Why Credit Matters

 Essential Question: “What does it mean to be “creditworthy?”

Investigate: What is Credit?

[Time Required: 15 minutes] 

1. Think about your last purchase and how you paid for it. Did you use cash, debit, credit, or did you write a check?
2. What are the differences between paying with cash, debit, credit, and checks. How does one get credit and who provides credit?
3. Have you ever loaned money, clothes, or even your car to a friend? Did you expect to get the item back? Loaning out money, clothes, and cars are all examples of lending credit.
4. Imagine that you are going to loan you brand-new car to a stranger. What factors would you consider before letting someone borrow your car? Would you consider: age, gender, religion, work history, driving record, race, language, education, or income?
5. Understand that lenders use specific factors to determine whether or not a person is “creditworthy” and eligible for a loan. There are five key factors that are considered when determining “creditworthiness:
   1. Payment history (If you pay your bills on time)
   2. Amount owed to current creditors (whether you have a car payment or a balance on a store credit card)
   3. Length of credit history (in general, the longer you’ve had access to credit and paid your bills on time, the better)
   4. Types of credit used (car and mortgage payments are often viewed as “better” debt than consumer credit card debt)
   5. Number of open accounts (lenders can be wary of borrowers with too much credit available) These factors are compiled on a person’s credit report, with an overall credit score that lets lenders know how risky it is to lend to that borrower. Some of the factors you might have believed should matter when it comes to getting credit actually don’t (e.g., education, race, gender, age, religion, etc.).

Student Preparation: Understanding Credit Scores

[Time Required: 15 minutes] 

1. What would you rather earn on a math test: 95 out of 100 or 55 out of 100? Just like test scores in school, the higher your credit score, the better. This is because a higher number means you are a lower risk as a borrower.
2. What is “creditworthiness” and what are the components of a credit score? How is a credit score calculated? What is considered a good score? What actions impact a credit score? Why does having a good score matter? Why would a bank or cell phone company care about your credit? 

Challenge: Imagine the Impact

[Time Required: 15 minutes] 

Download the student activity sheet, Catch the Credit Crisis. Determine how and why each scenario would impact their credit. 

Reflection

[Time Required: 10 minutes] 

Reflect in your notebook about how your credit score might impact your short, medium, and long-term goals; such as finding a job, buying a house or selecting a cell phone plan.