Choosing Credit Guidance for conversation on credit

Trainers Notes for basic credit with clients

2 BD/Sep15/v1

This session pack has been produced as part of Citizens Advice Financial Skills for Life. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Citizens Advice assumes no responsibility. The user of the information agrees that the information is subject to change without notice. To the extent permitted by law, Citizens Advice excludes all liability for any claim, loss, demands or damages of any kind whatsoever (whether such claims, loss, demands or damages were foreseeable, known or otherwise) arising out of or in connection with the drafting, accuracy and/or its interpretation, including without limitation, indirect or consequential loss or damage and whether arising in tort (including negligence), contract or otherwise.

Copyright © 2015 Citizens Advice All rights reserved. Any reproduction of part or all of the contents in any form is prohibited except with the express written permission of Citizens Advice. Citizens Advice is an operating name of the National Association of Citizens Advice Bureaux, Charity registration number 279057, VAT number 726020276, Company Limited by Guarantee, Registered number 1436945 England. Registered office: Citizens Advice, 3rd Floor North, 200 Aldersgate Street, London, EC1A 4HD

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Choosing credit

The Aim of this session is to help advisors to provide sessions on financial capability – specifically choosing credit – so that clients can make informed choices between different credit options they may have. Objectives are that by the end of this session clients will be able to:

• Identify a range of options for borrowing.

• Explain some pro and cons of different types of borrowing.

• Identify costs associated with borrowing money.

• Understand how APRs can help in understanding the cost of borrowing.

• Describe things to consider when choosing credit. General Guidance Notes on delivering a group financial capability session are available elsewhere on the Citizens Advice website. These notes are for the trainers use only. A separate handout pack should be used with every client in the group, which will include signposts for further information and guidance.

Trainers are encouraged to feedback to the Financial Skills for Life team with any feedback about training materials or resources. If you have any comments, please contact Basam.Diablos@citizensadvice.org.uk

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Contents

Session Specific Guidance 5 Top Tips

Lesson Plan

6 8

1 – Introducing Jargon

9

2 – Different Types of Credit

10

3 – Features of Different Types of Credit

11

4 – What is APR?

12-13

5 – APR in Real Life 6 – Choosing Between Types of Credit 7 – Where Now and What Next? Evaluation Guidance Trainers notes Appendix – Resources for Activity Three

14-15 16-17 18 19 21 22-30

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Session-Specific Guidance –

Subject information Trainers do not need to have specialist money advice knowledge or experience but must have a basic understanding of the different sources of credit, how to compare costs of credit and be able to signpost learners to sources of further advice and information. The pack contains all the key information for the topics covered. Any additional information that is given should be taken from an up to date and accurate source such as: • the money management section of www.adviceguide.org.uk • the Money Advice Service free leaflets at www.moneyadviceservice.org.uk including ‘borrowing money’, ‘credit cards’ and ‘credit unions’ This session aims to help learners make informed choices about borrowing, not to give money or debt advice. For this learners should be referred to their local Citizens Advice or other advice agency.

Materials • Blank flip chart paper • Marker pens • Note paper and pens for learners • Blu tack • Calculators • Prepared cut-outs for word-matching activity Manage expectations – Make it clear to clients that the session is a brief overview of choosing credit, and the most essential elements of financial capability that relate to it. As a one-off session, there will not be the time to explore any single element in any great detail. Signpost and empower – Ensure that clients are aware that after the session they will have a clear idea where to go to answer outstanding queries and to get further assistance. Pacing – Due to the length of the session, it is recommended to allow at least one break for the clients. Be aware of this when planning total timings for sessions.

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Top Tips -

Activity 1 – When filling in the jargon-busting flip, make sure the learners pick the language for the definitions, as it is crucial to find language that they are comfortable with. Activity 2 – If prompts are needed, ask learners how they pay for things. For example, how would they buy a car, or a washing machine? How do they buy things from a catalogue, or make an in-app purchase? Activity 3 – It is worth pointing out that not all these forms of credit are available to everyone: this can potentially be used to lead into a conversation on credit scores, ratings and reports. Activity 3 – These pros and cons are just a rough guide: what might be the best form of credit for an individual will depend on a number of factors. Activity 4 – Avoid getting involved in trying to explain exactly how APR is calculated (it’s a very complicated formula!) The main point to get across is that the APR is there to help the consumer compare costs of credit – the higher the APR the more they will have to pay. Activity 4 – Always stress to clients that online calculators (like the ones on Handout 12) will be much more accurate. Activity 4 – This session has more impact if you are able to show some real examples of credit so try to take along some local leaflets for different types of credit such as store cards, bank loans, credit unions: distribute them after the activity. Activity 5 – Ensure that clients are aware that several factors will make the results they get, and the results they get from any online calculator, differ. These factors include:

- The complexity of the formula. - Compounding. - The timing within the month when the compounding is actually

calculated. - Reduction of total debt as client makes repayments.

