Good Debt vs. Bad Debt

Middle SchoolFinancial 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