Year 9 Business - Term 3 - Weeks 3 - 4

Year 9 Business - Term 3 - Weeks 3 - 4

Introduction to Credit and Debt

Workbook Introduction

• Credit is money you borrow from a financial institution like a bank, credit union, build society or buy now pay later (BNPL) services.

• Credit has a cost; it isn't your personal money tree growing in your backyard. Any credit you use becomes a debt that must be repaid to the credit provider - usually with interest included.

• Interest is an extra amount you have to pay as a cost for borrowing the credit provider's money. This cost is added to the original amount of money you borrowed.

Workbook Introduction

• Many retailers offer interest-free deals, but the purchase is only interest-free for a certain period of time which is often 12 to 24 months. If the purchase balance is not paid in full within the interest-free period, interest will be charged on the outstanding amount at a high interest rate.

• Before you start looking for credit, do a budget - and make sure you only borrow what you can afford to pay back, so you don't end up with money problems

• The amount you can afford to borrow will depend on a number of factors such as:

• your income and your expenses

• estimated repayments

• You'll see the expression 'fees and charges' used a lot. They're really the same thing - amounts of money you've got to pay n addition to interest

• e.g. an amount you pay each year just to have your credit card, whether you use it or not.

Activity 1.1

Paying for your holiday - is credit the best option?

• Using credit and going into debt can be risky. If you don't know what you are doing you may end up in a lot more debt than you planned

• It can also affect your credit rating. A credit rating is a record of your credit applications and repayments you have missed. A bad credit rating could make it harder for you to borrow money in the future.

• Let's say you're planning a holiday. From what we've already discussed, answer the following questions:

• How does credit work?

• How does interest work?

• What should your next step be?

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Activity 1.2

Chloe's trick to control her impulse

• What tip did future Chloe give to her present self to try and get her spending habits under control?

• Can you think of any other tricks or methods people could try in order to keep a check on their spending?

Activity 1.3:

Amy and Maria make different decisions:

• How would you describe Amy's personality?

• How would you describe Maria's personality?

• What are the pros and cons of Amy's situation?

• What are the pros and cons of Maria's situation?

• Who do you think is making the best decision? Why?

• What is credit?

• When you get something on credit, what extra money do you have to pay on top of paying back the amount you borrowed?

Different types of credit

• There are many types of credit products.

• Each type gives you access to funds, but you have a legal obligation to repay the money - generally with interest and sometimes there are other fees and charges.

• You should shop around to get the best deal and they best type of credit for you.

• Different credit options have different costs, some cost more than others.

• It is important to remember that credit may solve a short-term money problem, but too much credit can cause money problems in the future.

• Complete the following table:

Different types of credit

• There are two different types of loans - secured loans and unsecured loans. The difference depends on how much risk there is that the borrower might not pay the loan back to the lender.

• With a secured loan the credit provider holds security over one or more of your assets to make sure they get their money back. It protects the lender from losing their money.

• With an unsecured loan the credit provider may decide that there is not a lot of risk and so they do not need to hold an item as security. The interest rate for unsecured loans is usually higher than for a secured loan.

Activity 1.4:

Tom uses different types of credit

• Read Tom's story below and then answer the following question:

• Tom got into the course of his dreams, but he needed to buy a computer and arrange internet access to be able to do the course. Also, he had to travel a long way to classes and there was no public transport there from his house. So, he applied for a personal loan to buy a second-hand car.

  
  

  He got a credit card to pay for the computer and he signed up for a 24-month internet contract. Now he is six months into his course and he has financial troubles. He is managing to keep up with his personal loan repayments, but he doesn’t have much money left over for the credit card repayments and the internet bills, which are both now three months overdue.

• What are the different types of credit or service plans Tom got to help him study?

Activity 1.5:

Tom ends up with repayment problems

• Credit reports: A credit reporting agency will have a credit report on you if you have:

  ·        Applied for a personal loan or credit card in the past 5 years

  ·        Signed a mobile phone contract

  ·        Paid a bill of as little as $100, at least 60 days late

  Credit providers use credit reports to help them decide whether to provide a person with credit. If the credit report reveals a poor history of repayment, they’ll consider you a higher credit risk. The credit provider may not lend you any money if you are considered too high a credit risk.

• What would help Tom receive a good credit rating in this situation?

• What are the benefits for Tom in the future by getting a good credit rating?

• What would cause Tom to get a bad credit rating in this situation?

• What kinds of problems will a bad credit rating cause Tom in the future?

• How can people avoid getting into repayment problems?

Activity 1.6:

Different types of credit for different purposes:

• Use what you have already and the internet to answer the following questions:

• What are some of the different types of credit?

• Define secured loans.

• Define unsecured loans.

• What is the difference between secured and unsecured loans?

• What is the difference between a credit card and a store card?

Activity 1.6:

Different types of credit for different purposes:

• Which type of credit would be best for each of the following: Buying a pair of shoes; Buying a car?

