1. How does credit work and what do banks do?
Credit and Banks
How does credit work and what do banks do?

2. A
Credit
Credit is the receiving of funds to buy goods and services today with the promise to pay for them in the future.
Principal- in business terms, it is the amount originally borrowed.
Interest- the amount the borrower must pay for the use of someone else's money. (That someone else may be a bank, credit union, credit card, store card, your parents)

3. Why would people Use Credit?B
Many items are big-ticket items, products that are major purchases.
With your partner take 2 minutes and think up ten big ticket items.
The decision to use credit involves whether the satisfaction the borrower gets from the purchase is greater than the cost of the interest.
In your groups, take 2 minutes and discuss whether your big ticket items would be worth the wait or should you borrow money.

4. Where to get your money C
Commercial Banks- Most of the funds and the widest range of services are offered today by Commercial banks. They offer a wide variety of services, but make most of their money from checking and savings accounts and loans.
Savings and Loans- Accept deposits, but mostly are in business to lend out loans. Often they have better interest rates because they specialize in loans.
Credit Unions- operate by members to provide members savings accounts and low interest loans to only its members.

5. How do they work? D
A person, Ben, has some money and does not want to spend it yet, but also wants to keep it safe. The person has two choices.
(Take 10 seconds and figure out the two choices.)
Choice 1 Choice 2
What are some of the advantages and disadvantages of choice one? What about choice two?

6. Banks Continued
So, Ben decides to place the money in a bank, because they are going to pay 2% interest over the course of the year.

7. Savings account 8% 17.5% 2% E Principal= $1000 Interest rate= 2%
Calculate how much money Ben will
make after 1 year:
Principal= $1000
Interest rate= 8%
Calculate how much money Ben will
make after 1 year:
Principal= $1000
Interest rate= 17.5%
Calculate how much money Ben will
make after 1 year:

8. F
Now, another person, Emma, wants to buy a new car for $20,000. That student can purchase the car in one of two ways.
Option 1
Option 2
Take a minute with your partner and write down those two ways as well as the advantages and disadvantages to both ways of purchasing.

9. Getting a loan
Emma decides to go the bank loan route, so the bank offers Emma a loan.
The bank loans the student the $20,000 with the idea that the student will pay back the loan and the one time payment of 8.9% interest. (Interest is calculated a different way, but that is for a different lesson)
The difference between the interest that bank gets from Emma and the interest they have to pay Ben is how a bank makes money.

10. G
Principal= $20,000
Interest = 17.9%
Calculate how much interest Emma will have to pay:
Principal= $20,000
Interest = 8.9%
Calculate how much interest Emma will have to pay:
Principal= $20,000
Interest = 12.5%
Calculate how much interest Emma will have to pay:

11. Figuring it all out
Ben has placed in the savings account $1,000 with the idea that they will make 2% interest on the money.
Emma has taken out a loan for $20,000 with a one time interest payment of 8%.
Remember, if Emma does not pay the loan, the bank gets the car.
How much money does Ben make on the savings account and how much does Emma’s car cost after paying off the loan?

12. If you do decide to purchase something on credit, remember two things:
- Make sure you have a good credit score
- Shop around for the lowest interest rate
House: Car: Credit Card:
How do you get a good credit score? I