Credit 101: Helping Students Understand Credit & Use it Responsibly
True story: I didn't get my first credit card until I was in my 30s. I found the process, interest rates, and risk of debt intimidating. So, I'm not an advocate for young people rushing to get their first credit card the moment they turn 18. However, data from the US Government Accountability Office shows that 82% of U.S. adults had a credit card in 2022. Statistically speaking, since most Americans will likely get a credit card, I do think it's important to equip students with the knowledge and skills to handle this responsibility wisely.
Highlighting the importance of teaching our youth about credit card responsibility, it's worth pointing out that the Federal Reserve Bank of New York found that by the young age of 25, 73% of Americans have a credit card, making it most people's first experience with credit. This is concerning, especially given the post-pandemic inflationary period, which has resulted in record-high levels of credit card debt. By the end of 2023, the average credit card debt per borrower in the U.S. was $6,360 (TransUnion: Q4 2023 Report).
As an educator, my goal is not to encourage students to get a credit card, but instead to prepare them for responsible credit consumption in the event they choose to go that route.
Understanding Credit
Credit is essentially an agreement that allows a borrower to receive money, goods, or services now and then pay the lender later, typically with interest. Students new to the world of credit may find the various meanings of the word "credit" confusing. For instance, you can borrow something on credit, have a line of credit, have good or bad credit, get a credit card, or run a credit check that produces a credit report and, possibly, a credit score. To help students understand credit, it's important to establish a strong foundation in personal finance terminology.
Mastering Credit Card Vocabulary
There are several ways to introduce credit card vocabulary. One approach is to provide definitions through direct instruction. Another option is to have students discover definitions independently. Below, you will find a free resource that offers a printable activity with two levels tailored to students' language abilities and academic needs: one is a simplified matching exercise for vocabulary terms and definitions, and the other is a more advanced activity requiring students to research definitions and complete a graphic organizer. Additionally, the resource offers a digital activity with a drag-and-drop feature for matching credit card terms with their definitions, which can be used online or with devices.
Practicing & Reinforcing Vocabulary
To reinforce vocabulary and give students an opportunity to practice, I've developed a series of puzzle sets. Each set includes a word search, a crossword puzzle with a word bank, a crossword puzzle without a word bank, and a terminology sheet with definitions and examples.
I use these sheets in various ways. Depending on the group of students I'm working with, I sometimes use the leveled puzzles for differentiation. The word search serves as an entry-level activity that all students can access, while the crossword puzzles offer increasing difficulty, with the one without a word bank being the most challenging. By offering all the puzzles, students can choose the option that best fits their learning style or ability level. The terminology sheet also serves as a helpful support, allowing students to look up vocabulary in a controlled setting, preventing overwhelm or frustration.
At other times, I use the puzzle sets for repeated exposure. For example, on a rally day with a short schedule, I might start with the word search. Later in the year, with a substitute teacher, I might leave the crossword puzzle with a word bank. Finally, in the spring, as a break from state testing, I might use the crossword puzzle without the word bank. By revisiting the same terms over the course of the year, I'm able to reinforce students' vocabulary development and spark new discussions about financial topics.
Credit Puzzle Set covers: Collections, credit bureau, credit history, credit monitoring, credit report, credit score, creditworthiness, debt-to-income ratio, delinquency, dispute, Equifax, Experian, FICO score, fraud alert, freeze, hard inquiry, identity theft, soft inquiry, TransUnion, utilization
Credit Cards Puzzle Set covers: Annual fees, annual percentage rate, authorized user, balance, balance transfer, billing cycle, co-signer, collections, credit limit, grace period, introductory APR, minimum payment, penalty APR, pre-approval, rewards, secured credit card, statement, and utilization.
Once you've established a foundational understanding of terminology, you can introduce students to the broader concepts of credit.
