Managing Credit: A Case Study
A Tale of Two Credit Scores
Staring at the two student files on her desk, Juliana knew that she only had a few minutes to review them before her
afternoon meetings. Her role as peer financial advisor at her college was to help students with their financial issues.
Both students were coming to her with one simple request: to ​teach them how to increase their credit score​. Young
people’s credit scores continue to lag behind their elders, as this chart indicates:
Exhibit 1: Credit Scores by Age
Opening the first file for her 2:00pm appointment, she immediately noticed that Samantha Snedeker, a college senior,
had what credit experts would call “a thin file.” As this term suggests, a consumer with a “thin file” has little borrowing
history, which often makes it difficult for them to receive a credit score. And without a credit score, it makes it difficult
for them to borrow and establish a credit history. It’s a classic “chicken or egg” problem, which is probably why
Samantha had sought out Juliana’s guidance in the first place.
Case #1: Samantha
As Juliana reviewed the handwritten notes from her first meeting, she noted the following:
●
Excellent budgeting skills; uses an app to track all of her spending and keeps to her $200/month budget.
●
History of being responsible with her money and has avoided any debt except for a $5,000 federal student loan.
●
Not required to repay her student loan until after graduation.
●
Attitudes toward debt come from her parents, who have paid off their credit cards every month and have
excellent credit scores.
●
Samantha’s interest in credit scores came from an article she read (​Smart Credit Blog​: What’s the best way to
build my credit score?​) that discussed ways to build a credit score and the importance of having a good credit
score.
Answer This​:
1. Use three adjectives to describe Samantha’s money habits.
a. ​[ organized]
b. [smart ]
1
c.
[ excellent]
2. Should Samantha be worried about her credit score? After all, she is still in college.
a. [Yes, she should be worried about her credit score since she has a thin file. However, she has very
good spending habit. She should borrow money from the bank with her organized habit so that her
“thin file” could becomes a “thick file”.]
Now that she had analyzed Samantha’s file, Juliana still had to come up with some recommendations for moving
Samantha from having a thin file to having a good credit score. However, before she could get started, Samantha
appeared in the doorway, ahead of schedule and distraught...
….as she waved this letter in her hand:
Exhibit 2: Rental Application Denial Letter
Ronnie DeLandlord
Magnolia Gardens Apartments
Tampa, FL
March 10, 2017
Dear Samantha,
I regret to inform you that we are unable to approve your application at this time. Your application has been
denied for the following reasons listed below:
● Insufficient Credit File
● Insufficient Credit References
● No Credit File
We wish you the best of luck in finding an apartment.
Sincerely,
Ronnie DeLandlord
2
Samantha choked to get her words out:
“How could this happen to me? How could they not rent this apartment to me? I have always been responsible
in all aspects of my life, including my personal finance. I have a great job lined up after graduation in Tampa and
loved this apartment complex. How can they not believe that I will be able to make the monthly rent payment?
What can I do to fix this?”
Juliana needed to find a way to console this distraught student, fast! She quickly did a web search regarding college
students and building a credit history and skimmed articles searching for three ideas that would help Samantha with her
situation.
Answer This:
3. Do the same Google search as Juliana and find three ideas to help Samantha, build her credit history, file, and
score. Be sure to take into consideration key details you know about Samantha from her case file as well as
her apartment renting goal.
Idea
Explanation
Source
[Borrow and pay on time ]
[Even Samantha has her own money for
something that she wants, I would still suggest
she borrow money from the credit card and then
pay on time. If she does that she will gain her
credit score. ]
[
https://www.experian.c
om/blogs/ask-experian/
credit-education/improvi
ng-credit/improve-credit
-score/​ ]
[Pay 2 times a month]
[Make a payment before the due date 2 weeks in
advance and then make one more payment one
day before the due date. This trick will help
Samantha looks like she has enough money to
cover her debt. ]
[https://clark.com/credit
/5-sneaky-ways-to-incre
ase-your-credit-score/​ ]
[Apply for a secured credit card
]
[This is a great way to build a credit score with a
person who has a thin file or credit history like
Samantha. It is similar to the traditional one but
it is easier. ]
[https://www.cnbc.com/
select/how-to-build-cred
it-with-no-credit-history/
]
As they reviewed the chart together, Samantha had a calm come over her, as they now had a plan to get her credit score
where it needed to be so she could rent an apartment. As Samantha walked out the door, Juliana hustled to review her
next file.