• How are different types of credit used?

• How can having credit cause you financial problems?

2. Credit contracts:

• When you get credit, you will need to sign a credit contract. A contract is a legal agreement of what it says. Before you sign up for credit you should read the contract and make sure you can afford the repayments. It's essential to know what you're signing up for, for whom you're getting the credit from and how they are charging you. You do not want to end up with a poor credit rating.

• When you sign up for credit, you are committing to a contract between you and the credit provider. A contract is a legal agreement and you have to take it seriously. You may not be able to cancel it - it depends on the detail of the contract and the circumstances.

• If you don't understand everything in a contract, or you're not sure about how a contract suits your situation, get advice from someone who can help.

Activity 2.1: Red-flagging cost items in a credit card offer

• Read over the example advertisement and then answer the following questions:

• 1. What parts or words in the contract should Chloe have asked about before signing up for the credit card?

• 2. Draw a red flag over (or highlight) the words that you need to be careful of or do not understand.

• 3. For each red flag that you identified for Chloe, write a question that you think Chloe should have asked the credit provider or done further research on before signing up for the credit card.

• 4. What are some things to check or ask about in an advertisement?

• 5. What does an asterisk (*) mean in an advertisement?

Activity 2.2:

Understanding a contract:

• Read the extract from a credit card contract and write out any words that you don't recognise or understand:

• What would you do if you didn't understand a contract?

• Who could you ask to help explain the contract to you?

3. Problems with credit:

• It's important to get help if you are experiencing financial difficulties.

• If you fail to repay your loans or credit card debts, your credit rating may be affected which may make it difficult to borrow money in the future.

• A credit reporting agency will have a credit report on a person if the person has:

  ·       Applied for credit in the past 5 years

  ·       Paid a bill (for utilities, a mobile phone or the internet) or made a repayment on credit at least 60 days late (that debt can be as little as $100)

• Credit providers use credit reports to help them decide whether to provide a person with credit. If the credit report reveals a poor history of repayment, they’ll consider you a credit risk and may not lend you the money.

• Failing to repay debts can have long term effects. A poor credit rating can take some time to fix. You may also have legal problems by not repaying what you owe.

3. Problems with credit:

• You have options available if you are having difficulty making repayments. Contact your credit provider without delay to see how they can help you. For example, you could negotiate an agreed repayment plan until your debt is paid off. A free financial counsellor can help you with this negotiation.

• If your circumstances change, you may be able to ask your credit provider for a ‘hardship variation’. For example, you may not be able to make your repayments due to temporary illness or unemployment. A hardship variation means the credit provider can agree to change the way you make repayments to make them more affordable for your situation.

• You do not have to go it alone; there are free financial counselling and legal services available to help.

Activity 3.1:

Chloe makes a rookie error and gets help:

• Remember back to the Credit hangover video and watch for Chloe’s rookie error.

  Answer the following questions:

  1.  What rookie error did Chloe make?

  2.  What problems did that rookie error cause future Chloe?

  3.  Who did Chloe end up going to for help and how did they help her?

Financial Counsellor:

• A financial counsellor is a person who “gives free, confidential and independent assistance to people with financial problems. Financial counselling services are usually provided by community or welfare organisations.”

• The local council where you live may be able to suggest a local organisation that provides financial counselling services. If you are confident enough, you can call the Financial Counselling hotline on 1800 007 007 to speak to a financial counselling service in your area.

• A financial counsellor can help you make a budget or help you negotiate with a financial institution, company or a debt collector for more time to pay or a repayment plan that you can afford. Financial counsellors are free.

• If a company takes you to court for a debt, you should contact a lawyer from a local community legal centre for free legal advice. To find your local community legal centre, you can contact the National Association of Community Legal Centres at www.naclc.org.au.

Activity 3.2:

How Chloe could have ended up with legal problems

• Answer the following questions:

  1.  What could have happened to Chloe if she had not contacted a financial counsellor to arrange a repayment plan with the credit provider?

  2.  What legal problems could Chloe then end up with?

  
  

  3.  What sort of situation can lead to problems paying back credit?

  
  

  4. Where can you go for help?

Reflection:

• List three (3) new things that you learned today about credit cards and/or debt.

• In your opinion, which of these components is the most important to you?

Task 2: Case Study:

How credit cards work:

• Go to the credit card section on the Money Smart website and use it to answer the following questions:

• 1.  When are you charged interest on a credit card?

  2.  Explain what is meant by the term ‘interest-free period’.

  3.  What are the disadvantages of credit cards with an interest-free period?

  4.  When might you consider getting a credit card with no interest-free days?

  5.  Outline the fees and charges which might add to the cost of a credit card.

  6.  Outline some of the credit offers that can become ‘debt traps’ which means they may make it easier for you to fall into debt.

  7. Which payment method is cheaper: credit card or cash?