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Session 5: Credit Score |
Fun Entrepreneur Icebreaker
Desert Island: If you had to spend a month on a desert island, what 3 things would you bring & why?
We're going to talk about something called a credit score. Think of a credit score like a report card for your money. Just like you get grades in school for your homework and tests, a credit score is a special number that shows how good you are with money and paying back what you borrow.
Imagine if you borrowed a video game from a friend. If you give it back the next day, your friend will trust you and might let you borrow more games in the future. But, if you keep it for a long time or don’t give it back at all, your friend might not trust you to borrow things anymore. A credit score works a bit like this trust between friends.
Your credit score can be a number from 300 to 850. The higher the number, the better. It's made up of a few things:
Paying Bills on Time: If you (or your family) pay bills like electricity or phone on time, that can help make your credit score go up.
How Much You Owe: If you borrow a lot of money and can’t pay it back quickly, that might make your score go down.
How Long You've Had Credit: If you've been good with money for a long time, it can help your score.
Types of Credit: This is like having different kinds of borrowing - like a credit card or a car loan.
New Credit: If you or your family start lots of new credit cards at once, it might look like you need a lot of money and can make your score go down.
Why is a credit score important? Well, when you're older and want to do things like buy a car, a house, or even get a credit card, banks and lenders look at your credit score to see if you're good at paying back what you borrow. A good score can help you get better deals, like lower interest rates, which means you pay less over time.
So, just like you work hard to get good grades in school, people need to work on having a good credit score. It's all about being responsible and trustworthy with money!
Let's use a couple of examples to understand what good and bad credit looks like. Think of these as two different stories about how people handle their money.
Example of Good Credit:
Alex's Story:
Alex has a credit card, and she uses it to buy things she needs, like school supplies and groceries.
Every month, she gets a bill for her credit card, and she always pays it on time, never missing a payment.
Alex doesn’t use all the money she can on her credit card; she only uses a small part of it. This shows she’s good at managing her money.
She’s had her credit card for several years, which shows she has experience in handling credit.
Alex doesn’t apply for new credit cards often; she’s happy with what she has.
Because of these good habits, Alex probably has a high credit score. This means if she needs a loan for something big, like a car or eventually a house, banks will see her as a trustworthy person who's good at paying back what she borrows.
Example of Bad Credit:
Ben's Story:
Ben also has a credit card, but he often forgets to pay his bills on time. Sometimes, he misses payments.
He uses almost all the money available on his credit card. This can make it look like he’s struggling to manage his money.
Ben’s only had his credit card for a few months, so he doesn’t have a long history of using credit yet.
He often applies for new credit cards because he’s always running out of money on the ones he has.
Ben’s habits might lead to a low credit score. This means banks might be hesitant to lend him money because they might worry he won’t pay it back on time. If they do give him a loan, it might have a higher interest rate, meaning it could cost him more money to pay it back.
From these examples, we can see that good credit is about being responsible – paying bills on time, not using too much of your available credit, and being steady and consistent. Bad credit usually happens when you're late on payments, use too much credit, or keep changing credit cards. Always remember, good credit doesn’t happen overnight; it’s like building a good reputation – it takes time and good habits!
What’s The Big Deal?
As an example and based on a $240,000 home mortgage;
For someone with good credit, banks may give a 4% interest rate, and the monthly mortgage payment would be about $1,100.
For someone with bad credit at a 7% interest rate, the monthly payment would be approximately $1600
So, in this scenario, the person with good credit would save around $500 each month compared to the person with bad credit. This example highlights how much you can save with a better credit score when you get a loan for something like a house. So, make sure when you borrow money from a bank (credit cards or loans) that you pay your debts back on time. And don’t get yourself into debts that you can’t pay back.
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