What Credit Is and How Interest Works
Aligned to JS:CD-1 — Jump$tart National Standards in K-12 Personal Finance Education & Advance CTE Career Clusters.
What this lesson teaches
Credit is borrowed money you promise to pay back, and interest is the rent you pay for using it. The interest rate (APR) tells you how expensive that rent is per year. Borrowing is not automatically bad — borrowing without knowing the total cost is.
Worked examples
Example 1
Borrow $1,000 at 6% for a year and you repay about $1,060. The $60 is what the loan cost you.
Example 2
A $500 phone on a credit card at 24% APR, paying only the $15 minimum, takes almost 5 years and costs about $330 extra.
Example 3
The same $1,000 at 24% instead of 6% costs $240 a year instead of $60. The rate matters more than the amount for small balances.
Practice questions
- Calculate one year of simple interest on $2,000 at 8%.
- Why does paying only the minimum cost so much?
- Name one time borrowing could be a reasonable decision.
Watch the lesson
Every lesson comes with a video taught in English and Spanish — the same video the QR code in the printed workbook opens.
▶ Watch this lessonEn español
Qué es el crédito y cómo funciona el interés
El crédito es dinero prestado que prometes devolver, y el interés es la renta que pagas por usarlo. La tasa de interés (APR) te dice qué tan cara es esa renta al año. Pedir prestado no es automáticamente malo — pedir prestado sin saber el costo total sí lo es.
Ejemplo 1: Pides $1,000 al 6% por un año y pagas como $1,060. Esos $60 son lo que te costó el préstamo.
Ejemplo 2: Un teléfono de $500 en una tarjeta de crédito al 24% de APR, pagando solo el mínimo de $15, tarda casi 5 años y cuesta unos $330 extra.
Ejemplo 3: Los mismos $1,000 al 24% en vez de al 6% cuestan $240 al año en lugar de $60. En saldos pequeños la tasa importa más que la cantidad.
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