Activity 5 – This is a good time to point out that although longer terms offer lower monthly payments, the total repayable is much higher.

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Activity 5 – The figures for the interest compounded over 3 years are derived as follows (monthly figures calculated by dividing by 36): Company A Year

Loan at the start

Interest

Loan at the End

0-1 £500 (£500 x 30%) = £150 £650

1-2 £650 (£ x 30%) = £195 £845

2-3 £845 (£ x 30%) = £253.5 £1098.5

Credit Union Year

Loan at the start

Interest

Loan at the End

0-1 £500 (£500 x 15%) = £75 £575

1-2 £575 (£ x 15%) = £86.25 £661.25

2-3 £661.25 (£ x 15%) = £99.19 £760.44

Company B Year

Loan at the start

Interest

Loan at the End

0-1 £500 (£500 x 100%) = £500 £1000

1-2 £1000 (£ x 100%) = £1000 £2000

2-3 £2000 (£ x 100%) = £2000 £4000

As this does not take repayments into account, and any compounding is only done annually, it is critical to keep stressing that this is a rule-of-thumb only.

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Lesson Plan Red activities – Are essential to any session on this topic Amber activities – Are highly recommended but not essential Green activities – Are optional activities, if time allows The size of the bubble indicates roughly how much time – relative to the session - to spend on an activity.

1

2

3

This session can take up to 90 minutes to deliver in full: the advisor is recommended to pick and choose activities depending on time constraints. Activities 2-3 and 4-5 are recommended together. In other words, if you do one, you should really do both. Activity 7 is – as always – very important, but in this session, relative to other activities, it can take a back seat. 6

7

4

5

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Activity 1: Introducing Jargon Welcome your learners as they arrive, introduce yourself and offer them refreshments if these are available Instructions • Give some brief information to the group on: - who you are (and a little bit about Citizens Advice if you wish)

- the session, including finish times, breaks and the general format:

for example, it’s not a ‘chalk and talk’ session, there are no tests, and it’s not about maths.

- Domestics (including fire exits, toilets, refreshments, breaks etc). - general ground rules for the session - the jargon-busting flip.

This should have all the financial terms that will be used in the session translated into everyday language: for example, APR can be defined as ‘how much extra you pay back on money that you borrow (also called ‘interest’ on ‘credit’). The tutor and learners can identify words to ‘bust’ throughout the session, adding to the flip throughout the day.

- evaluation – explain that you would like to know what everyone

thinks of the session and to help with this you will be giving out a feedback form at the end for people to complete.

If you found this useful, then why not try… Budget Building Guide

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Activity 2: Different types of credit Instructions

• Put the learners into pairs (or 3’s) and give them 3 minutes to think of as many different kinds of credit - and different places you can get credit - and make a note of these ready to feedback in the whole group.

• After 3 minutes, ask each pair to say a reason in turn and write these on the flip chart.

• Quickly run through the suggestions, clarifying any that people may not be familiar with (and write some of these up on the jargon busting flip if appropriate) and adding any that are missing.

Possible answers - Personal loan from a bank, building society etc (secured or

unsecured) Catalogue Credit card Hire purchase Door step lender Social fund loans (crisis loans or budgeting loans) Bank overdraft (authorised or unauthorised) Store card Friends and family Credit union Payday loan Pawnbroker Cheque cashing companies Loan from a debt consolidation company Student loans company Illegal lenders (loan sharks)

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Activity 3: Features of different types of credit Instructions – Prepared Cards from Trainer Notes Appendix

• Put the learners into three groups and give each group 3 cards showing three types of credit. Then give them the matching cards with the four facts (pros and cons) about each of these types of credit, all mixed up and ask them to match the right facts with the type of credit. Also give them some post its for them to add further pros and cons about these types of credit if they want to.

• In the whole group ask each group to share their answers for one of

their types of credit in turn, until you have covered all of them. Also ask the learners to share any additional points they wrote on their post its. Confirm the correct answers as you go and correct or clarify anything that is not understood.

• Give out the handouts ‘Different kinds of credit’ (Handouts 1-3) to

confirm the answers and ask the learners to add any of the additional facts that have come up on the post-its or in the discussions.

