How to Teach Credit Score to Students?

How to Teach Credit Score to Students?

You may be wondering how to teach credit score to students, but it is an important topic when teaching personal finance. But, you may be wondering what is the best way to teach your students about this topic. It’s a difficult topic to grasp because of the lack of information that is available about it. So, we’ve created a lesson plan on how to teach your students about credit scores, to help you, teachers, out. First, begin with a basic definition of credit scores. Then you’ll want to teach them how credit scores are calculated. Afterward, you can teach them how to raise their credit scores. To finish off, you may want to give them supplemental tools to better grasp the concept of credit scores.

What is a Credit Score?

A credit score is a numerical expression that determines an individual’s creditworthiness. In other words, a credit score is a number that is supposed to let lenders know if the consumer is a reliable lender, and if they can afford to pay a loan back on time. Some of the most common loan-lenders that will check a consumer’s credit are car dealerships, mortgage lenders and banks. The credit score is used to determine which consumers qualify for a loan, at what interest rate and what credit limits.

How are Credit Scores Calculated? 

 

A credit score is calculated a bit differently around the globe, but it is based loosely on the same formula. In the United States, a credit score is based on these factors.

1. Payment history: The most important factor in your credit score is your payment history. Your payment history reflects all the payments you make to your consumer debts, such as your credit card, line of credit, student loan, phone bill, and any other loan or debt you may have. The payment information that is reported shows separately for each account you have. It shows the amount you owe, what type of payment plan you have, whether you paid on time, and how many past due payments you have. It will also show whether you ever declared bankruptcy, or have any negative liens or judgments. 

2. How much is owed: When you apply for a loan, the lenders will check how much you already owe other lenders. If for instance, you are close to maxing out all your credit cards, that will lower your credit score. 

3. Length of credit history: The longer you have a credit history, the better it is for you because it paints a more accurate picture of how well you use your credit. However, after 6 or 7 years, all information gets removed from your credit history. It is suggested to use at least a minimal amount of credit on an ongoing basis, to keep your credit report alive.

4. New credit: Applying for new credit frequently can lower your credit score. “Credit Shopping”, can signal a consumer’s financial difficulty. Also, there is an assumption that the more new credit a person gets, the more in debt they are. Your credit score can (but aren’t always) affected by the following: the number of times your credit has been checked in the last 5 years, the number of credit accounts you have recently opened, how much time has passed since you opened any new accounts and the time since your most recent credit inquiries.

5. Types of credit used: The type of credit you applied for does affect your credit score. It is the least important part of your credit score, but it does affect it. Different types of credit can show lenders how you handle your money overall. If for example, someone takes out a consolidation loan, it means that they have difficulty paying their debts in the past.

Although I listed five of the most basic factors that affect credit score, there may be other less important factors involved depending on the credit report company. 

How to Raise a Credit Score? 

To have a high credit score; here is a list of advice:

1. Always pay your bills on time: Delayed payments negatively affect your credit score. Make sure to pay all your bills on time and always budget expenses.

2. Don’t apply for too many new credit accounts: Apply only as needed.

3. Don’t close unused credit cards: As long as credit cards aren’t costing you money, it is recommended to keep them open. Closing your credit card accounts may increase your credit utilization ratio.

4. Avoid applying for too much new credit: Whenever you apply for new credit it results in a hard inquiry on your credit report. Too many hard inquiries can negatively impact your credit score.

5. Make sure to dispute inaccuracies on your credit report: Mistakes on your credit report aren’t uncommon, so make sure to dispute any inaccuracies you may encounter.

6. Pay your utility bills on time: Paying basic utility bills like your phone bill can raise your credit score.

7. Leave old debts on your credit report: As long as old debts were paid on time, leave them on your credit report to show lenders you are capable of paying off debts on time. 

Supplemental Tools for Teaching About Credit Scores :

Personal Finance Lab Budgeting Game

After teaching your students about credit scores, they still may have difficulty comprehending it because of their lack of real-world experience with credit. There is no better way to learn than to be immersed in a real-life simulation. We highly recommend offering your students an online budgeting game simulation, which will teach your students about budgeting their finances and about how to use their credit cards. A budgeting game will allow students to manage a monthly budget, with fixed expenses, variable income, and unexpected life events. One of the greatest budgeting game teaching tools is Personal Finance Lab Budgeting Game. To view more articles about credit scores and related topics, click here

 

 

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