KEEPING SCORE: WHY CREDIT MATTERS

ESSENTIAL QUESTION: WHAT DOES IT MEAN TO BE CREDITWORTHY?  Think about your last purchase. How did you pay for it?  Cash, Debit, Credit, Check?  I need three volunteers to share their purchases and methods of payment.  How do you get credit? Who provides the credit?

LOAN DECISIONS  Imagine you are going to loan your brand new vehicle to a stranger. What factors would you consider before letting this person borrow your vehicle?  Would you consider age, gender, religion, work history, driving record, race, language, education or income?  Let’s discuss what factors should and would affect the decision.

CREDITWORTHINESS  Lenders use specific factors to determine whether or not a person is “creditworthy” and eligible for a loan.  There are 5 key factors that are considered when determining “creditworthiness.  Payment history: whether or not you pay your bills on time  Amount owed to current creditors: car payments, credit card debt, college loans, etc  Length of credit history: in general, the longer you’ve had access to credit and paid your bills on time, the better; depending entirely on cash can hurt your credit  Types of credit used: car and mortgage payments are often viewed as “better” debt than consumer credit card debt  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. *Notice – education, race, gender, age, religion, etc. do not affect a person’s creditworthiness.

UNDERSTANDING CREDIT SCORES  Just like grading systems in schools, the higher your credit score, the better. A higher number indicates you are a lower risk as a borrower.  Let’s take 15 minutes to review the “Take Control of Your Credit Score” brochure together. Look for the answers to the questions below.  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?

LET’S PRACTICE  In groups of 3-5, review the Spot the Credit Crisis handout and answer the questions.

CHECK YOUR WORK  Let’s review the answers to the scenario questions now. I have an answer key.  This lesson was taken from PracticalMoneySkills.com. For more information on creditworthiness or personal finance, in general, visit that site.  You are always welcome to visit the guidance office for assistance with your personal finance questions.