Case #2: James Grant
The name: James Grant. The thickness of his file told a very different story of financial habits. Juliana reviewed her notes
from their first meeting:
●
Never had a budget. Not sure where his money is going.
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●
With 3 credit cards (that his parents cosigned on) he has run up a total of $3,500 in debt. Paying minimum off
every month and bumping up against $4,000 total credit limit. Average interest rate on credit cards is 23.2%.
●
Loses track of his cell phone bill and rent checks and pays about ½ of those bills on-time. Angry about the late
fees, penalties, and higher interest rates that keep appearing on his bills.
●
Motivated now to be more financially responsible since he saw how difficult life has become for a friend of his
who recently graduated with poor money habits.
●
Interviewing for several part-time jobs (will work 10 hours per week) for state min $10/hour.
●
Parents are currently providing enough money to cover his basic needs (tuition, room and board and books)
while in college, but James is responsible for his spending money.
Answer This​:
4. Use three adjectives to describe James’ money habits.
a. ​[messy ]
b. ​[terrible creditor ]
c. ​[dependent ]
5. What would you anticipate James’ credit score to be?
a. [i would expect James’ credit score to be below 650]
6. What factors in his profile led you to that conclusion?
a. [ In the profile, it says he has up to $3,500 debt and loses his track on bills. He is an unorganized
person so I think he won’t have a very high credit score. ]
James has said he responds well to detailed plans; he just doesn’t know where to start since he has fallen into this
financial abyss. He knows that he wants to leave college in 24 months with 1) an improved credit score and 2) no credit
card debt. Juliana opens the ​spreadsheet that ​she has created for James’s financial plan and starts crunching some
numbers ahead of the meeting.
Answer This:
7. As long as he’s hired by someone, roughly how much can James earn in a month from his part-time job?
Assume that his net pay is $8/hour and assume 4.5 weeks per month (~31 days).
a. [ $360]
8. Spreadsheet instructions​: First, open the ​spreadsheet1 and​ make your own copy​. Adjust the “Monthly Credit
Card Payment” amount in ​Cell B14​ in order to get the Credit Card Balance paid off in 2 years (24 months). ​Cell
F44​ needs to be at or close to 0 (Zero) in order for credit card to be paid off in full.
9. Using the spreadsheet provided, calculate what the monthly payment on his credit cards would need to be in
order to have them completely paid off in 24 months (his graduation date).
a. [ $183.65/ a month to pay off in 24 months completely]
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​How To: Entering & Editing Data
4
10. As you’ve already seen, James is no financial whiz, so he’s not necessarily going to understand exactly what
this spreadsheet is calculating if you just show it to him. Create a bulleted list to explain to him how the
spreadsheet is working and what it represents. (At least 5 bullets)
a. [Column D depends on column B, the higher the balance the higher the interest rate ]
b. [B14 let James know how much money he should pay to get rid of the debt within 24 months ]
c. [The principal has $1 off compared to the interest rate because the $1 pays in column C (payment)]
d. [Closing balance is the balance plus the principal ]
e. [Column B17 shows James’ interest ]
11. What percentage of his monthly earnings from his part-time job will James need to devote to bill pay in order
to pay off his credit card balance by graduation? How much will he have left over every month to spend?
a. [ 23.20% will be the percent that he needs to devote from this part-time job salary to bill pay in
order to pay off his credit card balance by graduation. He will have a total of $176.35 leftover after
his payment. ]
12. Conduct internet research and develop three recommendations for James to help him, specifically, improve
his credit score. Recall the five factors that go into a credit score and develop recommendations for James
based on the debt payoff spreadsheet above and other details from James’s case file.
Credit Score Factor
Specific Action James Should Take
Source
[Pay on time, do not ever forget
]
[From the sources, there are tons of apps that
can remind James to pay his bill on time without
forgetting. It also can help James keep track of
what he spends.]
[​https://elixrapp.com/b
est-bill-reminder-apps/​ ]
[Keep track on spreadsheet ]
[Just like Juliana shows him the spreadsheet on
how much he has to pay in order to end his debt.
