LESSON 7 -- CREDIT REPORTS AND CREDIT SCORES LESSON DESCRIPTION AND BACKGROUND Using the Better Money Habits video What s the Difference Between a Credit Report and a Credit Score? (www.bettermoneyhabits.com), this lesson explains the differences between credit reports and credit scores. It is designed to be used as either an introduction to, or a review, of Lesson 13: Applying for Credit in Financial Fitness for Life, Grades 9-12. It includes basic information on credit scores, the three credit reporting agencies, and the importance of monitoring your credit history. The video is about 3 minutes, and this activity takes one 45 minute class period to complete. BETTER MONEY HABITS VIDEO Credit: What Is Credit?: What s the Difference Between a Credit Report and a Credit Score? (2:46) FINANCIAL FITNESS FOR LIFE CONNECTION, GRADES 9-12 Lesson 13: Applying for Credit ECONOMIC AND PERSONAL FINANCE CONCEPTS Credit History Credit Report Credit Score NATIONAL STANDARDS FOR FINANCIAL LITERACY Standard 4. Credit, Benchmark: Grade 12 5. Lenders make credit decisions based in part on consumer payment history. Credit bureaus record borrowers credit and payment histories and provide that information to lenders in credit reports. 6. Lenders can pay to receive a borrower s credit score from a credit bureau. A credit score is a number based on information in a credit report and assesses a person s credit risk. BETTER MONEY HABITS: HIGH SCHOOL 1
OBJECTIVES At the end of this lesson, the student will be able to: Explain the differences between credit scores and credit reports. Identity the three credit reporting agencies. List the five components of a credit score. Compute the debt to credit ratio. TIME REQUIRED One 45 minute class period MATERIALS Handout 7.1: Credit Reports and Credit Scores Handout 7.2: Why a Credit History Is Important Posterboard and markers Computer access if possible PROCEDURE 1. Tell students to imagine they are applying for a job or a scholarship at the local university. Ask them to name some of the qualities potential employers or scholarship committees would use to evaluate them. Put the list on the board and discuss the answers, asking students to explain why they are important criteria to consider. 2. Tell students to imagine they are applying for a loan to buy a car or for a college education. Ask them to name some of the qualities potential lenders would use to evaluate them as a borrower. Put that list on the board and compare it with the list in Procedure 1. Encourage students to discuss the importance of having good character, whether applying for a loan or applying for a job or scholarship. Remind them that people use various ways to determine what type of person we are, and many of those decisions are made by people who do not know us personally. 3. Use this discussion to introduce the video. Tell them this video will help explain credit scores and credit reports, two important parts of their credit history. Distribute copies of Handout 6.1 for students to complete while watching the video. 4. Show the video. After watching the video, review the student answers to Handout 7.1 and answer any questions students may have. (Note: You may want to collect Handout 7.1 or allow them to use it as a guide to answer questions on Handout 7.2.) BETTER MONEY HABITS: HIGH SCHOOL 2
5. Put students in small groups. Distribute copies of Handout 7.2. Tell students they are going to discuss what they learned in the video by answering the questions on Handout 7.2. 6. After they have completed Handout 7.2, have each group prepare a poster with information about credit scores and credit reports to hang up in the classroom. CLOSURE To summarize this lesson, review the information included on their posters and discuss any additional questions they have about the importance of a good credit history. ASSESSMENT Refer to Procedure 6, with the poster activity serving as the assessment. EXTENSION Refer to Lesson 13, Financial Fitness for Life, Grades 9-12. View additional videos from Better Money Habits, including What Really Goes into Your Credit Score?; What Is a Good Credit Score?, and How Credit Scores Affect Interest Rates. Distribute copies of the Better Money Habits poster Your Credit Score: How It s Calculated for students to use with this lesson. BETTER MONEY HABITS: HIGH SCHOOL 3
HANDOUT 7.1 CREDIT REPORTS AND CREDIT SCORES GUIDED NOTES: WHAT IS A Complete this handout while viewing Better Money Habits: What is a Credit Score? (www.bettermoneyhabits.com) A credit report is a compiled of all your accounts and payments. It can include a loan, credit, student loans, and a mortgage. Credit reports are maintained by three credit reporting agencies:,, and. A free copy of your credit report can be obtained every. A credit score is a that helps lenders assess your ability to repay a loan. A credit score consists of components. Payment history: % Debt to credit ratio: % Length of credit history: % Types of credit: % New credit accounts or inquiries: % The most common credit score is call the. Credit scores range from on the low end to on the high end. BETTER MONEY HABITS: HIGH SCHOOL 4
HANDOUT 7.2 WHY A CREDIT HISTORY IS IMPORTANT Write a paragraph that answers the following questions about the importance of having a good credit history. 1. What is a credit history, and how is it used? 2. How does a person s credit history affect their future decisions? 3. How does a person s credit history impact their ability to reach their future goals? 4. How does a person s credit history influence their future purchasing power? 5. What steps can a person take to protect their credit history? BETTER MONEY HABITS: HIGH SCHOOL 5
HANDOUT 7.1 ANSWERS A credit report is a compiled HISTORY of all your accounts and payments. It can include a CAR loan, credit CARDS, student loans, and a mortgage. Credit reports are maintained by three credit reporting agencies: EXPERIAN, TRANSUNION, AND EQUIFAX. A free copy of your credit report can be obtained every YEAR. A credit score is a NUMBER that helps lenders assess your ability to repay a loan. A credit score consists of FIVE components. Payment history: 35 % Debt to credit ratio: 30 % Length of credit history: 15 % Types of credit: 10 % New credit accounts or inquiries: 10 % The most common credit score is call the FICO SCORE. Credit scores range from 300 on the low end to 850 on the high end. BETTER MONEY HABITS: HIGH SCHOOL 6