Debt Jeopardy

Essential Question: “How can I stay out of debt?”

Investigate: Impulsive Spending

[Time Required: 15 minutes] 

1. Write in your notebook five things you want to buy right now (e.g., concert tickets, video games, clothes, a car, etc.).
2. Review the items and differentiate the wants from the needs. For example, is a car a want or a need? What about a video game? You must know the differences between wants and needs so that you can manage your money responsibly and avoid falling into debt.
3. What is debt and what causes it? How do people get into debt? Debt is when you owe more money than you have, and that one way to get into debt is to make impulsive decisions with money, whether for a want or a need.
4. It’s important to ask three questions before making any spending decision: 1) Can I afford it? 2) How will I pay for it? and 3) What will the consequences of my purchase be? For example, if you have an upcoming car payment and decide to buy a luxury item instead of making that payment, even though they cannot afford both, what would be the effects of that decision?
5. While impulsive financial decisions or using credit to buy wants can lead to bad debt, there is also such a thing as good debt. Good debt is when credit is used to purchase something that is needed but may be difficult to pay for in cash. Good debt may include items such as financing college tuition or taking out a mortgage to buy a home. Good debt can help build our credit history and demonstrate to lenders that you are financially responsible. Good debt helps show your “creditworthiness.” 

Student Preparation: The Choices We Make

[Time Required: 20 minutes] 

1. Making wise and thoughtful choices with your money can help you maximize savings, build credit, and minimize bad debt.
2. Download the activity sheet Credit Crossroads. You are going to determine bad debt versus good debt. Allow ten minutes to complete the activity.
3. Why is some debt considered good while other debt is considered bad? How can we distinguish between the two? 

Challenge: Debt and Credit

[Time Required: 15 minutes] 

1. What are the short- and long-term effects of debt and the ways a person can get into bad debt. For example, what happens if we pay our bills late or bounce a check? What about not paying off credit card bills? Debt can snowball very easily if you spend more than you have and only pay the minimum amount due on our bills. Understand there are consequences for falling into debt, such as increasing interest payments that can cause us to fall even deeper into debt. Remember that debt also impacts your credit score and while good debt builds a positive credit history, bad debt can negatively impact your credit score.
2. Next, download the activity sheet Debt Snowball. Give ten minutes to complete the activity,. How much did each purchase end up costing? How could the debt snowball have been prevented? How might the debt snowball impact credit?
3. In both scenarios, the actual cost of the purchases was significantly higher in the end because of interest rates and minimum payments. In the second scenario, the cost of the car repairs doubled the original payment, making a much greater impact in the long run than if Brent had paid off the car more quickly.
4. How do you think your life would be impacted if you had significant “bad debt.” For example, how would it affect spending time with friends, paying for a new car or planning for college? How might your credit scores be affected?
5. Understand that not handling credit responsibly can have long-term consequences, from decreasing credit scores to continual calls from creditors seeking payments. If a person gets so deep into debt that they are unable to get out on their own, they may consider filing for bankruptcy as a last resort. While bankruptcy can help eliminate or reduce money that is owed, it damages a credit score and can prevent you from being able to buy a house, open new credit card accounts or obtain any kind of loan.
6. What would you do if you were in debt? Would they change their spending habits? Understand that bad debt should be avoided because once bad debt snowballs, it becomes increasingly difficult to pay off. If debt begins to snowball, there are options such as debt counselors who help develop a plan for paying back money owed, and debt consolidation, which can simplify repayments and lower interest rates.
7. Debt can have a serious impact on your credit score and severely limit opportunities, such as the ability to go to college, afford a new apartment, or even purchase a gift for a friend’s birthday. Consider the impact the media has on our spending—many images we see encourage us to buy even if we can’t really afford it. Understand that making a budget and cutting unnecessary expenses are not only ways to alleviate debt, but also ways to save for the things you want to buy. 

Reflection

[Time Required: 5 minutes] 

Reflect in your notebook about good versus bad debt. How does good debt help your credit and how does bad debt damage your credit?