Ideas on How to Teach This Topic:
Credit scores are an integral and essential part of personal finance. It is a simple topic but often thought to be over complicated. The simplified ideas is that a credit score is a way for financial institutions to quickly work out who is responsible with their money and if they lend them money – what are the chances that they will get their money back on time. The lower the credit score, the riskier it is for them to lend money to that person/consumer.
- Define what a credit score is.
- Why do we have credit scores – the idea that it is a quick way to assess a consumers financial responsibility – are they likely to pay back money lent to them on time?
- How credit scores are calculated.
- Ways that credit scores are ruined
- How to build your credit score
What is a Credit Score?
A credit score or FICO score is a financial responsibility number ranging between 300 and 850 given by credit reporting agencies (Experian, Equifax, and TransUnion) for financial institutions to assess an individual based on their financial responsibility. The higher the number, the more financially responsible and more likely to pay back any money borrowed on time. The higher the credit score, generally the less risk to the lender and therefore larger amounts of money will be loaned, charged at lower interest rates.
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 :
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.
- What is a credit score?
- Why do credit scores exist?
- What are the credit score ranges?
- What is another name for a credit score?
- Can you check your credit score and if so, where?
- Give 3 ways in which a credit score can be ruined
- Explain how you would improve your credit score
- Because credit scores vary, based on financial responsibility. Lenders will also want to protect their money and lend money to consumers at different rates. Using various websites available to you, research credit scores and the ranges of interest rates offered.
- With your findings, calculate the cost of a loan based on borrowing $5000 to buy a car with a low credit score, medium credit score, and a high credit score.
- We hear about identity theft all the time. How could this affect your credit score?