IHMVCU "What is Debt?" - Parents

What is Debt?

HELPFUL TIPS & ACTIVITY GUIDE

DEBT OVERVIEW

TYPES OF

DEBT

What is debt? Debt is when you owe something, like money, to someone else. Here are two types of debts to consider:

UNDERSTANDING

Bad Debt

Always relying on your credit card to purchase consumables can make your monthly bill spike higher and higher. Explain to your child that purchasing these “wants” rather than “needs” – things like clothing, food at restaurants or vacations – can be OK in the short term, but when you repeatedly can’t pay your monthly bill, it begins to negatively affect your credit score. This is considered bad debt. Plus, your credit card or bank will charge you interest, or extra money, for not paying all the money back!

1 UNDERSTANDING DEBT | ACTIVITY GUIDE

UNDERSTANDING

Good Debt

It might be strange to think that debt (owing money to someone else) can be a good thing. When you have good debt, it means you’re creating value over a period of time. Give your child the following example: When you buy a house, you usually take out a mortgage. A mortgage is like an I Owe You to the bank, because most people can’t afford to pay cash for a house. This type of loan allows you to borrow a set amount of money that you can pay back in affordable monthly installments until it’s all paid off.

Explain to your child that although it takes a long time to pay off a house mortgage, you’re allowed to make renovations and home improvements that actually give the house more value. That’s a good kind of debt!

DEBT OVERVIEW

PITCHER

PAYMENTS

This activity will visually help to explain the concept of interest on a loan. Begin with pretending your child has $10,000 in credit card debt. Using a pitcher and some water, your child will experience making payments to the credit card company, along with interest payments toward that debt.

What they’ll learn How interest affects overall loan payment structures

What you’ll need:

Pitcher & Cup

Water

3 UNDERSTANDING DEBT | ACTIVITY GUIDE

Dry Erase Marker

Activity details 1

2

Fill a clear pitcher halfway up and, with a dry erasable marker, draw a line where the water stops. Write “$10,000 Debt” next to the line this represents your child’s debt amount.

Label two clear glasses; one with “Monthly Payment of $142” and draw a line ¼ of the way from the bottom. Fill the other glass to the top, making equal incremental lines from top to bottom, and mark each line with “$55 Interest Charged.”

It’s time to make your credit card payment!

3

4

Have your child pour water from the pitcher into the “Monthly Payment” glass up to the $142 payment line. Show how the water line on the pitcher has gone down slightly and explain the debt amount has dropped from the $10,000 owed. Your child is beginning to pay back the debt. But they’re not done.

Now have your child pour water from the “Interest Charged” glass – enough so the water drops to the next incremental line – and pour that into the “$10,000 Debt” pitcher. Point out how the water line went back up, almost to the top of line, but not quite.

This is a good visual representation of how not paying off credit card debt can be a “bad” debt!

DEBT ACTIVITY

SIMULATED

SHOPPING Looking for ways to repurpose those snack and cereal boxes?

Recycled food packaging is great for simulating the real world shopping experience of a grocery store while educating them on the importance of using a credit card to pay for things and making a timely payment.

What they’ll learn The importance of making payments on time

What you’ll need:

Food Packaging

Index Cards/Pen

5 UNDERSTANDING DEBT | ACTIVITY GUIDE

Play Money

Activity details 1

Borrow the play money from a game like Monopoly™ or The Game of Life™

2

Using index cards, create imaginary credit cards for your child.

3

4

5

6

In this activity, you are playing the role of the credit card company lender. Write the maximum amount your child is allowed to “borrow” from you on the index card (their “credit card limit”). Add the date their credit card payment is due and highlight it.

Label a cost associated with each of the recycled food items. Then, instruct your child to go shopping. Tell them to pay with their “credit card.”

Explain to your child that if they do not pay you back on time, you will need to “charge” an additional 10% above what they owe. Don’t forget to tack on the 10% late fee and show how it affects the amount they owe and what it does to their credit card score.

Using the play money as their source for paying their credit card bill, simulate various shopping scenarios, stressing the importance of paying their bills on time each month, and the consequences of accruing late fees.