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Grade 9-12
,
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.

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.]