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Activity 4: What is APR? Instructions Ask the group as a whole if anyone knows what effect interest, or APR, can have on credit. If a learner comes forward encourage them to tell the group what they know. Add to what they say if needed to give a basic explanation of what effect an APR has on credit – ie the higher the APR, or interest, the more you pay back. Write APR, Annual Percentage Rate and a definition up on the jargon busting flip. Using Handout 8, reassure the clients that the official APR calculation is – like many things to do with banks – intimidating but actually very straightforward. APR can – VERY ROUGHLY – be calculated as the amount of money one has to repay in a year after borrowing the initial sum. For example –

- Borrowing £10 at 20% APR means repaying £2 on top of the original £10 after one year (meaning £12 total)

- Borrowing £10 at 90% APR means repaying £9 on top of the original £10 after one year (meaning £19 total)

An alternative way to clarify this for clients is encourage them to use an example of £1 borrowed, and simply convert the APR to pence. To clarify – Borrowing £1 is borrowing 100p. If the APR is 20.6%, then just consider this as pence. That makes it clear that for every pound borrowed, the APR means that 20.6p interest is charged, per year. Stress to clients that this is the approach we will use here, as it is simple to use and even Martin Lewis (the majority of clients should have heard of him). However, also make clear that this is only a rough approximation as the sum that is used to calculate APR is actually very complicated and needs a computer to work out.

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When providing answers to clients, keep referring to one of the above approaches. Only discuss both approaches if it is clear this will not confuse the clients. Providing Handout 8, ask clients to guess what they think a likely APR is for that particular type of credit. A tried and tested way to phrase this is – ‘Imagine you borrowed £10 from this lender. What do you think they’re likely to charge you, as interest on top of that £10, after a year? Whatever number you think, you can change it into a percentage. So let’s say you think a £2 charge over a year is fair: well, £2 out of £10 is 20%, so that means you think it’s about 20% APR.’ Trainers are encouraged to change amounts and context as needed. Answers – Barclays Credit card 18.9% So for every £10, £1.89 interest is payable. John Lewis Credit Card 16.9% So for every £10, £1.69 interest is payable. Argos Store Card 29.9% So for every £10, £2.99 interest is payable. QuickQuid 819.12% So for every £10, £81.91 interest is payable. Wonga 4214% So for every £10, £421.40 interest is payable. Loan Shark 131,000% (notional) So for every £10, £13,100 interest is payable. Some trainers may find it more effective to provide Handout 8 after the activity, and simply talk through the methodology with the learners first. This is at the trainer’s discretion, but should be kept in mind as an alternative sequence of delivery.

It is easy to edge into maths and numeracy here: this is up to the trainer, but we recommend just giving learners a basic rule of thumb. Something like ‘if we’re looking at what you have to pay as interest on £100, just change the percentage to pounds. So 20% is £20.

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Activity 5: APR in real life Instructions • Put the learners into small groups, give out copies of Harry’s story

(Handouts 6-7) and read out the main text (not the questions) once each person has a copy. Ensure everyone still has a copy of Handout 8.

• Ask the groups to spend 5 minutes answering the questions using

Handout 8 to help with question 1.

• Bring all the learners back together and ask the first group to feedback their answer for the first loan amounts in question 1, the next for the credit union amounts and the next for the second loan amounts.

• Optionally, if the learners seem suitable, provide Handout 9 – talking it

through - and ask them to do the same for question 2. • Ask the group as a whole to look at their answers to see if a higher or

lower APR means you pay back more in total. • Ask whether Harry would pay back less weekly for a one-year loan

compared to a three-year loan, assuming the same APR for each. • Then ask the group as a whole to discuss their ideas for question 3.

Recap of Learning Points

1. The higher the APR the more you’ll pay back. 2. If you pay back over a longer time you pay less weekly or monthly

but you pay more in total 3. When choosing credit you need to consider the total cost of the

credit but also the need to make re-payments affordable (by paying less each month, week etc) and how long you will have to make repayments for.

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Harry’s story – The Answers

1. How much would Harry pay back if he borrows £500, and pays it

back over one year? Total – one year Monthly payments

Company A (30%) £650 £54.17

The credit union (15%) £575 £47.92

Company B (100%) £1000 £83.33

2. How much would Harry pay back if he borrows £500 and pays it back over three years?

Total – 3 years Monthly payments

Company A (30%) £1098.5 £30.51

The credit union (15%) £760.44 £21.12

Company B (100%) £4000 £111.11

3. If you were a friend of Harry’s, what would you say he should do?

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Activity 6: Choosing between types of credit Instructions

• Divide the learners into small groups. Choose whether Maxine or Tamara’s story is most relevant to your learners and give out either Handout 10 or Handout 11. Read the selected handout out and then give the groups 15 minutes to answer the questions on the handout. Ask the group for an example answer to question 1, or give APR as an example, to get people started.

