F. Financial Literacy · Money and Finances: Moving Money, Sales Tax, Budgets, Credit and Best Value

Credit and Debt: Borrowing Now, Paying Later

F1.4 A1About 40 minutes

Learning goals

I can explain what credit, debt and interest mean.
I can describe how a credit card and a loan work.
I can compare the cost of saving first with the cost of borrowing.
I can explain how having debt can change the money choices a person makes.

Words to know

credit
Being allowed to get money or things now and pay for them later, because a lender trusts you to pay it back.

debt
Money that you owe and must pay back.

borrow
To take money (or something else) that you will give back later.

lender
The person, bank or company that lends the money.

loan
Money that is borrowed and paid back, usually a little at a time, with interest.

interest
The extra money a borrower pays for using the lender's money.

due date
The last day to make a payment.

credit history
A record of how well a person has paid back money they borrowed. Lenders look at it before lending again.

Remember from Grade 4

In Grade 4 you learned that with a credit card, the card company pays the store now, and you pay the card company back later. If you don't pay the whole bill on time, you pay extra money called interest.

In Grade 5 you will learn the big ideas behind that: credit and debt, and how they change the choices people make.

Should Jonah wait or borrow?

Jonah wants a new hockey stick that costs $90 (tax included). He has $30. He can save $10 a week.

His older sister Mara says, "I'll lend you $60 today. But you have to pay me back $65."

Should Jonah wait and save, or borrow from Mara? Let's find out how each choice affects him.

Credit, debt and interest

Credit means a lender trusts you to pay later. Mara is giving Jonah credit.
Debt is the money you owe. If Jonah borrows, he has a debt of $65 until he pays it back.
Interest is the extra cost of borrowing. Jonah borrows $60 but pays back $65, so the interest is $5.

Banks and credit card companies are lenders too. They charge interest because they are letting you use their money.

Saving first: Jonah waits 6 weeks and pays $90. Borrowing: he gets the stick today, but pays $30 + $65 = $95.

Worked example

Example 1: Wait or borrow?

Compare Jonah's two choices. How long does each take, and how much does the stick really cost?

Wait and save: he needs $90 − $30 = $60 more. At $10 a week, that is $60 ÷ $10 = 6 weeks. The stick costs $90.
Borrow: he gets the stick today. He pays his own $30 now and owes Mara $65. The stick really costs $30 + $65 = $95.
Borrowing costs $5 more, but he gets the stick 6 weeks sooner.

Saving: 6 weeks, $90. Borrowing: today, $95. Jonah has to decide whether having the stick sooner is worth $5. (If hockey season starts tomorrow, it might be!)

Worked example

Example 2: Paying back a debt

Jonah borrows from Mara. He pays her back $13 a week. How many weeks until his debt is paid off? How does this change his spending?

Debt: $65.
$65 ÷ $13 = 5 weeks. (Check: 5 × $13 = $65. ✔)
Jonah only saves $10 a week now, so he must find $3 more each week, for example by doing extra chores, or by spending less of his other money.
For 5 weeks, he has less money for other things.

5 weeks. While he has a debt, much of his money is already promised to Mara, so he has fewer choices.

Jonah's debt shrinks by $13 each week: $65, $52, $39, $26, $13, then $0 after 5 weeks.

How a credit card works

You buy things with the card. The card company pays the stores.
Each month, you get a statement (a bill) that shows how much you owe and the due date.
If you pay the whole amount by the due date, you usually pay no interest.
If you pay only part of it, the card company charges interest on what you still owe. Your debt can grow.

Loans for big things

Some things cost so much that most people can't save for them quickly, like a home, a car or college or university. People often take out a loan and pay it back a little each month for many years, with interest. A loan to buy a home is called a mortgage.

Worked example

Example 3: Pay it all, or only part?

Mr. Ito's credit card statement says he owes $300. In this example, if he doesn't pay all of it, the card company adds $4 interest next month to the amount he still owes. What happens if he pays all $300? What if he pays only $100?

Pay all $300 by the due date: he owes $0. No interest.
Pay $100: he still owes $300 − $100 = $200.
Next month, interest is added: $200 + $4 = $204.
He paid $100 and still owes $204, so this month's things cost him $4 more than their price, and the cost keeps growing if he waits.

Paying the full $300 costs nothing extra. Paying only $100 leaves a debt of $204 next month.