The spreadsheet helps so much to keep track and
how James should spend his money. ]
[​https://www.creditcard
s.com/credit-card-news/
organize-credit-card-tips1267/​ ]
[Pay the most expensive debt
first ]
[The more debt the higher interest rate so James
should get rid of the expensive debt in order for
the interest rate to go low. ]
https://money.usnews.c
om/money/personal-fin
ance/debt/articles/easyways-to-pay-off-debt​ [ ]
[Make more money than just
part-time job salary]
[James should sell things he doesn’t need
anymore to pay off his debt quickly. ]
https://money.usnews.c
om/money/personal-fin
ance/debt/articles/easyways-to-pay-off-debt​ [ ]
[Pay more than the minimum
balance ]
Pay more than the minimum balance required,
James’ debt should be dent]
https://money.usnews.c
om/money/personal-fin
ance/debt/articles/easyways-to-pay-off-debt​ [ ]
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James enters the room and is relieved to see Juliana has created the spreadsheet and his next three action steps -- he
promises to follow her plan to the tee!
As James exits, Juliana reflects on her counseling sessions for the day and tries to forecast where her two clients will be
in a few months’ time.
Answer This:
13. Do you think Samantha or James will be more successful in achieving an improved credit score and meeting
their credit goals before college graduation? Explain.
a. [Yes, I think they will be successful in achieving improved credit scores and meeting their credit
goals before college graduation because they now have all the tips on how to build credit scores.
After the failures, I’m pretty sure they learned their lessons. ]
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Impact of Credit Score on Auto Loans
NAME
Estimated Score
SAMANTHA
JAMES
785
600
Now, assume that Samantha and James have
graduated from college, and secured a
$65,000/year job, and now want to go car
shopping. Although Samantha continued her
positive financial habits, unfortunately James did
not listen to your financial plan. Use the ​FICO Loan
Savings Calculator​ to determine how much the
loan is going to cost Samantha and James.
Note: This calculator goes down every year in late September-early
October. If we are doing this activity during that timeframe, use this
Car loan calculator​ to complete the activity instead!
Enter the following information into the
calculator:
A. Car price: ​$21,000
B. Interest Rate: refer to ​average rate (new)​ at the top right of calculator
C. Trade-in / down payment: leave blank
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D. Number of months: ​60
E. Push Calculate
1. Complete the chart below using data from the calculator.
NAME
SAMANTHA
JAMES
Estimated Score
720-850
590-619
APR (~interest rate)
4.04%
15.142%
Monthly Payment
$387
$501
Total Interest Paid
$2,228
$9,069
3. What is the difference in APR paid by Sam and Jessica? (James?)
[The difference in APR paid by Sam and James (?) are 11.102% ]
4. How does that APR difference impact their monthly payments and total interest?
[The APR difference impacts their monthly payments and total interest are the lower the APR the lower the
monthly payments and total interest. Since Sam has a higher credit score so she has a lower APR and also
lower total paid than James. ]
5. Hypothesize: What if they were buying a car with a $42,000 principal instead?
[If they were buying a car with a $42,000 principal instead, I think they would end up being the same. ]
Impact of Credit Score on Home Loans
Now, let’s see how Samantha and Jame’s future credit scores would impact a
mortgage. This time they’re each trying to finance $600,000 of a condo using a
30-year fixed mortgage. Use the ​FICO Loan Savings Calculator​ and enter the
following information:
A.
B.
C.
D.
E.
Type of Loan: ​30-year Fixed
State: ​California
Loan Principal Amount: ​$700,000
Current FICO Score Range: ​Varies by person
Push Calculate
6.
NAME
SAMANTHA
JAMES
Estimated Score
760-850
620-639
APR (~interest rate)
2.371%
3.96%
Monthly Payment
$2,719
$3,326
Total Interest Paid
$278,886
$497,286
7. If someone asked you, “Why should I bother worrying about my credit score?” what would you say?
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[​If someone asked me, “Why should I bother worrying about my credit score?” I would say: “Having a poor
credit score would make life worse. You gain the bank’s trust by having a high credit score so that they can
loan you a good amount of interest and so. Make your life easier by paying on time and be smart!”​ ]
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