• Bring all the learners back together and ask each small group in turn to feedback one idea for question 1 until all ideas have been said and note these ideas on flip and do the same with questions 2 and 3. If a group is reticent to speak, encourage them by saying something about what you know they’ve been saying in their group.

• Keeping the flip up with the answers to questions 1 and 2, explain

now there’s a chance to vote for tips for choosing credit. Each person has three votes. Read through the ideas on the flip once as a whole. Then read through the list one by one, asking for a show of hands for those voting for each tip. Write on the flip how many votes by each item. You could join in the vote if you want. After reading through all items on the flip, mark and read out the top three or top five tips. If relevant for the group, you could encourage learners to write down the chosen tips.

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Learning Summary – There are lots of things to think about when deciding on whether to borrow money to buy something and where to borrow that money from in order to make the choice that works best for us.

Trainer notes Try to write group feedback down as general points and tips, rather

than being very specific to the case study. For example, if a group says for Maxine that the freezer may be expensive in the store with the store card, record this as “store cards – check if expensive shop” or similar. This way, the learning points are tips and transferable to other situations.

Things to think about may include: - How easy it is to get - How quick it is to get - Is the store card for an expensive shop? - How long it will take to pay off - How flexible it is - what if you can’t pay one month? - How easy it is to keep track of what you owe - How expensive it is – cost of interest, regular payments, fees - Different APRs - What happens if you fall behind - Whether you can afford repayments - What minimum and maximum amounts you can borrow

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Activity 7: Where now and what next? Instructions • Whole group summary - check with the whole group for questions they

still have, and answer these or sign post for further information. Provide Handout 12 as a list of potential signposts, stressing their relevance to clients. It is recommended the trainer showcase these via a laptop, to highlight the value of basic digital literacy to the clients.

• Give out Learning Review sheets (Handout 13) to learners. Read out

the questions and ask learners to think back over the session and write

• Ask learners to share the Learning review sheets in twos or threes, adding to their sheet anything they feel they missed that their partners have shared with them.

• Close - get everyone to complete a feedback sheet (Handout 14) or an

evaluation form. Finally, thank everyone for taking part and end the session.

Help the client to decide what action they can take to choose better credit options - do not be over-optimistic about what can be achieved. One small achievable step will help to improve client confidence and enable them to see that they can exercise a better choice of the credit they use: it is often unrealistic to ask them to avoid credit altogether.

Evaluation Guidance Areas that underpin client financial capability These are the Citizens Advice Financial Capability Areas that were carefully researched and developed by The Impact Team at Citizens Advice to help local offices measure client financial capability robustly and consistently across services. They were developed in line with the MAS UK Financial Capability Strategy Adult Outcomes Framework. Sample questions and scales can be found overleaf. An Impact Tool is available in Petra for recording responses and progress.

Keeping track of money Controlled spending

◉ Keep track of money going out, money coming in and calculate what's left over. ◉ Check my current balance and keep my papers in order.

◉ Spend or save only what I can afford after covering the basics I need to live, like food, housing and electricity.

Having enough money to live Planning ahead with money

◉ Have enough money to cover the basics I need to live like food, housing and electricity.

◉ Know when my bills and payments are due and keep on top of priority bills, like for electricity, loans and council tax. ◉ Put some money aside for big or unexpected costs.

Looking for the best deals Staying informed about money services

◉ Look at different options and buying the best deal for things like food, clothes, large items or services like phone, electricity or insurance. ◉ Get different opinions on what I am buying, like from reviews and comparison websites.

◉ Read the main information about money services I get like banking, benefits and loans. ◉ Stay on top of changes to these or get help when I don’t understand.

Mindset

◉ Confidence about taking action on my money matters.

Copyright © 2015 Citizens Advice All rights reserved. Any reproduction of part or all of the contents in any form is prohibited except with the express written permission of Citizens Advice. Please note these areas, questions and scales are owned by Citizens Advice and subject to copyright restrictions so reproduction must include the relevant copyright statement above and no changes to its wording, response categories or layout must be made. For further information please contact Satdeep Grewal on satdeep.grewal@citizensadvice.org.uk or 03000 231 608.

