credit. standard: using credit credit allows people to purchase goods and services that they can use...

Credit

Standard: Using Credit• Credit allows people to purchase goods and services that they

can use today and pay for those goods and services in the future with interest. People choose among different credit options that have different costs. Lenders approve or deny applications for loans based on an evaluation of the borrower’s past credit history and expected ability to pay in the future. Higher-risk borrowers are charged higher interest rates; lower-risk borrowers are charged lower interest rates.

Debrief• Who wishes they bought more insurance?• Who wishes they bought less insurance?• Notes:• The insurance is priced close to actuarially fair plus small profit.• Lesson 10 in Financial Fitness is simpler and does not look at

actuarially fair issue…

Two aspects• How do you pay for something? Middle School, Lesson 15• How do you establish credit?

How do you pay for something?

Establishing Credit• I like exercises that put students into the mind-set of a person

issuing credit or recommending credit.

Use of Credit Scores• Credit• Credit Cards• Mortgage• Car loan

• Insurance companies• “Scores effectively predict the number of claims consumers file

and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.” http://www2.ftc.gov/opa/2007/07/facta.shtm

Uses of Credit• “Credit scores are like the dating equivalent of a sexually

transmitted disease test,” said Manisha Thakor, the founder and chief executive of MoneyZen Wealth Management, a financial advisory firm. “It’s a shorthand way to get a sense of someone’s financial past the same way an S.T.D. test gives some information about a person’s sexual past.” New York Times, Dec. 25, 2012.

Uses of Credit

Other things…• Understanding the importance of checking your credit report• Understanding how your behavior can influence your score