# Earning Credit. Compelling Question Have you ever borrowed money from someone and not repaid it? Or has anyone ever borrowed money from you and not repaid.

## Presentation on theme: "Earning Credit. Compelling Question Have you ever borrowed money from someone and not repaid it? Or has anyone ever borrowed money from you and not repaid."— Presentation transcript:

Earning Credit

Compelling Question Have you ever borrowed money from someone and not repaid it? Or has anyone ever borrowed money from you and not repaid it? © Council for Economic Education1

Credit - The opportunity to borrow money or to receive goods or services in return for a promise to pay later. Credit score – A single number assigned to a person used by lenders to predict the risk that borrowers will not repay. © Council for Economic Education2

Your Credit Score Low 300 High 850 © Council for Economic Education3

What makes up your credit score? 35% Payment history 30% Managing your debt 15% Length of credit history 10% Diversity of accounts 10% Number of credit applications © Council for Economic Education4

Interest rate - The price paid for using someone else’s money, expressed as a percentage of the amount borrowed Principal – An original amount of money invested or lent © Council for Economic Education5

What is the total cost of the car? What is your monthly payment? Price of car/Loan principal: \$15,500 Interest rate: 0% Loan term: 5 years (60 months) © Council for Economic Education6

How to calculate simple interest Simple interest – Interest paid only on the principal of a loan Price of car/Loan principal: \$15,500 Interest rate: 2% Loan term: 5 years (60 months) I (simple interest) = P (principal) x R (interest rate) x T (# of years) I = \$15,500 x.02 x 5 I = \$1550 © Council for Economic Education7

What is the total cost of the car? What is your monthly payment? Price of car/Loan principal: \$15,500 Interest rate: 2.0% Loan term: 5 years (60 months) © Council for Economic Education8

How to calculate compound interest Compound interest – Interest paid on the principal of a loan and the interest owed Price of car/Loan principal: \$15,500 Interest rate: 2% How much is owed at the end of 1 year? Principal (\$15,500) + Interest (0.02 x \$15,500) \$15,500 + (\$15,500 x 0.02) = \$15,810 Another way to state this equation: \$15,500 x (1 + 0.02) = \$15,810 © Council for Economic Education9

How to calculate compound interest Price of car/Loan principal: \$15,500 Interest rate: 2% How much is owed at the end of 1 year? \$15,500 x (1 + 0.02) = \$15,810 How much is owed at the end of 2 years? \$15,500 x (1 + 0.02) x (1 + 0.02) = How much is owed at the end of 3 years? \$15,500 x (1 + 0.02) x (1 + 0.02) x (1 + 0.02) = What formula can you derive that will calculate the amount owed for a specific number of years? How can you state this as a general formula? 10 © Council for Economic Education

What is the total cost of the car? What is your monthly payment? Price of car/Loan principal: \$15,500 Compound Interest rate (annual): 2.0% Loan term: 5 years (60 months) © Council for Economic Education11

Car payment calculation A= Monthly payments i= monthly interest rate (annual interest rate/12) P= principal n= total number of payments © Council for Economic Education12