As we discussed in the last column, I believe that requiring a Personal Finance course in high school is something that we owe to our young people. I don’t like telling people what they must do, any more than anyone else, but, in my opinion, financial wellness will be more critical to them, as they go through life, than it has been for any prior generation. We live in an increasingly “Debt is OK, Hyper-Consumer, Keep up with Everyone Society,” where you have to be an attorney or an accountant to understand some of the financial products out there. To survive, they have to increase their Financial IQs to a level that very few of them appreciate.
My hope is that this series on the kinds of things that students can learn in a course on Personal Finance and Money Management will encourage more school districts to require such a course, and, if nothing else, it will give concerned parents something for their high school students to read.
Before we look at some of the lessons in the Borrowing module of the NEFE High School Financial Planning Program, I have to share some of the great quotes in highlighted boxes throughout the pamphlet, which I am certain lead to interesting class discussions. You may have heard them. “If you think nobody cares if you’re alive, try missing a couple of car payments.” “A bank is a place that will lend you money if you can prove that you don’t need it.” “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” “No man’s credit is as good as his money.”
Here are some of the things that students work on in the Borrowing module:
$ DIFFERENT KINDS OF CREDIT. Here they learn about the different kinds of credit — revolving credit, installment loans cash loans, and service loans, i.e. for utilities.
$ CREDIT IS NOT GOOD OR BAD. They learn that credit is just a tool to buy something now and pay for it later. In itself, it is not good or bad. It is how one uses credit that it good or bad. A major true emergency, that you can’t cover with your emergency fund, may be a good use of a credit card, whereas an impulsive purchase of something that you don’t need and can’t afford — not so much! In either case, you will have to pay more. This leads to discussions about using credit for good and bad purposes, like using a credit card for convenience (shopping online or for big purchases, where the company may provide you with extra protections) vs. that item you really can’t afford. Also, they learn about using credit to buy a car or a home, to invest in a business or other income producing activities, or to obtain an education.
$ UNDERSTANDING INTEREST. Students learn about fixed and adjustable or variable interest rates, and introductory rates, that may be offered, but then increased. They also learn about amortization schedules, and about the wisdom of making additional principal payments. They learn about the true cost of credit — it is not about the monthly payments, it is about the term of the loan and the interest rate. To illustrate this lesson,
they learn to use loan payment calculators online to see the true cost of different kinds of loans. They also learn about compound interest — interest on interest, and how important it is to avoid paying it whenever possible.
$ ADDITIONAL COSTS OF BORROWING. When it comes to credit and debit cards, and credit lines, they learn about annual fees, cash advance fees, over limit fees, paying within grace periods to avoid late fees, ATM fees, maintenance, setup, and other fees. When it comes to Installment loans, they learn about origination fees, prepayment penalties and the possible need for a down payment.
$ THE SHREWD BORROWER CHECKLIST. This is a suggested list of questions that you should be able to answer yes to before you borrow. Is it a Sincere need or want? Will I be Happy to pay for it when I have to make the payments? Is there Room for it in my budget? Is it worth the Extra cost I will pay? What would I lose if I Waited and saved. Will I have the Discipline to make any payments on-time? Beyond that, students learn techniques to compare borrowing options, the importance of reading and understanding all of the terms, the need to ask the right questions, and the need to compare apples and apples, so to speak.
$ THE IMPORTANCE OF A GOOD CREDIT HISTORY AND A GOOD CREDIT SCORE. Here students learn about credit histories, and that it is easier to maintain a good one than it is to fix one that you have ruined. They also learn about credit scores and how those credit histories and scores can affect your ability to get loans, an apartment, a job, and more. They also learn that they affect the interest rate you pay, if you do get a loan, whether you may have to make a deposit or a down payment, or whether you need a cosigner. They also look at the wisdom of cosigning for anyone. In addition, they learn the importance of having a good payment history, how to ensure you have a good credit history and credit score and how to improve them, and how to obtain their free annual credit reports and how to correct any errors.
$ MISCELLANEOUS LESSONS. These include how to Defer, Detect, and Defend against identity theft and fraud, and the importance of paying off any debt as soon as possible. In addition, they learn the advisability of using cash as much as possible — MY PERSONAL FAVORITE!
In the next column we will cover more modules. It seems to me that this is a good review for everyone.
John Ninfo is a retired bankruptcy judge and the founder of the National CARE Financial Literacy Program. Find his previous weekly columns at http://www.mpnnow.com/search?text=Ninfo or at http://www.monroecopost.com/search?text=Ninfo.