Have you ever had to make a decision that you did not really like but knew it would do good for you in the end? Have you ever had to make a tough decision like this with money? Maybe paying your parents back on Friday meant that you could not go to the movies with your friends on Saturday. Sometimes debtors need to make tough choices that will benefit them in the end.
Sometimes people make the choice to take out an additional loan to pay off their credit cards. Doing so will consolidate all of their debt with one financial institution and should drop their interest rate. The one monthly payment to pay off their new loan should be less money than before they consolidated their debt. As a consequence, taking out another loan is debt. The Credit Bureaus note the new line of credit and the consumer’s credit score drops. It feels good to pay off several credit card companies with the new money from the loan; which may have even boosted your credit score temporarily. However, after a few months the new loan hits your credit and your score will drop- right back to where you started from. Is it worth it? What is the end goal? What good does a credit score do? Do you need a credit score?
What options are available, without opening another line of credit, to pay off debt? What happens if the loans are not or cannot be paid off?
Read the letter that “J” wrote to Penny, in the Tampa Bay Times. What do you think? Write a letter to advise J on the best way to pay off debt. Where can help be found when looking for support in debt management? Using what you have learned, share whether or not an additional loan should be taken out to pay off debt in the future.
Extension: Create a scenario in which it would not be advisable to open a new line of credit to pay off existing credit. Write about the FICO score and how financial decisions affect the movement of a credit score. What items tarnish your credit for seven years or longer?
SS.912.FL.4.5: Explain that lenders make credit decisions based in part on consumer payment history. Credit bureaus record borrowers’ credit and payment histories and provide that information to lenders in credit reports.
SS.912.FL.4.6: Discuss that lenders can pay to receive a borrower’s credit score from a credit bureau and that a credit score is a number based on information in a credit report and assesses a person’s credit risk.
SS.912.FL.4.7: Describe that, in addition to assessing a person’s credit risk, credit reports and scores may be requested and used by employers in hiring decisions, landlords in deciding whether to rent apartments, and insurance companies in charging premiums.
SS.912.FL.4.8: Examine the fact that failure to repay a loan has significant consequences for borrowers such as negative entries on their credit report, repossession of property (collateral), garnishment of wages, and the inability to obtain loans in the future.
SS.912.FL.4.9: Explain that consumers who have difficulty repaying debt can seek assistance through credit counseling services and by negotiating directly with creditors.
SS.912.FL.4.10: Analyze the fact that, in extreme cases, bankruptcy may be an option for consumers who are unable to repay debt, and although bankruptcy provides some benefits, filing for bankruptcy also entails considerable costs, including having notice of the bankruptcy appear on a consumer’s credit report for up to 10 years.
Created by Deborah Kozdras and Brittany Sampson