Theme 4: Borrow

What This Topic Is About

In life, you sometimes need to buy big things. This could be paying for college, buying a home, or fixing a car after an accident. Sometimes people borrow money to pay for these big things. This is called taking out a loan. Before you borrow money, there are things to think about. One helpful tool is called a debt-to-income ratio. It helps you keep track of how much money you owe.

Questions From the Classroom

What is credit? How do you show you can be trusted with credit?
Credit means you borrow someone else's money, and you pay a fee for using it. People borrow money for many reasons. They might get a student loan to pay for college. They might get a mortgage (a loan for a house) to buy a home.

Being "creditworthy" means you can show a lender that you will pay back the money you borrow, on time. Lenders look at four things:

• Capacity – Can you afford your payments?
• Capital – How much stuff of value do you own?
• Character – Have you paid your bills on time in the past?
• Collateral – Do you have something valuable you could give up if you can't pay?

How do you take care of your credit? What makes credit "bad"?
Taking good care of your credit means paying back money the way you promised. With credit cards, it's smart to pay the full amount you owe before it is due. It's also smart to not use up all the credit you're allowed to use.

Bad credit happens when you:

• Miss payments or pay late
• Let your credit card bill get bigger and bigger
• Use one credit card to pay off another one

Also, if you owe a lot of money compared to your credit limit, your credit score can go down.

What's the difference between a credit card and a debit card?
Credit cards and debit cards look alike, but they work differently.

A credit card lets you borrow money. You must pay it back. If you don't pay it all back by the due date, you also have to pay extra money called interest.

A debit card is different. Your bank gives it to you, and it's linked to your own bank account. When you use it, the money comes straight out of your account. It's your own money, so you never pay interest. But you need to have enough money in your account already, because the card takes it right away.

How do people pay for college?
People can use savings or look for scholarships (free money for school) to help pay for college. You can also ask the government for help. This starts with filling out a form called the FAFSA (Free Application for Federal Student Aid). There are different kinds of help:

• Grants and scholarships – free money you never have to pay back
• Student loans – money you borrow and must pay back, plus interest
• Work-study – a job you can do while going to school, so you earn money

How do money ratios affect me?
A "financial ratio" is like a snapshot that shows how someone handles money. Lenders look at these ratios to decide if you're creditworthy.

One common ratio is called "debt-to-income." It compares how much money you owe to how much money you earn. If this number is high, lenders worry you might not be able to pay your bills every month. It's best if the money you owe (not counting rent or a house payment) is a lot smaller than the money you earn each month.

Words To Know

• Credit: Being able to borrow money now and pay it back later.
• Credit Card: A plastic card you use to borrow money to buy things.
• Credit Card Accountability Responsibility and Disclosure Act: A law that stops unfair credit card tricks. It also makes sure credit card companies clearly explain their fees, so people can compare cards.
• Credit Report: A paper that shows your history of borrowing and paying back money. It shows if you pay on time, how much credit you have, and how much you're using.
• Credit Score: A number, usually between 300 and 800, that shows how trustworthy you are with credit. A common one is called the FICO® score.
• Creditworthiness: How much a lender trusts that you will pay back money you borrow.
• Debit Card: A plastic card linked to your bank account. It lets you take out or spend your own money.
• Debt-to-Income Ratio: Comparing how much money you owe each month to how much money you earn each month. Example: If you pay $200 for a car and $1,000 for a house each month, that's $1,200 total. If you earn $4,000 a month, your ratio is 30% ($1,200 ÷ $4,000).
• Financial Ratios: Numbers that show how well someone is doing with their money.
• FAFSA (Free Application for Federal Student Aid): A free form you fill out to ask for help paying for college.
• Student Loans: Money you borrow to pay for college. You must pay it back later, with interest.

Questions to Ask Your Child

• When you want to borrow something from a friend, how do you show them you can be trusted?
• Where do you think money comes from? What's the difference between cash, credit, and debit?
• What do you think it would be like if nobody used cash anymore?
• How can you tell if a credit card offer is real or fake?
• How much do you think it will cost to go to the college you want to go to?

What If My Teen Wants To…

Get a credit card or debit card?
You might worry your teen will spend too much, especially shopping online. There's a law that says anyone under 21 who wants a credit card needs an adult to co-sign, or must prove they can pay it back alone. This law protects young people from too much credit card debt. But it's also a chance to teach your teen how to use credit cards the right way. If you co-sign, make clear rules in writing about paying on time. As a co-signer, you must pay the debt if your teen can't or doesn't. If the debt isn't paid, it can hurt your own credit too.

Debit cards are a great way to teach your teen about budgeting — choosing between things they need and things they want. If your teen is ready, you could open a shared checking account together. This lets you help watch how they spend money. It's a good chance to talk about their purchases, how to use online banking, and how to read bank statements. Teens often don't realize how fast money runs out at first. It's better for them to learn this at home now, instead of learning it the hard way later.

Take out a student loan?
Fill out the FAFSA with your teen. This shows how much help they can get from the government for school. Then look at different kinds of help together, like work-study jobs, grants, scholarships, and loans. There are different kinds of student loans — you can look them up online. Think about how much the monthly payments will be, and compare that to how much money your teen might earn after school.

Borrow money?
If your teen wants to borrow money for something they want, like a new car or phone, help them think of other ways instead — like making a budget, saving up, and working toward the goal. Explain that borrowing money for something that helps you grow, like a college education, can be smart. But borrowing money just for something you want isn't always the best choice. If your teen is planning for college, look into scholarships, grants, and work-study jobs to help borrow less money.

Family Activities

Compare Colleges: If your teen wants to go to college, help them look up and compare their top three college choices. Use a tool online to compare costs. Talk about how much money they would need to save or borrow.

Compare Credit Cards: Save some credit card offers that come in the mail. Show them to your teen. Talk about the different rates, fees, and rules each one has.

Resources

Articles:

• Providing Financial Aid: Saving for a Child's Future – Tips on saving for things like college.
• The Financial Aid Process – A simple picture-guide showing the steps to get financial aid.
• How Much Will College Cost in 25 Years? – An article about how college costs may change over time.
• Know Before You Owe: Credit Cards – A sample credit card agreement, showing how interest works and what happens with late payments.

Online Tools:

• FAFSA – Fill out this form to get help paying for college.
• Federal Student Aid – Get help getting ready for, applying to, and paying for college.
• Compare and Pay for College – A website to compare colleges and look at financial aid.