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Transcript
Good Debt vs. Bad Debt
Middle School
Financial Literacy #5
Pre-Test
1. What is usually a good debt?
2. What is usually a bad debt?
3. When credit card bills are paid off within a
month, how much interest must be paid?
Objectives
• Review Last Lesson
• Good Debt
– Created value or has the potential to create value
• Bad Debt
– Difficult paying money back or does not add
meaningful value
• Credit Card Problems
Review
1.
Tool on the internet that provides information
about income vs. expenses
• Reality Check
2.
What is the annual salary needed to cover your
expenses?
• Answers will vary
• Average Range: $50,000-$60,000
3.
What careers of interest cover those expenses?
• Answers will vary
• Usually needs to be a high-skill career
Good and Bad Debt Video
• Watch the Good and Bad Debt video
• Pay close attention: what is good or bad debt?
• Mixed opinions on whether borrowing money to
buy a car is a good or bad debt
Good and Bad Debt
• Good Debt
– College Loans
– A loan that can make you money
• Bad Debt
– Things that can be consumed fairly quickly with no or
little cash or personal value
– Buying something you really do not need
– Cannot afford the monthly payments
Credit Card Interest
1. The average interest rate is 20% for
credit cards
2. When credit card bills are paid off within
a month, no interest is paid
3. The credit card company requires
people to pay at least 3%
of the principal every month
Credit Card Scenario #1
1. Mai charges $1,000 to her credit card for a vacation
–
–
Her credit card interest rate is high: 20%
She only pays the minimum amount per month
2. How long do you think it takes Mai to pay off the debt?
–
25 years
3. After adding interest, how much do you think the
$1,000 vacation costs Mai?
–
$2,224.06
Credit Card Scenario #2
1. Ed has bad credit rating for not paying previous loans
–
–
His interest rate is very bad because of this: 37%
He only pays the minimum amount per month
2. For the same $1,000 vacation loan, how much do you
think Ed paid in interest
–
$24,040.81
3. How long do you think it took Ed to pay off the debt?
–
50 Years
Groups: Usually Good or Bad Debt?
• Which of the loan items below are usually good or
debts?
• Give reasons why they are good or bad debts
– Credit card finance charges
– Buying a home
– Paying for college
– Buying clothes
– Paying for a vacation
Groups Share With Class
• Which of the loan items are usually good or debts?
• Give reasons why they are good or bad debts
– Credit card finance charges
– Buying a home
– Paying for college
– Buying clothes
– Paying for a vacation
Usually Good Debt
• Buying a home
– Most people need a loan to buy a home
– Interest money is tax deductible
– When it is bad: Monthly payments too high for income
• Paying for college
– Costs are often much less than increase in income
– When it is bad: High tuition with few long-term financial or
personal benefits
Usually Bad Debt
• Credit Card Finance Charges
– Often very high interest, Payments primarily going to interest
– When it is good: Pay balance quickly, buy something important
• Buying Clothes
– Not recommended to borrow for items consumed fairly quickly
– When it is good: Clothes essential for new job, pay back fast
• Paying for a vacation
– When costs creates payments you cannot afford, consumed quickly
– When it is good: Cost slightly over your savings, rejuvenates you
Post-Test
1. What is usually a good debt?
2. What is usually a bad debt?
3. When credit card bills are paid off within a
month, how much interest must be paid?
Review
• A good debt is usually
– Buying a home, Paying for college
• A bad debt is usually
– Credit card finance charges, buying clothes, paying for a vacation
• Amount of interest when credit card bills are paid off within
a month
– $0.00