Financial Literacy for Kids
Credit is a powerful tool that allows people to make purchases they might not be able to afford otherwise. However, it's important to understand how credit works and how to use it responsibly. Credit is essentially borrowing money that must be repaid with interest. When you use a credit card or take out a loan, you're using credit. When you make a purchase with a credit card, you're essentially borrowing money from the credit card company. If you don't pay off the balance in full each month, you'll be charged interest on the remaining balance.
Debt is money that you owe to someone else. When you borrow money, you're taking on debt. Debt can be used to make purchases you can't afford upfront, like a car or a house. However, it's important to only take on debt that you can realistically afford to pay back. If you take on too much debt, you could end up in a situation where you can't make your payments and your credit score could suffer.
It's important to understand the difference between good debt and bad debt. Good debt is debt that's used to invest in something that will increase in value over time, like a college education or a home. Bad debt is debt that's used to purchase something that will decrease in value over time, like a car or a vacation. It's important to avoid bad debt whenever possible.
Suppose you want to buy a car that costs $20,000. You could pay for the car in cash, but you don't have that much money in your bank account. You decide to take out a car loan instead. The car loan has an interest rate of 5% and a term of 5 years. After 5 years, you will have paid back $22,021.05. This means you paid $2,021.05 in interest. If you had paid for the car in cash, you wouldn't have paid any interest.
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