Grade: 7 Lesson#12
Your Credit Score- Why Is It Important?
SS.8.FL.4.4 -Explain that lenders charge different interest rates based on the risk of nonpayment by borrowers. Describe why the higher the risk of nonpayment, the higher the interest rate charged by financial institutions and the lower the risk of nonpayment, the lower the interest rate charged.
Correlated Literacy Standards:
LAFS.68.RH.1.2 Determine the central ideas or information of a primary or secondary source; provide an accurate summary of the source distinct from prior knowledge or opinions.
LAFS.68.RH.3.7Integrate visual information (e.g., charts, graphs, photographs, videos, or maps) with other information in print and digital texts.
LAFS.68.WHST.3.9Draw evidence from informational texts to support analysis reflection, and research.
SS.8.FL.4.4 -Explain that lenders charge different interest rates based on the risk of nonpayment by borrowers. Describe why the higher the risk of nonpayment, the higher the interest rate charged by financial institutions, and the lower the risk of nonpayment, the lower the interest rate charged.
Your Credit Score - Why It’s Important!
Lesson Number 12
Correlated Florida Standards (See Full Text on Cover Page)
LAFS.68.RH.1.2
LAFS.68.RH.3.7
LAFS.68.RH.3.9
Essential Question
- What is a credit score and why is it important?
Learning Goals/Objectives
- Define “credit.”
- Identify the components of a credit score.
- Explain the importance of having good credit.
- Describe techniques for building a strong credit history.
- Define “f interest.’
Overview
- Students will learn about credit cards and the importance of maintaining a good credit rating or score.
Materials
- Computers and Internet access.
- Student Activity Sheet entitled, Sample Credit Report for Ms. Carolina Blue. (Included in the lesson.)
- Student Activity Sheet entitled, Credit Report Scenario. (Included in the lesson.)
Time
50 minutes
Activity Sequence
INTRODUCTION/HOOK(10 minutes)
- To introduce the lesson, have students watch a clip from What’s Up in Finance? to see how a small-business owner named Anna Cohen is reviewed positively by a lending committee based on her strong credit rating. The video may be accessed at:
ACTIVITY (25minutes)
- Write the following terms relating to credit on the board:
a.)credit- an arrangement by which a buyer can take something now and pay for it later
b.)credit card- a card issued by a bank or business that allows somebody to purchase goods and services and pay for them later, often with interest.
c.)credit risk-a borrower’s likelihood of not paying back a debt
d.)interest –the borrowing charge a person agrees to pay when using credit
e.)APR- Annual Percentage Rate; what the banks charge for borrowing the money
f.)credit limit-maximum amount of money which you can borrow (2 minutes)
- Discuss each of the terms with the class. (8 minutes)
- Discuss the difference between credit cards, debit cards, and cash. (Both credit cards and debit cards allow you to use a plastic card to pay for a purchase, but debit cards actually take the money directly from your savings or checking account within a couple of days.) (3 minutes)
- Explain to the students that the most important issue for a bank or credit card company is how likely is it that the money owed to the card will be repaid on time (i.e., the borrower’s credit risk). (2 minutes)
- Tell the students that banks use a numerical score called a "credit score" or a "credit rating" to help them predict a person's future behavior with a credit card. The credit rating takes into account a variety of behaviors made in the past - it is a way to numerically represent a person's history of using credit cards and other loans. ( 5 minutes)
- Review the What’s Up in Finance video segment, discussing with students why a strong personal credit rating would help Anna get a loan for her business. (Answer: Because her strong personal credit rating, or score, showed that Anna has a history of using credit wisely; i.e., repaying loans and paying credit cards on time). (5 minutes)
CLOSURE(15minutes)
- Explain that students will now apply what they learned about credit scores to a sample scenario. With the time remaining and to be finished as homework, have students read and interpret the Student Activity Sheet entitled, Sample Credit Report for Ms. Carolina Blue. (Included in the lesson.) Have students complete the Student Activity Sheet entitled, Credit Report Scenario. (Included in the lesson.) Discuss the assignment the following day.
OPTIONAL EXTENSION SUGGESTION/HOME LEARNING
- As an extension activity, have the students collect credit card offers that arrive at home or that they notice displayed in public places. Once some offers have been compiled, analyze and evaluate real-world credit card offers.
Sources/Bibliographic Information that contributed to this lesson
- What’s Up in Finance,
- and,
- Hands on Banking,
- Family Economics & Financial Education – Revised April 2009 – Credit Unit – Understanding Credit Reports –Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona
Sample Credit Report for Ms. Carolina Blue
- Personal Identification Information
101 Hopeful Ave
Lucky, Tennessee 55555
Social Security Number: 000-11-0000
Date of Birth: July 27, 1982
Previous Address
101 College Street
Collegetown, AL 36830
Last Reported Employment
All Night Diner, cook, Collegetown, Alabama 36830
- Public Record Information
Liabilities (debts) of $37,568
Assets of $8,657
- Collection Agency Information
- Credit Account Information
Account Number: 123-01 22 123-02 123456
Whose Account: Individual Individual Individual Individual
Date Open: 7/98 1/99 7/00 12/01
Last Activity : 2/035/02 1/02 2/03
Type of Account and Status: Revolving Revolving Revolving Revolving
60 days past 30 days past 30 days past
High Credit: $3000 $2500 $1200 $2500
Balance: $3300 $1500 $958 $1968
Past Due Date Reported: $350 $50 $50 $125
Additional Information
Checking account opened on 01/99 closed for reason: non-sufficient funds with amount $583
- Companies that Requested your Credit File
7/03 Wally World
7/03 See-N-Save
Sample Credit Report Continued
Reading a Credit Report:
Section A shows information about you - your name, current and previous address, Social Security number, date of birth, and other information to identify you.
Section B is called Public Record Information. In this area, you’ll see any information that is listed about you in the records of local, state, or federal courts. In this example you see a bankruptcy.
Section C shows collection agency account information. If you fail to pay back one of your creditors, they may hire a collection agency to contact you. This is a company that specializes in collecting money to pay off debts.
Section D shows your credit history. This is a list of all the places where you have credit - or used to have credit. These are called your accounts.
Section E, the last section of the credit report, is called Inquiries.
Sources: The sample credit report and questions were adapted from the following two sources:
a) and,
b)
Credit Report Scenario
Name: ______
Directions: Read Carolina Blue’s credit report. Carolina is seeking a bank loan to purchase a new car. Analyze Carolina’s credit report and answer the following questions to determine if Carolina should receive the loan.
- List five items on Carolina’s credit report that suggest she is a high risk borrower:
- Name three companies Carolina currently has credit with? Is her credit with these companies good or not?
- Has Carolina’s credit payment history been positive? Support your answer with two examples.
- What is the amount of difference between Carolina’s assets and her liabilities (debt)?
- Would you lend money to her? Support your answer with two reasons.
- List three strategies Carolina can implement to help improve her credit rating:
.