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Lesson

# Earning Credit

Time: 90 mins,
Updated: April 1 2021,

### Objective

Students will be able to:

• Define credit score and interest rate.
• Explain how lenders use credit scores to evaluate risk.
• Explain the kinds of behaviors that affect people’s credit score.
• Explain how credit scores affect interest rates for individual borrowers.
• Compare simple and compound interest.
• Use mathematical strategies to calculate monthly payments, given principal and interest rate.
• Calculate how compound interest affects the total cost of a major purchase.
• Compare the total cost of major purchases for people with low and high credit scores.

### Concepts

In this personal finance lesson, students will learn to compound interest and amortization to calculate the cost of a car.

### Resources

Miscellaneous Items

• Scientific calculator for each student

### Procedure

EARNING CREDIT PART 1

Warm-Up

Start your lesson by saying, “In today’s lesson, you will learn about credit scores and interest rates and analyze how current financial choices, such as borrowing money and failing to repay it, can have major costs in the future.”

Open the Earning Credit PowerPoint Slides and show slide 1. Pair students and give them 1-2 minutes to discuss and answer the following question seen on the slide: Have you ever borrowed money from someone and not repaid it? Or has anyone ever borrowed money from you and not repaid it?

Modeling

Show Slide 3 and define credit as borrowed money that is used to buy goods and services and must be repaid later. Explain that credit-rating agencies, such as Trans Union, Experian and Equifax, actually track individuals’ use of credit throughout their lives and create credit reports. Other companies use information from credit reports to compute credit scores for individuals. The most well-known of these is Fair Isaac Corporation, now called FICO. A credit score is a single number assigned to a person used by lenders to predict the risk that a borrower will not repay.

Individual Activity

During the next section of the lesson, students will take an online survey, which will calculate a simulated credit score for them. Teacher Set-up: Before assigning students to take the survey, you must sign up as a teacher in Earning Credit Survey. Student responses to the survey will be used to calculate a simulated credit score for them. Scores will range from 300 to 850.

Show slide 4. Direct students to log in to Earning Credit Survey. Ask students to be patient while the survey is loading. Once the application has loaded, instruct students to write down their access code for future reference. Each student should record his/her credit score because it will be used later in this lesson. The survey includes the following questions:

1. What was your score on the most recent test in this class?
2. In this class, how many assignments have you missed OR turned in late?
3. At what age did you first save some of your own money?
4. In how many clubs/organizations are you involved this year?
5. When was the last time you asked your parents for money not for a required school activity?

Show slide 5 so that students can see the range. Ask students how the survey questions are relevant to their real credit score.  Explain that each question on the survey was designed to simulate one of the factors used to assess risk and determine credit scores. Ask students what factors they think are included in determining actual credit scores.

Show slide 6, which lists the categories used to determine an individual credit score, and explain how each survey question related to these categories. See notes section for teacher discussion points.

Show slide 7, which lists questions to check for understanding on credit. The answer key is in the notes section of the presentation.

EARNING CREDIT PART 2

Modeling

Open Earning Credit PowerPoint Slides. Show slides 8-14 and use the notes section of the presentation for teacher discussion points and answer keys.

Individual Activity

Distribute copies of the Exit Slip, to each student or show slide 15. Give students 5 minutes to answer the questions. Review the answers for the exit slip to check for understanding using slide 16.

Show slide 17. Use the notes section of the presentation for teacher discussion points. Then, distribute a copy of The Amortization Formula and the Price of Your Car. Distribute a calculator to each student and walk students through an example using the amortization formula using the activity sheet. Use an interest rate of 2%, a principal of \$15,500 and a 5 year (60 month) loan term. Review this activity sheet as a class. You will need the Earning Credit survey to complete the worksheet. See slide 18.

Show slide 18. Read the scenario and steps or instructions to the students question 3 on The Amortization Formula and the Price of Your Car. Refer to You can view a spreadsheet of credit scores in case students have forgotten their credit scores. This is available on the Teacher Dashboard when you log in to the app. Once they have their score, direct students to calculate the monthly payment and the total cost of the loan using their interest rate, the price of \$20,000, and a loan period of five years (60 months).

Show slide 19. This table will show how interest rates will vary based on credit score.

Group Activity

Show slide 20. Arrange students in groups with a variety of different credit scores/interest rates. Explain expectations for group behavior. Show Slide 21 with discussion questions. Give students 15 minutes to discuss the question with their group. Review each question as a class. Use the notes in the presentation for the teacher guide. Show slide 22 to review the graph.

Show slide 23. Explain that students will have an opportunity to obtain a new credit score and interest rate, based on their predictions about their own future behavior. Direct students to login to Earning Credit Post-Survey and take their last survey. This time, the site will provide both the credit score and interest rate simultaneously.

### Assessment

Go to ReadyAssessments and assign Adopt-A-Highway Quiz to your class(es).

1. Show the graph on Slide 16. Ask students what happens to the total amount of interest paid when interest is compounded more frequently? [It increases.]
2. How will a low credit score impact an individual’s total cost when purchasing a large item, like a car or house? [They will pay a lot more.]
1. Which of the following best defines “credit”?
1. [The opportunity to borrow money or to receive goods or services in return for a promise to pay later.]
2. The price paid for using someone else’s money, expressed as a percentage of the amount borrowed.
3. Money paid regularly, at a particular rate, for the use of borrowed money.
4. A record of past borrowing and repayments.
2. Assume you are a lender. Each of the four individuals described below is seeking a car loan. To whom would you offer the lowest interest rate on a loan?
1. Lebron, a high school basketball coach and golf pro; he recently borrowed \$15,000 to go back to school and \$200,000 to buy a new house, and he owes \$2500 on his four credit cards.
2. Katrina, a real estate agent who recently got a new job after 8 months of unemployment; she has \$5,000 in credit card debt and missed two mortgage payments on her home this year.
3. [Bonnie, a travel agent with \$2500 in credit card debt and a \$150,000 mortgage on her house in Hawaii; she made two late credit card payments in the past 15 years.]
4. Walt, a recent college graduate who just got his first teaching job; he has never taken a loan or owned a credit card.
3. Max borrows \$10,000 to buy a new car at a rate of 5% for 72 months (6 years). Interest is compounded monthly. What will be the total cost of the car, including principal and interest, at the end of 72 months?
1. \$11,000
2. \$11,322
3. [\$11,595]
4. \$13,400

Constructed Response

1. Jim takes out a car loan for \$23,500. Due to his strong credit score, he is approved for an interest rate of 2.6%.
1. What is the principal amount he has borrowed? (\$23,500)
2. If Jim borrows for five years, how much will he pay in principal and interest by the end of five years? (Use the amortization formula) (\$25,086)
3. What is Jim’s monthly payment? (\$418.10)
4. How much did he pay in interest? (\$1,586)
5. Now assume that Johnny also takes out a car loan for \$23,500. Due to his lower credit score, he is approved for an interest rate of 5%. How much will he pay in principal and interest by the end of five years? (\$26,608.20)
6. What is Johnny’s monthly payment? (\$443.47)
7. How does a better credit score affect the total cost of a new car? [A better credit score will produce a lower interest rate and will reduce the total cost of the car.]