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Financial Literacy View details
1. Credit and Debt JHS
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Chapter 1
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Credit and Debt JHS

This lesson will teach you the theory required to fully understand the topic and will present both exercises and selftests to gauge your understanding.
Problem Solving Reasoning and Communication Error Analysis Modeling Using Tools Precision Pattern Recognition
Lesson Settings & Tools
10 Theory slides
15 Exercises - Grade E - A
Each lesson is meant to take 1-2 classroom sessions
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Credit and Debt JHS
Slide of 10
Have you ever wondered why people have credit cards? Or how people can afford to buy a house? This lesson will teach you about the basics of loans and what it means to borrow money.

Catch-Up and Review

Here are a topics that should be understood before getting started with this lesson.
Savings & spending basics:

  • What is a personal financial goal?
  • How can you make a personal budget?
  • What is planned spending vs. necessary spending?


Understanding responsibility and consequences:

  • What happens when rules are not followed? (loan repayment fees, penalties, etc.)


Basic percentage and multiplication:

  • How will interest increase the total cost of a loan? (e.g., 5 % of $100)


Needs vs. wants:

  • Is something worth the cost of paying interest?
  • When is borrowing useful or necessary and when is it risky?
Discussion

What Is a Loan?

A loan is money that you borrow and have to pay back later, usually with extra money added on called interest. When you take out a loan, there are two main parties involved:

  • Lender — a person or business (like a bank) that gives the money that is being borrowed
  • Borrower — a person that takes a loan and promises to pay it back
Discussion

Why Do People Take Out Loans?

Sometimes people need money for things that are important but are too expensive to pay for all at once. They might want to buy a car, fix a broken appliance, go to college, or cover any other big expense.

Taking-out-a-loan.png

Taking out a loan allows them to get the money they need now and then pay it back, little by little, over time. This way, people can afford big purchases or cover unexpected expenses without having to pay the whole thing right away.
Pop Quiz

Lender or Borrower?

Practice identifying lenders and borrowers.

Discussion

Paying Off a Loan

When you take out a loan, you borrow a certain amount of money which is called the principal of the loan. This is the original amount you borrow, not including anything extra. The most common type of extra money you have to pay is called interest. Interest is like a fee for using someone else's money. Interest is usually a percentage of the principal. Loan-principal-interest-debt.png

As you borrow money, you accumulate debt, which is the total amount of money you owe to someone like a bank or lender.
Example

Jalen's New Ride

Jalen wants to buy a used bike for $60.

Jalen-bike.png

He doesn't have the money right now, so his older sister says that she will lend it to him but she will also charge him 10 % interest on the loan. He agrees to pay her back in 3 equal payments.

a What is the total amount of interest being paid?
b How much will Jalen pay his sister in total?
c If Jalen pays in 3 equal payments, how much does he pay each time?
d How much of each payment goes toward the interest?
e How much of each payment goes toward the principal?

Hint
a Move the decimal one place to the left to find 10 % of a number.
b Add the principal and the interest together.
c Divide the total amount he will pay by 3.
d The total interest is spread out equally across all the payments.
e Subtract the interest portion from each payment to find how much of each repayment goes towards the actual loan.

Solution
a Jalen wants to buy a used bike for $60. His sister lends him the money with 10 % interest. To find the interest, we need to calculate 10 % of the loan amount.
10 % of $60 ⇓ 10 % * $60 Let's perform the calculations.
10 % * $60
WriteDec

Write as a decimal

0.10 * $60
Multiply

Multiply

$6
The total interest Jalen will pay is $6.
b To find the total amount Jalen will pay back, we add the principal of the loan and the interest he will pay.

$60 + $6 = $66 Jalen will pay back a total of $66 to his sister.

c To find the amount of each of the three equal payments, we divide the total amount by 3.

$66/3 = $22 Jalen will pay $22 each time.

d We know the total interest is $6 and that Jalen will repay his loan in 3 payments. To find out how much of each payment goes toward the interest, we can divide the interest by 3.

$6/3 = $2 For each $22 payment Jalen gives his sister, $2 goes toward the interest.

e The principal is the original loan amount, $60. We know Jalen pays $22 each time, $2 of which goes toward the interest. To find out how much goes toward the principal, we subtract the interest from the total payment.

$22 - $2 = $20 For each $22 payment Jalen gives his sister, $20 goes toward the principal.

Example

The Price of Fun

Ava wants to buy a new video game that costs $30. Her aunt offers to lend her the money but Ava has to pay her back $40 total, in four equal weekly payments.

Ava-video-game.png

a How much total interest is Ava paying?
b How much interest is Ava paying each week?
c What percentage of the loan is Ava paying in interest? Round your answer to the nearest whole percentage.

Hint
a Subtract the price of the game from the total amount Ava will pay back.
b Divide the interest by the number of payments Ava makes.
c To find a percent, divide the interest amount by the original loan and multiply by 100.

Solution
a Ava wants to buy a new video game that costs $30. Her aunt is lending her the money, but she has to pay back $40 in total. To find the total interest she will pay, we need to subtract the amount Ava borrowed from the total amount she has to pay back.

