2]
   
• "Interactive Maze": Use this printable interactive to help Vicki find Tim’s shin guards.
  www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/maze.htm ^[3]
• "Coloring page": This coloring page shows the garden tools that Miss Ellie borrows from Mrs. Fuentes. www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/tools.htm ^[4]
   
• "Door tags": Students can cut out door tags that tell people they are a responsible borrowers.
  www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/doorhanger.htm ^[5]

Students are asked to rate the character, capacity and collateral of a person asking for credit. They then need to write 3-4 sentences telling whether they would make a loan to that person or not using one of the following activities:

• Who is Creditworthy? - Interactive Activity

• Who is Creditworthy? - Printable Worksheet
   

Process:

Have students read the story Giving Vicki Credit (www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/01.htm ^[1] ).

[Note to teacher: If students have limited reading skills, you may want to project the story using an LCD projector or TV monitor so students can listen and read along.]

Follow-up with a discussion of the THINK ABOUT It questions. Students can prepare for the discussion by answering the questions below and printing out a copy of their answers for group discussion.

THINK ABOUT IT

1. What else did Vicki borrow from Tim besides the shin guards? [A baseball glove]
2. What happened to the baseball glove? [It was left outside in the rain]
3. What happened when Money Mouse borrowed Heather’s cheese maker? [It broke, so Money Mouse had to borrow money from Miss Ellie to fix it.]
4. Why did Money Mouse give Heather some cheese when he returned the cheese maker? [Because she had to buy cheese while he had her cheese maker and he wanted to let her know he appreciated her lending the maker to him for so long]
5. Why do you think Heather will let Money Mouse borrow the cheese maker again? [Money Mouse proved he could be trusted. He fixed the cheese maker before returning it and he gave her some cheese.]
6. If Vicki can’t find Tim’s shin guards, what is she going to do? [Buy him a new pair]
7. If Vicki doesn’t return Tim’s shin guards, what do you think Tim will do? [Tim will probably not let her borrow anything else.]
8. Is Tim being mean if he doesn’t let Vicki borrow things from him in the future? [Answers will vary. Some students will probably say that, given Vicki’s past history, Tim is wise not to let her borrow anything else]
9. How would you feel if you if loaned something and it wasn’t returned or it was returned damaged? [Potential responses include feeling anger, sadness, worry, and distrust]
10. Would you loan to the same person in the future? Explain your answer. [Most students if not all will say no. Reasons may include they are afraid they won’t get the loaned item back or it will also be damaged. Even it they eventually get the loaned item back, they may want to use themselves.]

ACTIVITY 2

Divide the class into five groups. Assign each member of the group a role, for example, recorder, editor, printer, lender, borrower, and narrator.

Instruct students to read the online text introducing the 3C’s of credit. Using what they have read, each group should then assess the creditworthiness of the potential borrowers in each of the six situations on the Who is Credit worthy? or the printable activity sheet. Based on the ratings provided, direct the students to decide which of the potential borrowers' requests they would grant. The Recorder should use the group’s answers to complete the online Activity Sheet. The Editor should proof the answers for accuracy, grammar and spelling. The Printer prints and distributes copies of the completed sheet to you and each group member.

As students give you their completed activity sheet, assign each group one of the six situations to role play in front of the class. In situations in which the group decided not to lend money, have them come up with ways to refuse the requests. In situations in which they decide to lend money, have them act out what they would do if the person did not pay them back as promised. When the group presents its scenario to the class, the narrator sets the scene for the situation, and the borrower and lender act out what the group has decided about how to handle the situation appropriately.

[Note to teacher: If you want to involve more students in role playing, you can have them work in pairs or teams of three taking responsibility for more than one of the tasks described above.]

After each role-play episode, discuss:

• How did the 3 C’s of credit influence the group decision?
• Can you think of other ways in which the situation might have been handled?
• Did other groups make a different decision? Why? How might different decisions be handled?

Explain to the students that most people lend to others only when they know they can trust the borrowers to take good care of what they borrow, and return it. When we are the borrower and we want someone to loan something to us, we must demonstrate that we will return it in good condition and in the time frame promised. 

Some students may give reasons for granting credit that they believe outweigh the risk that something borrowed will not be returned or will be returned damaged. For example, a relative or friend might view the relationship with the borrower as more important. Point out that when decisions are made, both the benefits and costs of alternatives are considered. Banks and other financial institutions rarely allow the value of a relationship to outweigh consideration of risk in their decision about lending.

Conclusion:

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), his or her 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 considerations of risk in lending decisions. Borrowers increase their chances of getting a loan if they can show a lender they meet these 3 C’s of credit.

Assessment Activity:

Assessment is based on the student activities and student responses to the assessment activity. Potential responses to the assessment questions are below.

Students should pretend a friend has asked to borrow something from them. Have them list three questions to ask before they say yes to the friend's request.

Students' potential questions include:

1. Has this friend borrowed from me and paid me back?
2. Does he or she return things in good condition?
3. What is his or her record in paying back others?
4. How likely is it that the friend will be able to get the money to pay me back?
5. Will the friend be able to return what he or she has borrowed when I want or need it?
6. What can I do if my friend doesn't return what he or she has borrowed?

Students now should write out a list of three ways in which they can show others that they are creditworthy.

Students may include the following items on their list:

1. I will return borrowed items at the agreed upon time.
2. I will return borrowed items in good condition.
3. If I damage something I borrow, I will fix it or replace it.
4. I will give the lender something as collateral to prove that I plan to return what I have borrowed.
5. I won't borrow if I think I will have trouble returning the borrowed item.

Extension Activity:

• As a class, visit the school library and talk to the librarian about the importance of caring for and returning library books. Discuss the consequences when books are damaged or lost. [For example, the cost of replacement, fewer new books, and books unavailable for student projects.]
  
• Using student tips on borrowing and lending from the assessment activity, create a class tip sheet or series of posters illustrating how to be a good borrower and/or lender.
• Have students travel through a Wise Pockets’ maze and help Vicki find Tim’s shin guards. (www.umsl.edu/~wpockets/Clubhouse/library/  GivingVickiCredit/maze.htm ^[3] )
• Print and let students color the Wise Pockets’ page that shows the garden tools that Miss Ellie borrows from Mrs. Fuentes. (www.umsl.edu/~wpockets/Clubhouse/library/  GivingVickiCredit/tools.htm ^[4] )
• Have students make door tags that tell people they are responsible borrowers. (www.umsl.edu/~wpockets/Clubhouse/library/  GivingVickiCredit/doorhanger.htm ^[5] )

Links Used:

1. ^{^} "www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/01.htm" - (www.umsl.edu)
2. ^{^} "www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/01.htm" - (www.umsl.edu)
3. ^{^ ^} "www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/maze.htm" - (www.umsl.edu)
4. ^{^ ^} "www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/tools.htm" - (www.umsl.edu)
5. ^{^ ^} "www.umsl.edu/~wpockets/Clubhouse/library/GivingVickiCredit/doorhanger.htm" - (www.umsl.edu)

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