Sample questions and scales for measuring client financial capability These questions can be used to ascertain how good someone’s financial capability is and so, what their level of need is. They also allow you to track progress by being used to follow-up with how someone is getting on after you have helped them.

Score 1 to 3 Score 4 Score 5 to 7

Low financial capability Average financial capability Advanced financial capability

High need Medium need Low need

Keeping track of money ◉ Calculate money going out, money coming in and what's left over. ◉ Check my current balance and keep my papers in order. Rate your knowledge about the above 

No knowledge 

No to some knowledge  

Some knowledge 

Some to good 

knowledge 

Good knowledge 

Good to excellent knowledge 

Excellent knowledge 

Don’t know 

1  2  3  4  5  6  7  ▢ 

How often do you do the above? 

Never   Never to sometimes 

Sometimes  

Sometimes to often 

Often   

Often to very often  

Very often  

Don’t know 

1  2  3  4  5  6  7  ▢ 

 

Staying informed about money services ◉ Read the main information about money services I get like banking, benefits and loans. ◉ Stay on top of changes to these or get help when I don’t understand.  Rate your knowledge about the above: 

No knowledge 

No to some knowledge  

Some knowledge 

Some to good 

knowledge 

Good knowledge 

Good to excellent knowledge 

Excellent knowledge 

Don’t know 

1  2  3  4  5  6  7  ▢ 

How often do you do the above? 

Never   Never to sometimes 

Sometimes  

Sometimes to often 

Often   

Often to very often  

Very often  

Don’t know 

1  2  3  4  5  6  7  ▢ 

 

Mindset How much confidence do you have about taking action on your money matters? 

No confidence 

No to some confidence 

Some confidence 

Some to good confidence 

Good confidence 

Good to high confidence 

High confidence 

Don’t know 

1  2  3  4  5  6  7  ▢ 

Copyright © 2015 Citizens Advice All rights reserved. Any reproduction of part or all of the contents in any form is prohibited except with the express written permission of Citizens Advice. Please note these areas, questions and scales are owned by Citizens Advice and subject to copyright restrictions so reproduction must include the relevant copyright statement above and no changes to its wording, response categories or layout must be made. For further information please contact Satdeep Grewal on satdeep.grewal@citizensadvice.org.uk or 03000 231 608.

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Trainers notes

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Appendix – Resources for Activity One

Credit card

You have to fill in a form to get one

Once you’ve got one you can use it anywhere

If you don’t pay back all the money every month, the money owed can increase a lot

The APR (interest) is usually high. But you don’t get charged interest if you pay your bill off

in full every month

If you use your card to take out money from a

cash machine or bank you will usually pay a fee and start paying interest immediately

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Personal Loan

You need a bank account

You pay a set amount each month. You can decide how many months to pay back over

The money you pay back is what you borrowed, plus interest, and maybe an upfront fee

The APR (interest) will vary from bank to bank

The loan can be secured against an asset you have such as a home or a car. Sometimes it can

be unsecured

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Catalogue

Most people are accepted

You can use only use this with one catalogue

You pay back a fixed amount weekly.

There may be no APR (interest), but the price of what you are buying can be expensive.

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Hire purchase

You apply for this when buying specific things

such as a car, TV or sofa

You pay back a set amount monthly

You can use this only for specified items

The APR (interest) is usually high

You won’t own the goods until you have paid

for them in full

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Doorstep lender

You probably won’t get turned down

Once you’ve got the money you can spend it anywhere

You pay back weekly to someone who calls round to the house

The APR (interest) is usually very high

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Overdraft

You ask your bank for one of these. You do not need to fill in a form.

You may get refused

Once you’ve got the money you can spend it anywhere

The APR (interest) will vary from bank to bank

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Store card

You have to fill in a form to get one

You can only use this for the shop that’s given you the card – or group of shops

If you don’t pay back all the money every month, the money owed can increase a lot

The APR (interest) can be different for different shops. But you don’t pay interest if you pay

your bill off every month

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Payday loan

Cash to sort out your short term money

problems

You have to be over 18, have a bank account

and be in full time employment

The fees and charges can be very high

Many cheque cashers offer this service and you can also get them online using a bank

debit card

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Pawn brokers

You are lent money according to the value of

the goods that you leave with them

They must give you a receipt known as a

ticket

They have to keep the goods for at least 6 months

You can get them back at any time by paying

the loan plus interest

If you don’t repay the loan or extend the credit

your goods can be sold