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Topic: Money and Finances F1.4 – Credit and Debt

Ontario Curriculum Expectation:

5.F1.4 explain the concepts of credit and debt, and describe how financial decisions may be impacted by each

Read the Following Selection

Read the following selection, or click on the play button below to listen aloud.

Credit and Debt

Mrs. Hogan’s car broke down. She found out that it will cost $1000 to get it fixed, but she doesn’t have the money to pay for the repair. She needs her car to get to work. What can she do?

Mrs. Hogan can use credit to pay for the repair.

There are many different kinds of credit cards

What Is Credit?

Credit allows people to get things or services (such as car repairs) before they pay for them. How is this possible? A company, such as a bank or credit card company, lends people the money they need to pay for something. People agree to pay back the money in the future.

Mrs. Hogan can ask if her bank will lend her the money she needs. This kind of credit is called a bank loan. If the bank agrees to lend Mrs. Hogan the money, the bank will deposit the money in her account.

If Mrs. Hogan has a credit card, she could use it to pay for the car repairs. The credit card company will pay the garage that makes the repairs. In the future, Mrs. Hogan will pay back the credit card company for the car repair.

Banks and credit card companies do not require people to pay back all the money at once. People can pay back some of the money each month until the full amount owed is paid back.

Banks and credit card companies charge interest

The Cost of Credit

Credit is not free. Banks and credit card companies charge for the service of lending people money. These charges are called interest.

There is one important thing to remember about using credit to make purchases. Interest charges mean that people have to pay back more than the original cost of the item or service.

In some situations, it makes sense for people to use credit to pay for something that is necessary—even though interest charges will increase the amount they end up paying. Mrs. Hogan needs her car to get to work so she can earn money.

When somebody owes money, they are in debt

What Is Debt?

Debt is money that a person owes. The money that Mrs. Hogan needs to pay back to the bank or credit card company is an example of debt. When people owe money, we say that they are “in debt.”

Banks and credit card companies require people to pay back at least a certain amount each month. This amount is called a minimum monthly payment. People now need to include in their budget the minimum monthly payment—or a higher amount if they wish to pay off the debt faster. Needing to pay back debts means there is less money to spend on other things.

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