Nearpod version available
Grade 9-12
,
Lesson
Earning Credit
Objective
Students will be able to:
- Define credit score and interest rate.
- Explain how lenders use credit scores to evaluate risk.
- Explain the kinds of behaviors that affect people’s credit score.
- Explain how credit scores affect interest rates for individual borrowers.
- Compare simple and compound interest.
- Use mathematical strategies to calculate monthly payments, given principal and interest rate.
- Calculate how compound interest affects the total cost of a major purchase.
- Compare the total cost of major purchases for people with low and high credit scores.
Standard
National Standards in Economics
Incentives
Standard: 4
- Students will understand that: People usually respond predictably to positive and negative incentives.
- Students will be able to use this knowledge to: Identify incentives that affect people's behavior and explain how incentives affect their own behavior.
Interest Rates
Standard: 12
- Students will understand that: Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses.
- Students will be able to use this knowledge to: Explain situations in which they pay or receive interest, and explain how they would react to changes in interest rates if they were making or receiving interest payments.
National Standards in Financial Literacy
Earning Income
Standard: 1
- Students will understand that: Most people earn wage and salary income in return for working, and they can also earn income from interest, dividends, rents, entrepreneurship, business profits, or increases in the value of investments. Employee compensation may also include access to employee benefits such as retirement plans and health insurance. Employers generally pay higher wages and salaries to more educated, skilled, and productive workers. The decision to invest in additional education or training can be made by weighing the benefit of increased income-earning and career potential against the opportunity costs in the form of time, effort, and money. Spendable income is lower than gross income due to taxes assessed on income by federal, state, and local governments.
Investing
Standard: 4
- Students will understand that: People can choose to invest some of their money in financial assets to achieve long-term financial goals, such as buying a house, funding future education, or securing retirement income. Investors receive a return on their investment in the form of income and/or growth in value of their investment over time. People can more easily achieve their financial goals by investing steadily over many years, reinvesting dividends, and capital gains to compound their returns. Investors have many choices of investments that differ in expected rates of return and risk. Riskier investments tend to earn higher long-run rates of return than lower-risk investments. Investors select investments that are consistent with their risk tolerance, and they diversify across a number of different investment choices to reduce investment risk.
Managing Credit
Standard: 5
- Students will understand that: Credit allows people to purchase and enjoy goods and services today, while agreeing to pay for them in the future, usually with interest. There are many choices for borrowing money, and lenders charge higher interest and fees for riskier loans or riskier borrowers. Lenders evaluate creditworthiness of a borrower based on the type of credit, past credit history, and expected ability to repay the loan in the future. Credit reports compile information on a person’s credit history, and lenders use credit scores to assess a potential borrower’s creditworthiness. A low credit score can result in a lender denying credit to someone they perceive as having a low level of creditworthiness. Common types of credit include credit cards, auto loans, home mortgage loans, and student loans. The cost of post-secondary education can be financed through a combination of grants, scholarships, work-study, savings, and federal or private student loans.
Concepts
In this personal finance lesson, students will learn to compound interest and amortization to calculate the cost of a car.
Resources
Procedure
Click NEARPOD VERSION: EARNING CREDIT PART 1 and NEARPOD VERSION: EARNING CREDIT PART 2 to access an interactive version of the lesson powered by Nearpod: students interact and respond to questions on their device, and teachers will see their responses in real time!