Credit Scores: What Students Need to Know
Students should start by understanding that a credit score is a numerical representation of an individual's creditworthiness, based on their credit history. This score reflects how likely they are to repay borrowed money on time and considers several factors:
Payment history
Amount of debt
Length of credit history
Types of credit (loans, cards, etc.)
New credit accounts (opening several new accounts in a short period)
A common question students ask is whether their credit score starts at 0. Before turning 18, most people do not have a credit score. A person's first credit score is calculated once they obtain their first credit product, such as a credit card or loan. This initial score varies depending on their payment history, debt, credit history, types of credit, and the number of new credit accounts. Although young adults don't start with a score of 0 or even as low as 300, it can take months or even years of responsible payments to reach credit scores above 700.
Benefits of a Good Credit Score
Students also often wonder why they should care about their credit score. A good credit score (670+) signals to lenders that a customer is trustworthy, which can lead to a variety of benefits:
Easier approval for credit cards, mortgages, and car loans
Lower interest rates on loans and credit cards
Access to credit cards with favorable rewards (mileage, points, cashback)
Possible discounts on insurance policies
Easier approval for various housing options
Simplified setup of utility services (gas, water, electric)
Improved chances of employment approval
Challenges of Establishing Credit for Young Adults
It's important to recognize that some students may face challenges establishing credit. For example, some students may lack a Social Security number, while others may have been victims of child identity theft. There are strategies to help these students, such as:
Keeping credit card balances low by paying off bills before the due date and making multiple payments each month if necessary
Paying bills on time and setting reminders to avoid missed payments
Reviewing credit reports to correct errors, such as incorrect payment history or outdated information
Limiting the frequency of applying for new credit
For many students, the impact of a good credit score may seem distant or irrelevant. Remind them that their future selves will appreciate the benefits, such as lower interest rates, freedom from credit card debt, and access to better mortgage options.
Credit Protection and Identity Theft Prevention
If scammers obtain a student's personal information, they can use it to open credit cards, take out loans, borrow money, make purchases, and transfer funds in the student's name. Javelin Strategy & Research's Child Identity Fraud Study found that 915,000 U.S. children were victims of identity fraud in 2022, equating to approximately 1 in every 50 children each year. Identity thieves often target children because minors usually have clean credit histories, and fraud can remain undetected for years. As young people spend more time online, often unsupervised, they face a higher risk of data breaches and phishing schemes.
This is concerning because many young adults discover they have been victims of identity theft only when they apply for their first credit card, car loan, or apartment and find that someone has opened multiple lines of credit in their name, resulting in tens of thousands of dollars in debt. It's never too early for students to start checking their credit and working with their parent or guardian to take protective steps:
Credit Checks
Experts recommend checking your credit at least once a year, ideally quarterly. Regular credit checks help you spot signs of identity theft and address errors that could negatively impact your credit score and creditworthiness.
Credit Freeze
A credit freeze prevents you from opening new credit accounts, which also prevents anyone else from opening an account in your name or using your Social Security number. You must temporarily lift the freeze to apply for new credit. Credit freezes are free, but you must contact each credit bureau separately to initiate one.
A credit freeze is a valuable option for everyone, even if you don't suspect your information has been compromised. If you aren't actively applying for a new credit card or loan, a freeze adds a layer of protection. It's free and easy to lift or reinstate as needed. However, be cautious of relying solely on a credit freeze, as it may provide a false sense of security. It's just one strategy that should be combined with other identity protection methods.
Fraud Alerts
If you believe your information has been stolen or that you are at risk of fraud, you can set up a fraud alert with the credit bureaus. This requires businesses to contact you and verify your identity before issuing new credit in your name. You only need to contact one bureau to set up an alert, which lasts for one year.
Smart Credit Card Use: Essential Guidelines
Students must take credit cards seriously. It's important to emphasize that they should only consider getting a credit card if they can (and fully intend to) pay off the balance each month, or if they need it for genuine emergencies. It's critical for students to understand that carrying a balance on credit cards can quickly lead to high-interest rates and fees, resulting in escalating debt that can be difficult to escape.
