Borrowing Responsibly — slides
Financial Literacy Club
Credit & Debt · Lesson 7
Borrowing Responsibly
Questions to ask before you borrow, and strategies for paying debt down.
12-minute lesson · learnwithflc.org
Borrowing Responsibly · 1 / 21
Financial Literacy Club
Credit & Debt · Lesson 7
Borrowing Responsibly
Questions to ask before you borrow, and strategies for paying debt down.
12-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Ask four questions before borrowing
- Calculate a debt-to-income ratio
- Compare the avalanche and snowball methods for paying off debt
Warm-up
Before you borrow money for anything, what questions should you ask yourself? List as many as you can in two minutes.
Think, then write your answer.
The big idea
Borrowing Responsibly
Questions to ask before you borrow, and strategies for paying debt down.
Credit & Debt · Lesson 7
Debt is a tool. It can help you get something that improves your future — like education or a reliable car to get to work — if the payments fit your budget. It hurts most when it pays for things that lose value fast, or for wants you can't afford yet.
Credit & Debt · Lesson 7
- 1
Do I need this now?
Could I save up instead, or buy a cheaper version?
- 2
Can I afford the payment?
Does it fit my budget with room for emergencies?
- 3
What's the total cost?
APR, fees, and total interest — not just the monthly payment.
- 4
What if things change?
Could I still pay if my hours were cut?
Vocabulary
Debt-to-income ratio (DTI)
Your monthly debt payments divided by your gross monthly income. Lenders use it to judge whether you can take on more.
Credit & Debt · Lesson 7
If you have several debts, pay the minimum on all of them and put every extra dollar toward one target:
- Avalanche: target the highest APR first. This saves the most money.
- Snowball: target the smallest balance first. Quick wins can keep you motivated.
Credit & Debt · Lesson 7
Falling behind?
Call the lender before you miss a payment and ask about hardship options. Nonprofit credit counseling agencies can help you make a plan. Be wary of any company that wants money before it does anything.
See it
The avalanche method targets the highest interest rate first and saves the most money. The snowball method targets the smallest balance first and builds motivation with quick wins.
| Avalanche | Snowball | |
|---|---|---|
| First target | Highest APR | Smallest balance |
| Main benefit | Least total interest | Fast early wins |
| Good fit if… | You're motivated by math | You need momentum |
Real example
Two debts, one plan
Jess owes $1,200 on Card A at 25% APR and $400 on Card B at 18% APR. After minimums, Jess can put an extra $100 a month toward debt.
- Avalanche: the extra $100 goes to Card A (highest rate). Jess pays less interest overall.
- Snowball: the extra $100 goes to Card B (smallest balance). It's gone in a few months — then that payment rolls over to Card A.
Both beat paying only minimums by a mile. The best method is the one Jess will actually stick with.
Try it together
Try it: plan a payoff
Put in Card A's numbers and see how much faster an extra $100 a month gets it done.
Your numbers
Assumes no new purchases on the card.
Results
Paying $150 a month
9 months
$127 in interest
Paying only the minimum
7 years, 10 months
$1,365 in interest
- Balance $1,200
- Interest $127
“Minimum” here means 1% of the balance plus that month's interest, or $25, whichever is more — a common formula. Card issuers vary; your statement shows yours.
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Activity · pairs · 12 min
Avalanche vs. Snowball
- Two debts: Card A has $600 at 15% APR (minimum $25). Card B has $2,400 at 24% APR (minimum $60). There's $250 a month for debt.
- Pairs decide which card gets the extra money under snowball (smallest balance first) and under avalanche (highest APR first).
- Share the results below and ask: which plan would you choose, and why?
Check for understanding · 1 of 4
You owe $800 on Card A at 24% APR and $2,000 on Card B at 15% APR.
Using the avalanche method, which card gets your extra payments first?
- ACard B, because the balance is bigger
- BCard A, because it has the higher APR
- CSplit it evenly
- DNeither — pay only the minimums
B. Card A, because it has the higher APR
Avalanche targets the highest interest rate first, which cuts total interest the most.
Check for understanding · 2 of 4
Your gross income is $3,000 a month. Your car payment and student loan payment total $600 a month.
What's your debt-to-income ratio?
- A5%
- B50%
- C20%
- D60%
C. 20%
$600 ÷ $3,000 = 20%.
Check for understanding · 3 of 4
The snowball method always saves the most money.
- True
- False
False
The avalanche method (highest APR first) saves the most interest. Snowball trades a little extra cost for motivation.
Check for understanding · 4 of 4
You realize you won't be able to make next month's car payment.
What's the best first step?
- ACall the lender now, before you miss it, and ask about options.
- BIgnore it and hope for the best.
- CTake out a payday loan to cover it.
- DStop answering the lender's calls.
A. Call the lender now, before you miss it, and ask about options.
Lenders often have hardship options, and they're more flexible before a payment is missed. Payday loans usually make things worse.
Remember
Key takeaways
- Ask: need it now? Can I afford it? Total cost? What if things change?
- DTI = monthly debt payments ÷ gross monthly income.
- Avalanche saves the most money; snowball builds momentum.
- Call your lender before you miss a payment.
Discuss
Talk it over
- Is student loan debt "good debt"? When might it not be?
- Why do you think the snowball method works for so many people, even though it costs more?
Exit ticket
What should you do if you know you're going to miss a payment?
Answer on your exit ticket before you leave.
Nice work today.
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