Money Module 4 Spotlight: Credit Matters

Do your students understand how their credit will impact their lives? Ask your students what they think of when they hear the word “credit”? Credit scores? Credit reports? Maybe credit cards? Simply put, the term “credit” refers to an agreement or contract between you and a lender, allowing you to purchase an item or borrow money now and pay later. Understanding credit; matters! In this article, we'll cover key elements for students to know about credit directly from Module 4 of the MONEY program. Read on, and feel free to share with your students!

HAVING GOOD CREDIT

Have you seen car commercials advertising low or no interest rates for new car loans? “Come on in, buy a car with no down payment and zero interest!” It sounds exciting until you find out that this amazing rate only applies to “well-qualified buyers.” Aka, buyers with excellent credit. For anyone with less-than-excellent credit, the loan may cost buyers hundreds or even thousands more.

Having good credit makes it easier to get approved for a rental lease or home loan. It can also help you get better auto insurance rates and avoid having to pay security deposits. People with good credit get approved for higher limits on loans, have more negotiating power, and qualify for lower interest rates. Good credit even helps when applying for jobs.

Unfortunately, there are also many consequences to having bad credit. Bad credit means not being able to get those good interest rates on a car loan. If you can get a loan at all, the interest rate might be incredibly high. People with poor credit often have to put down a deposit in order to set up utilities or purchase a cell phone. Insurance rates can also be higher, too.

CREDIT REPORTS

So how do lenders know about YOUR credit? They read your CREDIT REPORT. 

Your credit report comes from three major credit agencies - Equifax, TransUnion, and Experian. These reporting agencies collect and store information about you, the financial decisions you have made, how you use credit and how much credit is available to you.

Any time you apply for a loan or a line of credit, the lending institution will request - or “pull” - your credit report to see your creditworthiness. This includes personal information, employment history, and even public records like bankruptcy or court judgments. The main part of a credit report is your CREDIT HISTORY - a summary of your credit activities. This includes your total debt, monthly payment amounts, and available credit.

Finally, a credit report includes CREDIT INQUIRIES. Each time you apply for credit, a lender requests to see your credit report. This is called an inquiry. Lenders can see who else has looked at your credit report for the last two years. But lenders are not the only ones who can access your credit report. You can request a copy of your report from one of the credit agencies at any time. 

CREDIT HISTORY & CREDIT SCORE

Now let’s talk about the two components that make up your credit profile: your CREDIT HISTORY and your CREDIT SCORE.

Lenders look at your credit history and credit score to determine if they think they can trust you to repay the money you borrow. Your credit history provides a close-up view of how you use money. This is the main component of your credit report. Your credit history includes your financial activity and obligations for the past seven to ten years.

A credit score is like a report card, but instead of getting grades for each class, you are given a score based on your financial decisions and activities.

There are two credit scoring companies - FICO and VantageScore. They take the information contained in your credit report and use it to calculate your credit score. There are 5 factors in the calculation:

1. Payment History (35% of your score)
   Do you pay your bills on time? The longer you pay on time, the better your score will be. Just one late payment can lower your credit score.  Payment history is THE MOST important factor of your credit score, and it makes up 35% of your score.

2. Credit Utilization (30% of your score)
   Credit utilization is the amount of money you owe versus the amount of credit you have access to. How much outstanding debt do you have? Are your credit cards charged to their limits or do you have available credit? High balances and fully charged credit cards will lower your score.

3. Length of Credit History (15% of your score)
   How long have you had or used credit? People with no credit history will have a low score in this area. It may seem wise to avoid applying for credit and carrying debt, but it can actually hurt your score if lenders have no credit history to review.

4. New Credit Accounts (10% of your score)
   If you have opened multiple accounts or applied for credit several times within a short timespan, it can suggest that you are in financial trouble and lower your credit score.

5. Credit Mix (10% of your score)
   Having a variety of accounts, including installment loans, home loans and credit cards may improve your score.

Credit scores range from 300 to 850. A score of 300-579 means you have new or poor credit. 580-620 is ok credit, and 621-740 is good credit. A score of 741-850 is excellent credit.

If your credit score is in the dumps - DON'T PANIC! With some extra effort, you can boost your credit score! A few simple things done consistently will make a big improvement on your score. This includes using less credit than you have access to, paying off balances every month, and ALWAYS paying on time.

CONCLUSION

Credit MATTERS. It’s crucial for students to understand that having good credit can impact their ability to get a loan, buy a house, and even get a job.

Encourage your students to check their credit report and come up with a few things they can do to improve today! For existing MONEY schools, be sure to reference Module 4 of the program. To learn more about bringing the MONEY program to your students, click here.