Decoding the Schumer Box: Key Credit Card Information
A Schumer Box is a standardized table that credit card companies are legally required to provide that summarizes a credit card's rates and fees. Online, the Schumer Box can typically be found as a link titled "rates and fees" or similar, and these companies must also include it with mailed credit card solicitations. The box has a standard layout, featuring a column of descriptors on the left and detailed information on the right, with key details highlighted in bold.
The Schumer Box is named after New York Senator Charles Schumer—who was a congressman at the time—due to his involvement in the legislation that established it. Emphasize to students that the Schumer Box provides essential information about a credit card, such as interest rates, fees, and other terms. Before applying for a credit card, students should carefully review the Schumer Box for the cards they are considering. With practice, reading and understanding Schumer Boxes will become easier.
The lesson "Credit Card 101" features a Schumer Box Scavenger Hunt, where students can practice decoding the fine print on credit card offers. By mastering this skill, students will be able to make informed decisions about which credit card to choose and avoid surprises like high interest rates, penalty APRs, or unexpected transaction fees.
Consequences of Credit Card Mismanagement
It's essential for students to understand the long-term consequences of their actions with credit cards, as debt can escalate quickly if not managed properly. Start by explaining the repercussions of failing to pay their credit card bill:
Late fees
Penalty APR, which is a higher interest rate for six months or more
Damaged credit score
Possible cancellation of the card, with the company sending debt to collections
Potential debt collection lawsuits
If you want to go into the details of paying a credit card bill, the Consumer Financial Protection Bureau has a whole lesson on credit card statements, including a sample statement and explanation.
Security Best Practices for Credit Card Users
Consumers often avoid checking their credit card apps or statements because they want to avoid confronting their spending habits or dealing with stressful debt. However, it's crucial for students to recognize the importance of regularly reviewing their statements to detect fraudulent purchases. Companies have a time limit for waiving liability for false charges, making timely checks essential. It's also increasingly important to safeguard personal information by avoiding sharing details on insecure sites or public Wi-Fi, and by not storing information on vendor websites. Here are some specific tips to help protect against fraud and misuse:
Enable account alerts to receive notifications about charges and potential fraud.
Monitor accounts regularly to identify any unauthorized charges.
Avoid emailing credit card information or speaking it over the phone where others might overhear.
Shred old credit card statements and receipts or switch to paperless statements.
Don't store credit card information on vendor websites.
Look for websites with "https" for secure transactions.
Sign the back of the card to validate it.
Avoid using public Wi-Fi when handling sensitive credit card information.
Getting Started with Credit: Tips for Young Adults
As a young adult, establishing credit without a spending history can be challenging. This can make it harder to rent an apartment, set up utilities, secure loans, or get a credit card. Here are some options to help students start building their credit history:
Get a secured credit card once they turn 18. These cards require a security deposit, which becomes their credit limit. After using the card responsibly for 6-12 months, the company typically upgrades to an unsecured card and returns the deposit.
Become an authorized user on a responsible parent's or guardian's credit card account. They'll receive their own card on the account, but their parents will remain responsible for the payments.
Start small with a credit card that has a low lending limit. Make sure to pay the bill regularly, in full, and on time to build a positive credit history.
In conclusion, teaching students about credit card responsibility is an essential component of financial literacy that can have a profound impact on their future. By equipping young adults with the knowledge to understand credit card terminology, recognize the importance of credit scores, and employ effective credit protection strategies, we promote their financial success. The ability to manage credit cards wisely and avoid potential pitfalls can empower students to achieve their long-term goals. By guiding students in establishing credit responsibly and emphasizing the real-world consequences of mismanaging credit, educators play a vital role in shaping students' financial futures. If you are interested in diving deeper into this topic, you can check out Credit Card 101 available on my Teachers Pay Teachers store.
