The Basics of Credit – How a Good Credit Score Saves You Money

1. The Basics of Credit – How a Good Credit Score Saves You Money CreditReport.com Commercials Kevin Murphy

2. Objectives and Standards Economics and Technology The Student Will Be Able To: • Define key terms used in personal banking (credit report, credit score, interest rate) • Calculate the loan payment and cumulative cost differences from different loan terms due to different credit scores. • 6.5.6.H: Explain the differences between interest rates for saving and borrowing. • 3.4.6.D1: Apply a design process to solve problems beyond the laboratory classroom. • 3.4.6.D2: Use computers appropriately to access and organize and apply information. • 3.4.6.D3: Design and use instruments to evaluate data.

3. Agenda (not part of notes to students) • Warm-up activity (hypothetical exercise – 5 mins) • Opening comments (1 minute) • Kick-off and play anticipatory set video (4 minutes) • Interactive discussion and review of notes (10 mins) • Car loan example demonstration using Internet (calculator link) and MS Excel (formula & graph) (8 mins) • Student Independent work on 2nd car loan problem and check of all students’ answers and spot check of graphs (10 mins) • Closing comments and video clip (2 minutes)

4. Basics of Credit • What is credit? • For what purposes would you need to borrow money? • What is a credit report? • Today we’ll learn… • What is a credit score? • Why it is important?

5. What is a Credit Score • Your credit score is a number generated by a mathematical formula -- based on information in your credit report, compared to information about tens of millions of other people. • The resulting number is a highly accurate prediction of how likely you are to pay your bills.

6. What is a Credit Score Used For • Credit scores are very important – 90% of the largest banks use it to make a credit decision • Credit scores are used extensively to decide whether you will get approved for a mortgage, a car loan, a credit card, or auto insurance • The interest rate you will receive will be directly related to your credit score • The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates

7. Credit Score Ranges The American public’s scores range from 300 to 850 The best interest rates for loans go to those with credit scores at 720 or above

8. What’s the Big Deal • Your credit score is used to decide whether to even give you credit • One of the main deciding factors on the price you must pay for credit (mortgage, car loan, and credit card rates) • The better your score, the lower your interest rate which saves you money - $$$! • The difference between a person with a 520 and a 720 score is approximately 3.5% • For a $100,000 30-year mortgage that would mean a savings of more than $85,000 in interest charges alone • The difference in the monthly payment would be almost $250

9. How Your Score is Calculated There are 5 factors • How you pay your bills (35 percent of the score) • Pay on time (most recent payment history most important) • Any loans never paid back? • Amount of money you owe and the amount of available credit (30 percent) • Do you have enough credit • What percentage of your available credit are you using • Length of credit history (15 percent) • The longer the better • Mix of credit (10 percent) • Revolving lines (credit cards) • Installment credit (car loans, home loans) • New credit applications (10 percent) • How regularly are you looking for credit

10. How Your Score is Calculated

11. What Is NOT Part of Your Score • Age • Race • Job or length of employment at your job • Income • Education • Marital status • Whether or not you've been turned down for credit • Length of time at your current address • Whether you own a home or rent A lender may use some of these factors when deciding to give you a loan, but they are not part of your credit score. If your credit report has errors in it, your score may not be accurate.

12. Who Else Wants to Know Your Credit Score? (Besides Someone Thinking of Lending You Money) • Landlord thinking of renting you an apartment • Someone selling you a cell phone service • Someone thinking of hiring you for a job that involves money handling or other sensitive tasks (government clearances such as FBI, CIA, State Department, etc.) • A utility company considering connecting you for services

13. Let’s See What it Costs Us For a car loan of 5 years the 10% rate may be offered for a customer with a “good” score while the 15% may be offered to the person with the “not so good score” http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx

14. Use Excel to Calculate and Show Value of a Good Credit Score

15. Your Turn to Calculate Now you calculate the difference between a car loan of $25,000 with a 4 year term (48 months) with an interest rate of 8% (good score) and 12 % (not as good score) and graph it in MS Excel as we did with the $15,000 car loan.

16. Conclusion Yes Man Clip Do you want Jim Carrey to give you a loan for a mountain bike or sailing lessons? If you want him to lend you money, or any banker for that matter, it is important to remember to take good care of your credit score.

17. References • http://credit.about.com/od/credit101/a/reportscorebasc.htm • http://www.bankrate.com/finance/credit-cards/what-is-a-credit-score-1.aspx • http://www.erate.com/fico_score_credit_scoring_basics.htm • http://www.thirteen.org/edonline/lessons/fe_credit/b.html • http://www.edmunds.com/advice/finance/articles/47280/article.html • http://www.youtube.com/watch?v=fLIFn_ekpeM&feature=related