What Are Interest Rates?
Learning Goals/Objectives:
Define an interest rate as the cost of borrowing money (expressed as a percentage.)
Define annual percentage rate (APR)
Compare fixed-rate and variable-rate interest rates.
Overview:
One of the most important things to understand about your credit card or any other type of loan is its interest rate. An interest rate is the price you pay for borrowing money. For credit cards, the interest rates are stated as a yearly rate, called the annual percentage rate (APR). On most cards, you can avoid paying interest on purchases if you pay your balance in full each month.
This lesson uses a web site from the Board of Governors of the Federal Reserve System to introduce the basic concepts of interest rates.
Grouping of Students:
Class discussion
Accessing web-based resources
Methods:
Using web-based resources
Activities:
1. Explain that this lesson will introduce the basics of interest rates by looking at the interest rates paid for the use of credit cards.
Provide this definition of an interest rate. “The price paid for borrowing money. For credit cards, the interest rate is usually stated as a arly percentage rate, called annual percentage rate, or APR.” (FRB Credit Card Glossary)
2. Go to the Board of Governors of the Federal Reserve System “Credit Cards: Interest Rates” web page. http://www.federalreserve.gov/creditcard/rates.html
3. Using the glossary, review the web page definitions, including:
4. Go to the light green box on the web page titled: “Where do I find my APR?” Click on the underlined link “sample credit card offer.”
Where do I find my APR?
To see an example of where your APRs might be located on communications from your credit card company, take a look at our sample credit card offer and billing statement.
Or, use our consumer credit card agreements search to find the interest rates offered in a credit card issuer's consumer credit card agreements.
Review and discuss the sample credit card offer APR example.
5. Click on the link: Getting the Most From Your Credit Card
1. Pay on time.
2. Stay below your credit limit.
3. Avoid unnecessary fees.
4. Pay more than the minimum payment.
5. Watch for changes in the terms of your account.
Assessment:
Students should be able to define “interest rate” and “APR.”
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