Theme 4: Borrow

What Is Credit?

Credit means using someone else's money.
You pay a fee for this.
People borrow money for big things.
Like paying for college.
Or buying a house.

Being "creditworthy" means people trust you.
They know you will pay money back.

Four things show you are creditworthy:

• Can you pay on time? (This is called capacity.)
• What do you own? (This is called capital.)
• Have you paid bills before? (This is called character.)
• Do you have something valuable to promise? (This is called collateral.)

Taking Care of Credit

Good credit means paying back money on time.
For credit cards, pay the full amount each month.
Don't use up all your credit.

Bad credit happens when you:

• Pay late.
• Let your balance grow too big.
• Use credit to pay off other credit.

If you owe a lot compared to your limit, your credit score can go down.

Credit Cards vs. Debit Cards

A credit card lets you borrow money.
You must pay it back.
If you don't pay in full, you pay extra. This extra is called interest.

A debit card uses your own money.
It comes from your bank account.
You never pay interest with a debit card.
You need enough money in your account first.

Paying for College

You can use savings.
You can look for scholarships.
You can also ask for help from the government.

First, fill out a form called FAFSA.
This helps you get money for school.

There are three kinds of help:

• Grants and scholarships — you don't pay these back.
• Student loans — you do pay these back, plus interest.
• Work-study — you work at school and earn money.

Financial Ratios

A financial ratio shows how you handle money.
Lenders look at ratios too.

One important ratio is called "debt-to-income."
It compares how much you owe to how much you earn.

A high ratio can worry lenders.
They may think you can't pay back money.

Words to Know

Credit: Borrowing money to pay back later.

Credit Card: A card used to borrow money for things you buy.

Credit Report: A record of how you pay money back.

Credit Score: A number that shows how trustworthy you are with money.

Creditworthiness: How well you can be trusted to pay back money.

Debit Card: A card that uses your own money from the bank.

Debt-to-Income Ratio: Comparing what you owe to what you earn.
Example: 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%.

Financial Ratios: Numbers that show how you handle money.

FAFSA: A form to ask for help paying for college.

Student Loans: Money you borrow for college.
You pay it back later, with extra money called interest.

Questions to Ask Your Child

• How do you show people you can be trusted?
• Where does money come from?
• What is the difference between cash, credit, and debit?
• How can you tell if a money offer is safe?
• How much does your dream college cost?

What If My Teen Wants a Card?

Getting a credit card can be risky for teens.
A law says teens under 21 need a grown-up to co-sign.
This means the grown-up promises to help pay if needed.

If you co-sign, write down clear rules together.
If your teen doesn't pay, you must pay instead.

Debit cards can teach budgeting too.
You could open a joint account with your teen.
This helps them learn to spend wisely.

What If My Teen Wants a Student Loan?

Fill out the FAFSA together.
This shows how much aid your teen can get.

Look at all the options:

• Work-study
• Grants
• Scholarships
• Loans

Think about how much money will need to be paid back each month.

What If My Teen Wants to Borrow Money?

If your teen wants something they just "want" (not need),
help them make a plan instead.
They can save money and set a goal.

Remind them: borrowing for school can be smart.
Borrowing for wants isn't always the best choice.

For college costs, look for scholarships and grants first.
This can lower how much money needs to be borrowed.

Family Activities

Compare Colleges:
Help your teen pick three colleges.
Look up costs for each one.
Talk about saving or borrowing money for them.

Compare Credit Cards:
Save credit card offers you get in the mail.
Look at them with your teen.
Talk about fees and rules for each card.