Unit 4, Lesson 6

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FICO Formulation & Utilization Ratios

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Preparation

Lesson

Materials

Preparation

Prep

Lesson Narrative

Students deconstruct the FICO credit score formula. They will calculate credit utilization ratios and mathematically prove why missing a single payment destroys a score faster than anything else. Students will also calculate the lifetime financial penalty of having a sub-600 credit score.

Learning Goals

• Deconstruct the five weighted categories of a FICO credit score. • Calculate credit utilization ratios. • Evaluate the financial penalty of a poor credit score on major loans.

Student Facing Lesson Objective

• Let's calculate exactly how the FICO credit score works and why a low score makes life incredibly expensive.

Student Facing Learning Targets ("I Can" Statements)

• I can list the factors that make up my credit score. • I can calculate a credit utilization ratio. • I can mathematically prove why bad credit costs thousands of dollars.

Required Academic Standards

View State Standards

National Jump$tart Standards: • Credit and Debt (Standard 1): Analyze the costs and benefits of various types of credit.

Glossary Entries

FICO Score: A three-digit number based on the information in your credit reports, designed to represent your credit risk. Payment History (35%): The most heavily weighted factor in a FICO score; whether you pay your bills on time. Credit Utilization (30%): The ratio of your current revolving credit balances to your total available credit limits. Hard Inquiry: When a lender checks your credit report to make a lending decision, temporarily lowering your score.

Lesson

Warm Up

4.6.1: The Three-Digit Number Launch: Have students stand in randomized groups of 3 at vertical whiteboards. Present the prompt verbally or project it. Give them 4 minutes. Synthesis: Select two groups to share. Establish the baseline: A credit score is just a mathematically generated "trust score" ranging from 300 to 850.

Student Facing Task

Student-Facing Task: A credit score is a number between 300 and 850. If you have an 800, you get the cheapest loans. If you have a 500, you are denied loans. 1. If you never borrow money in your entire life and always pay cash for everything, what do you think your credit score is?

Activity 1

4.6.2: The Utilization Math Launch: Keep students at whiteboards. Project the utilization scenario. Give groups 8 minutes to run the calculations. Synthesis: Have the class observe the boards. (Teacher Key: 1. $900 / $1000 = 90%. 2. $900 / $10,000 = 9%) . Explain that FICO penalizes you heavily if you max out your cards (over 30%). You look desperate for cash. Student B looks highly responsible.

Student Facing Task

Student-Facing Task: "Credit Utilization" makes up 30% of your FICO score. It is calculated by dividing your Current Balance by your Total Limit. • Student A: Has one credit card with a $1,000 limit. They spend $900 on it. • Student B: Has one credit card with a $10,000 limit. They spend $900 on it. 1. Calculate Student A's Credit Utilization Ratio (percentage). 2. Calculate Student B's Credit Utilization Ratio (percentage). 3. Which student does the FICO algorithm punish for looking "financially desperate"?

Activity 2

4.6.3: The Heavyweight Champion Launch: Present the FICO pie chart breakdown. Give the whiteboard groups 8 minutes to debate the impact. Synthesis: Facilitate a class debate. (Key: Payment history is 35%. A single 30-day late payment stays on the report for 7 years and crushes the score) . Emphasize that you can do everything else right, but one missed payment ruins the formula.

Student Facing Task

Student-Facing Task: Look at the FICO formula weights: • Payment History: 35% • Amount Owed (Utilization): 30% • Length of Credit History: 15% • New Credit/Inquiries: 10% • Credit Mix: 10% 1. Based on this math, what single behavior has the most massive power to either build or destroy your credit score? 2. Why does opening 5 new credit cards on the same day lower your score?

Lesson Synthesis

Lesson Synthesis (5 min) Narrative: Bring the class back to their seats. Review the student-facing learning targets. Summarize: "To get a perfect credit score, you only need to do two things: Pay on time, every time (35%), and never utilize more than 10% of your available limits (30%)."

Cool Down

4.6.4: The Price of a Score Narrative: This exit ticket serves as a formative assessment on the real-world cost of FICO scores. Teacher Rubric: A successful response must articulate that a low FICO score tells the bank the borrower is high-risk. To compensate for that risk, the bank charges a massive interest rate (APR), meaning the borrower pays thousands of extra dollars for the exact same loan.

Student Facing Task

Student-Facing Task: A bank approves a $20,000 auto loan for a person with an 800 FICO score and a person with a 550 FICO score. Mathematically, why will the person with the 550 score end up paying thousands of dollars more for the exact same car?

Assignments