MA.912.FL.3.10

Benchmark Instructional Guide

Connecting Benchmarks/Horizontal Alignment

• MA.912.FL.1.1

Terms from the K-12 Glossary

Vertical Alignment

Previous Benchmarks

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Purpose and Instructional Strategies

• Instruction begins with a discussion (MTR.4.1) among students regarding what they think lenders look for when deciding if a potential borrower is trustworthy. Organize their thoughts on your whiteboard or a piece of chart paper to reflect on later in the lesson. After the discussion, inform student that credit scores are the metric lenders commonly used to gauge the trustworthiness of a borrower. 
• Instruction includes exploring how credit scores impact buying power so students can identify the benefits of maintaining a high credit score. Have students explore various online loan calculators that feature a credit score field they can change. They should quickly notice that interest rates for loans increase as credit scores decrease. As a class, calculate the difference in total interest payments for a given loan depending on the credit score of the borrower. Use the information you find online or consider the following example. 
  • Two families are applying for 30-year loans to purchase homes that each will cost $240,000 after down payments. The families’ income and monthly expenses are nearly identical. The major difference is their credit history. The Johnson’s have a credit score of 631 and receive an offer at 4.312%. The Thompson’s have a credit score of 803 and receive an offer at 3.216%. If they both take the out their respective loans, how much more in interest will the Johnson’s pay due to poor credit? 
• Once students gain an appreciation for how credit scores affect their future finances, begin instruction regarding how they are calculated. 
  • Credit scores are calculated from your credit report. Your credit report lists what types of credit you use (credit cards, installment loans, mortgage loans, etc.), the balances on these accounts, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit. There are three credit bureaus that generate credit reports: Equifax, TransUnion and Experian. 
  • The most common credit score is calculated by Fair, Isaac and Company (FICO) and is used by a majority of lenders. Five key categories of information from your credit report are used to generate a FICO score. 
    • Payment History 
      This category counts for around 35% of your overall score as lenders are very concerned with the likelihood borrowers will repay their loans. It shows how consistently you’ve paid your accounts over your credit history. A history of on-time payments will cause this category to increase and a history of late payments or delinquent accounts will cause it to decrease. Deferring payments does not have an impact on this category, since the lender is giving written permission to defer. 
    • Amount of Current Debt 
      This category counts for around 30% of your overall score as consumers who take out too much credit are more likely to make late or missed payments. Keeping high balances on credit cards will cause this category to increase and keeping low credit card balances reducing balances of other loans will cause it to decrease. Deferring payments can affect this category since account balances are not decreasing over a period of time. 
    • Length of Credit History
      This category counts for around 15% of your overall score. Borrowers with longer credit histories, especially positive histories, receive higher scores. 
    • Types of Credit Held (stated as Public Records Information in benchmark clarification) 
      This category counts for around 10% of your overall score. Higher scores for this category go to borrowers who successfully manage different types of loans. Opening too many types of loans too quickly can negatively impact the final category. 
    • Number of Recent Credit Inquiries or New Credit
      This category counts for around 10% of your overall score. Opening too many new credit accounts too quickly or having too many new credit inquiries represents greater risk to lenders and will lower scores in this category. One exception to this is rate shopping for low mortgage, auto, or student loans. The credit inquiries needed to explore rates for these are often treated as a single inquiry if they are done within a 30-day window. 
• Once students understand how credit scores are calculated, explore how short-term and long-term purchases may increase or decrease credit scores. 
  • Short-term purchases using revolving accounts, such as credit cards, or short installment loans can help build a positive payment history and length of credit history which can increase credit scores if your balances are low. Opening too many accounts to quickly or carrying high balances can lower your credit score. 
  • Long-term purchases, such as home, student or auto loans, can build a positive payment history and length of credit history which can increase credit scores if your balances are consistently decreasing. Deferred payments on these loans can keep your balances high and lower your scores. Taking on too many larger, longterm purchases will lower your credit score. 
    • Since home loans are typically the largest loans taken by most consumers, they rely heavily on credit scores to set interest rates and other loan parameters. Most conventional mortgage lenders require at least a 620 credit score to obtain a loan.

Common Misconceptions or Errors

• Students may assume that each category of a credit score calculation works independently of the others and seek to positively impact one category without considering the impact on other categories. 
  • For example, opening a new line of credit could increase the Types of Credit category but it also lowers your average credit history across your accounts and increases the amount of total debt. Students should consider the impact of decisions across all 5 categories when making financial decisions.

Instructional Tasks

• Katy currently rents an apartment. She recently applied for a home loan but was not eligible for a low interest rate due to a low credit score. Rather than take out a mortgage at a high interest rate, she decides to delay a home purchase until she can raise her credit score. Below is a list of her current credit accounts. 
  • Credit Card A - $5,000 limit, $2,143 current balance, 3 late payments in the last 12 months 
  • Credit Card B - $3,000 limit, $1,687 current balance, 2 late payments in the past 12 months 
  • Installment Loan A (Furniture) - $1,809 current balance 
  • Car Loan A - $15,756 current balance 
  • Student Loan A - $23,875 current balance 
• What steps could Katy take over the coming months to raise her credit score and become eligible for lower interest rates?

Instructional Items

• Generally, which of the following most influences your credit score?
  a. Having a long credit history
  b. Maintaining low balances on credit accounts
  c. Keeping a positive payment history
  d. Opening several new credit accounts

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