Credit can help when...	Debt can cause problems when...
Something important is needed right away, like fixing a broken furnace in January.	Payments are so big there is no money left for needs.
Something costs too much to save for quickly, like a home.	Interest makes things cost much more than their price.
A person has a plan to pay it back on time.	Bills aren't paid on time, and lenders stop trusting the person (a poor credit history).

Credit is a tool. Used carefully, it can help. Used carelessly, it can make money choices harder.

Before you borrow, ask

Do I need this now, or can I wait and save?
How much will it really cost, with interest?
How will I pay it back, and how long will it take?
What won't I be able to buy while I'm paying it back?

Careful online

Apps and games sometimes say "Buy now, pay later!" That is credit, and it is real money. Always ask a grown-up before buying anything online.

Riddle

What grows bigger the longer you ignore it?

A credit card bill with interest... and a pile of laundry!

Hands-on activity

The borrowing game

You need: 30 small counters (buttons, dried beans or paper squares; keep small items away from younger children), paper and a pencil. A grown-up plays the bank.

Each week (one round), you earn 3 counters.
You want a "prize" that costs 12 counters. Write a prize on a sticky note.
Game A: save 3 counters a round until you have 12. How many rounds? (Answer: 4 rounds.)
Game B: borrow 12 counters from the bank in round 1 and get your prize right away. The bank's rule: pay back 14 counters. You pay back all 3 counters you earn each round. Record a table: round, counters earned, still owed.
Compare: in Game B, how many rounds until you owe 0? What did the prize really cost?

What to look for: Game B takes 5 rounds to pay off (3 + 3 + 3 + 3 + 2 = 14), and the prize really costs 14 counters, 2 more than in Game A. Talk about it: "Was getting the prize sooner worth 2 counters?"

Your turn

What is debt?

What is interest?

Ella borrows $40 from her uncle and pays back $44. How much interest did she pay?

If you pay your whole credit card bill by the due date, do you usually pay interest?

Sam owes $60. He pays $12 a week. How many weeks until his debt is paid?

Name two big things people often borrow money to buy.

Give one way debt can change a person's choices.

More practice: warm-up

A person or company that lends money is called a ____.

Borrow $20, pay back $21. Interest?

Borrow $50, pay back $55. Interest?

True or false: a credit card is free money.

What is a loan to buy a home called?

More practice: on your own

Aiden owes his brother $20. He gets $8 a week and pays back $5 a week. How long until his debt is gone? How much can he spend each week until then?

Grace wants a $48 game. She has $18 and saves $6 a week. How long must she wait if she saves?

Grace's cousin offers to lend her $30 now if she pays back $33. What would the game really cost her? Is it worth it?

Why do lenders look at a person's credit history?

A credit card bill is $150. Mia pays $50. In this example, $2 interest is added to what she still owes. How much will she owe next month?

Challenge

Two ways to pay for a $120 bike: Plan A: pay $12 a month for 12 months. Plan B: pay $25 a month for 5 months. Find the total cost of each. Which costs less? Which has smaller monthly payments?

Mr. Ito owes $200 on a credit card. Each month he pays $50, and in this example the card company then adds $3 interest to whatever is still owed. Make a table. How many months until he owes $0, and how much does he pay in all?

Lucas has $100 saved. His bike breaks and needs a $60 repair before he can ride to his job delivering flyers. Should he use savings or borrow? Explain what you'd advise.

Check your understanding

Quiz

What is debt?

What is interest?

You borrow $40 and pay back $44. How much interest did you pay?

What usually happens if you pay your whole credit card bill by the due date?

You owe $60 and pay $12 a week. How many weeks until it's paid off?

Which is the most sensible use of credit?

For parents and teachers

What your child is learning: the Ontario curriculum (F1.4) asks Grade 5 students to explain the concepts of credit and debt, and describe how financial decisions may be impacted by each. The lesson uses small, friendly numbers (a sibling loan, made-up interest amounts) rather than interest rates. The key ideas are: borrowing lets you have something sooner but usually costs more; debt ties up future money; paying credit card balances in full by the due date avoids interest. Weighing choices and explaining reasoning are mathematical processes (A1).

Common difficulties:

Thinking credit cards are free money, or that the minimum payment clears the debt.
Forgetting money already saved when comparing waiting with borrowing.
Seeing all debt as bad. Many families use mortgages or student loans; the point is to borrow with a plan.

How to help: Talk about a time your family chose to wait and save, or used credit carefully, without sharing details you'd rather keep private. When an app or store offers "buy now, pay later," ask your child to explain what that really means.