Credit, is it a dirty word or a get out of jail free card? Well, it can be either depending on how it is used. Credit is a tool that allows a person to achieve a certain goal:It can be beneficial or calamitous. The key to using credit well is education, and that is why Ed Lott teaches about credit and personal finance to students in his class, Math Models and Intro to Calculus—just in time for college.
This week, Mr. Lott asked his students to take a few minutes to write down everything they thought they knew about credit cards. He then circulated around the room, reading his students’ answers over their shoulders. The most commonly held misconception, he discovered, was that his students thought the credit limit associated with the card was "their" money to spend, as if the card functioned like a debit card. Mr. Lott explained that a credit card is a loan from a bank and the money spent is the bank's money. The cardholder is beholden to pay that loan back—with interest.
He then tied the discussion back to their homework the night before, which was aimed at understanding how credit reports and scores (credit worthiness) affect what a person pays by looking at two different types of loans at varying interest rates. The pedagogical point was that having good credit can save you a lot of money in the long run and that consumer behavior affects credit scores. People with good credit are considered responsible borrowers because they have a proven track-record of paying their bills on time and managing their available credit, which grants them access to more money and lower interest rates on their loans.
Mr. Lott gave the following real-life example: in 2018 the median mortgage on Cape Cod was $261,200, and if paid over 30 years at a modest rate of 5.78% would result in paying the lending institution $288,887 in interest, which is over and above the principle of the loan—and this is if the borrower has good credit. If the borrower has a bad credit history, the interest paid out could be as high as $500,000 for exactly the same house.
This lesson is an example of the kind of practical application Ed Lott brings to teaching math. He ended this particular lesson with some sage advice for these soon-to-be college students:
- Always have two credit cards, one to use judiciously and one with a higher limit to be used ONLY FOR EMERGENCIES.
- Only get a primary credit card with a limit that you know you can afford to pay off monthly, or can manage the minimum monthly payments on your own (for example, a minimum payment on a maxed-out $2,000 credit card is $80 a month). Also, watch out for fees. If you borrow over your limit or make a payment late, you will be assessed fees EACH MONTH until the account is corrected.
- Remember, if you don’t pay off your credit card balance monthly, interest accrues on the remaining balance. That balance, which now includes interest, is also charged interest.