Earning Credit
Compelling Question
Have you ever borrowed money from
someone and not repaid it? Or has
anyone ever borrowed money from you
and not repaid it?
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https://www.youtube.com/watch?v=nFY0HBkUm8o
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Credit - The opportunity to borrow money
or to receive goods or services in return
for a promise to pay later.
Credit score – A single number
assigned to a person used by lenders to
predict the risk that borrowers will not
repay.
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Your Credit Score
Low 300
High 850
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What makes up your credit score?
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35% Payment history
30% Managing your debt
15% Length of credit history
10% Diversity of accounts
10% Number of credit applications
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Interest rate - The price paid for using
someone else’s money, expressed as a
percentage of the amount borrowed
Principal – An original amount of money
invested or lent
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Price of car/Loan principal: $15,500
Interest rate: 0%
Loan term: 5 years (60 months)
What is the total cost of the car?
What is your monthly payment?
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How to calculate simple interest
Simple interest – Interest paid only on
the principal of a loan
Price of car/Loan principal: $15,500
Interest rate: 2%
Loan term: 5 years (60 months)
I (simple interest) = P (principal) x R (interest rate) x T (# of years)
I = $15,500 x .02 x 5
I = $1550
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Price of car/Loan principal: $15,500
Interest rate: 2.0%
Loan term: 5 years (60 months)
What is the total cost of the car?
What is your monthly payment?
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How to calculate compound interest
Compound interest – Interest paid on the
principal of a loan and the interest owed
Price of car/Loan principal: $15,500
Interest rate: 2%
How much is owed at the end of 1 year?
Principal ($15,500) + Interest (0.02 x $15,500)
$15,500 + ($15,500 x 0.02) = $15,810
Another way to state this equation: $15,500 x (1 + 0.02) = $15,810
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How to calculate compound interest
Price of car/Loan principal: $15,500
Interest rate: 2%
How much is owed at the end of 1 year?
$15,500 x (1 + 0.02) = $15,810
How much is owed at the end of 2 years?
$15,500 x (1 + 0.02) x (1 + 0.02) =
How much is owed at the end of 3 years?
$15,500 x (1 + 0.02) x (1 + 0.02) x (1 + 0.02) =
What formula can you derive that will calculate the
amount owed for a specific number of years? How can
you state this as a ©general
formula?
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Price of car/Loan principal: $15,500
Compound Interest rate (annual): 2.0%
Loan term: 5 years (60 months)
What is the total cost of the car?
What is your monthly payment?
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Car payment calculation
A= Monthly payments
i= monthly interest rate (annual interest rate/12)
P= principal
n= total number of payments
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Group Discussion Questions
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What was your credit score?
What was your interest rate?
How are your interest rate differences related to your credit
score differences?
How did these differences impact the total cost of the car for
individuals in your group?
What behaviors caused some students to have lower credit
scores?
What behaviors caused some students to have higher credit
scores?
What could individuals with low simulated credit scores do to
improve these credit scores?
Now think about the categories used to calculate an actual
credit score. What kinds of behaviors would result in a low
score, representing a high risk?
What kinds of things can each individual do in the future to
ensure that your real credit score is high?
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The impact of compounding frequency on total interest paid
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