$40 - $30 = $10 Ava is paying $10 in interest.

b Ava has to pay a total interest of $10 over four weeks. To find out how much interest she is paying each week, we can divide the total amount of interest by 4.

$10/4=$2.50 Ava will pay her aunt $2.50 each week for four weeks.

c We can find the percent of the loan that is interest by dividing the total amount of interest by the cost of the video game and then multiplying by 100.
$ 10/$ 30 * 100
CalcQuot

Calculate quotient

0.3 * 100
Multiply

Multiply

33.3 %
RoundInt

Round to nearest integer

33 %
Ava is paying approximately 33 % of the loan amount in interest.
Discussion

Credit Score

A credit score is a number that shows how likely someone is to pay back a loan. Credit scores are usually between 300 and 850. A higher score means that you are considered more trustworthy to lenders.
Credit score charts often show wedges of equal size to make them easy to read. However, even though they look the same, the ranges they represent may not be equal. This can be misleading, so make sure that you are always reading the numbers carefully!

How can debt help you build your credit score?

When you borrow money and pay it back on time, you build a good credit score. This shows lenders that you are responsible and can manage your money well. Having a good credit score is like building a good reputation with lenders, which can help you get better loan and credit card deals in the future. Here are some more things that can help or hurt your credit score.

Actions That Affect Your Credit Score
Help Hurt
Pay bills on time Miss a payment
Keep credit card balances low Max out credit cards
Use credit responsibly Owe more than you can pay back
Keep accounts open for a long time Frequently open and close credit accounts
Explore

Would It Help, Hurt, or Not Affect Your Credit Score?

Certain actions can boost your credit score, while others can bring it down. Some actions will not change it at all. Look at each situation below and sort it into the most appropriate group.

Closure

The Hidden Cost of Forgetting to Pay

When you default on a loan, it means you stopped paying it back like you promised. That might not seem like a big deal now, but it can lead to real problems later!

Default-on-loans.png

What Happens When You Default

  • You still owe the money — and now maybe even more because of late fees.
  • Your credit score drops, making it harder to borrow money again in the future.
  • The lender might take back what you bought or send collection agencies after you!

How to Prevent Defaulting

There are many ways that you can prevent yourself from defaulting on a loan.

  1. Only borrow what you know you can pay back.
  2. Understand interest before you say yes to a loan. Even low interest can add up if you are not careful!
  3. Make a budget so you know where your money is going.
  4. Always communicate with the lender if you are struggling — they might be able to help you out.
If you borrow $100 with 10 % interest, you don't just owe $100, you actually owe $110. If you don't plan for that extra $10, you might fall behind... and that's how default starts.
Level 1
Level 2
Level 3
Credit and Debt JHS
Exercises
Aaliyah borrows $50 from her mom to buy school supplies. Her mom asks for $5 in interest when Aaliyah pays her back. How much will Aaliyah pay in total?

Borrowers always pay back both the principal and extra as interest. Aaliyah borrowed $50 and pays $5 in interest. Her total repayment is the sum of these two numbers. Principal+ Interest = Total Repayment $50 + $5 = $55

E
Hint & Answer
S
Solution
Which of the following is an example of a borrower?

Let's remember what a borrower is.

Borrower |- A person that takes a loan and promises to pay it back

Now let's consider the given options.

Option Conclusion
A. A bank that gives loans A bank is usually the lender, not the borrower. *
B. A person taking out a loan This is correct. A borrower is someone who takes a loan. ✓
C. A credit card company They lend money to people, they don't borrow it from people. *
D. A teacher giving homework This is not related to borrowing or lending money. *
E
Hint & Answer
S
Solution
If a person does not pay back a loan on time, what is this called?

Let's look at each of the given options to see which one is the best.

Option Conclusion
A. Defaulting on a loan This is the correct term for not paying back a loan. ✓
B. Making extra payments Making extra payments actually helps your credit, it does not hurt it. *
C. Saving money Not paying a loan does not mean that you are saving that money. The money has already been spent. *
D. Borrowing again Borrowing again is a separate action, not related to missing a payment. *

Defaulting happens when someone doesn't keep their promise to pay a loan back.

E
Hint & Answer
S
Solution
Match each definition with the correct term.

Let's review the definitions of each of the key vocabulary words from this lesson.

  • Lender: A person or business (like a bank) that gives the money that is being borrowed
  • Interest: A fee for using someone else's money
  • Borrower: A person that takes a loan and promises to pay it back
  • Loan: Money that is borrowed and has to be paid back later
  • Principal: The original amount this is borrowed, not including anything extra like fees

We can use these definitions to match the correct term to each meaning.

E
Hint & Answer
S
Solution
Elijah borrows $20 and agrees to pay $2 in interest. What percentage of the loan is interest? Round to the nearest whole percent.

To find out Elijah's interest rate, we can divide the amount of interest paid by the principal and then multiply by 100.

The interest is 10 % of the loan amount.

E
Hint & Answer
S
Solution

Credit and Debt JHS

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