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Course: Financial Literacy > Unit 11
Lesson 2: About this unit: Consumer creditReal world: A Tale of Two Credit Scores
Janae and Bob each want to buy the same model of car. But Bob's is more expensive than Janae's. A LOT more. Why is that? Is that even legal? Created by David Rheinstrom and Elvira Valdez.
Want to join the conversation?
- My favorite part has to be the 5 seconds of jazz music(29 votes)
- This is a fun lesson, I enjoyed this way to much XD(14 votes)
- Who did the art and sketching?(9 votes)
- David Rheinstrom and Elvira Valdez created the video.(3 votes)
- what factors affect my credit score?(3 votes)
- There are a number of factors that impact your credit score, including credit utilization, payment history, credit age (averaged across your accounts), hard inquiries, total accounts, and derogatory marks (such as a bankruptcy, foreclosure, tax lien, etc.).
If you are interested in these factors, check out the article titled "How do I raise my credit score?": https://www.khanacademy.org/college-careers-more/financial-literacy/xa6995ea67a8e9fdd:consumer-credit/xa6995ea67a8e9fdd:credit-score/a/how-do-i-raise-my-credit-score(4 votes)
- bro all lessons should be like that.(4 votes)
- Quick question, what are a few great ways to raise my credit score? I know paying bills on time and paying your credit card bills are especially good ways, but what other ways are there?(2 votes)
- Stay out of jail.
Return rented property undamaged.
Stay in the same job for at least a year. Don't jump around.(4 votes)
- How long does it take to build a good credit score?(2 votes)
- You start when you are 18 and can get credit on your own, your credit score can be computed within a year.(4 votes)
- who did the story boarding for this video presentation(3 votes)
- Who did the art and sketching?(3 votes)
- who did the art and sketching(5 votes)
- It was Khan Academy's super talented David Rheinstrom. He also did a lot of work on the ELA content.(1 vote)
Video transcript
(jaunty music) - [Narrator] Khan Academy proudly presents "A Tale of Two Credit Scores." This is Janae.
- [Janae] Hi. - [Narrator] And this is Bob. - [Bob] Good morning, narrator. - [Narrator] Hi, Bob. These two charming
characters are coworkers, each with the same job and salary. They both need a vehicle, so they've traveled to this
used car dealership together so they can each buy a new ride. - [Janae] I'm all about this model. It's got everything I need. It's got the all-wheel drive,
it's got the adaptive braking, - [Bob] It's got the backup camera. - [Janae] And... - [Janae And Bob] It's a hatchback! - [Bob] Gonna carry so much
furniture in this thing. - [Narrator] They are greeted by Susanna, an employee at the dealership. - [Susanna] Janae, Bob,
I got your message. - [Janae] Oh, good. - [Susanna] These hatchbacks
have been flying off the lot, but I've reserved one for each of you. You're both sure this is what you want? - [Bob] Definitely. We
both did a lot of research. - [Janae] Yeah, we're both sure. But I've got a question. - [Susanna] Understandably. - [Janae] What's the damage? How much is this car going to cost? - [Susanna] We have this
car listed at $13,750. After taxes and fees, we're looking at $15,500 out the door. Are you paying cash, or you both thinking about financing? - [Janae And Bob] Financing. - [Susanna] Okay, follow me inside. We've got some applications to fill out. - [Bob] Will there be
oversized novelty pens? - [Susanna] Oh, yeah. - [Narrator] And so Janae and Bob got out their writing implements and entered the enchanting
world of paperwork. They gave permission to the dealership to run credit reports on each of them. They answered a barrage of
questions about their finances. Finally, Janae and Bob got
their applications back from the dealership. - [Susanna] Okay, so
I've got some good news and I've got great news. - [Bob] Great news first.
- [Janae] Yeah. - [Susanna] Great news, Janae. We got you approved for a 36-month term with a monthly payment of $453. - [Janae] All right, I
can afford that for sure. - [Susanna] Good news, Bob. You are also approved for
the exact same 36-month term and a monthly payment of $584. - [Bob] Wait, let me do some math before I agree with you
about it being good news. - [Susanna] It's good news. You are approved. - [Bob] No, help me out, Janae. Your loan comes to a total of... - [Janae] $16,308. And yours... - [Bob] $584 times 36. Let's see. That's $21,024. How am I paying almost
$5,000 more than you? It's the same car. Is that legal? - [Narrator] Great question. Pause. What do you think is happening here? - [Bob] Is this even a question? Of course it's not legal. - [Narrator] Bob, I'm
talking to the learners. We'll get back to you in a minute. - [Bob] So it is legal? - [Narrator] I said pause. - [Janae] Bob, he said pause. Come on. - [Bob] Sorry. - [Narrator] Where was I? What do you think is happening? Share your perspective
with your classmates or write them down. Pause the video here and then enjoy five seconds
of peaceful jazz music. (mostly peaceful jazz music) So what accounts for the vast difference between Bob's loan offer
and Janae's loan offer? It all comes down to the credit score. Let's dig into that. The dealership asked a credit bureau to evaluate how risky it would be to loan money to Janae or Bob. Their credit scores are an
illustration of that risk. Janae's credit score is
800, which is excellent. Great job, Janae.
- [Janae] Thank you. - [Narrator] That score means that Janae is a low-risk borrower. Low-risk borrowers get low interest rates. She pays her bills on time, she
uses her credit responsibly. Bob, on the other hand-
- [Bob] Uh-oh. - [Narrator] Bob has
a credit score of 500. To be blunt, this is a
pretty bad credit score. Bob's credit report shows that he's consistently
late paying his bills, he's outright missed a bunch of payments, and here it says he defaulted
on a loan in the past. That's a huge red flag for a lender. - [Bob] But why is it
more expensive for me than it is for Janae? - [Narrator] So given your credit history, they think it's likelier that you won't pay them for
the full amount of the car. To make up for that risk, your loan carries a 21% interest rate, which means you are paying
thousands of dollars more in interest over the life of the loan, 5,000 to be exact. - [Bob] And again, that's legal? - [Narrator] Afraid so. - [Bob] This sucks. Did you know credit scores
were such a big deal? - [Janae] I knew a little, yeah. - [Narrator] I knew too. - [Bob] Of course you did. - [Narrator] After
signing their contracts, Bob and Janae regroup at a coffee shop; Janae to celebrate, Bob to
drown his sorrows in coffee. - [Bob] Another. - [Janae] I think you've had enough, pal. - [Bob] I'll stop when I'm good and ready. Ugh, how did everything get so expensive? - [Narrator] That's part
of the problem, Robert, you didn't know when to stop. You maxed out your credit cards. - [Bob] I'm a free spirit. - [Narrator] You defaulted on that business loan five years ago. - [Bob] The market was not ready for chocolate-covered beef jerky. - [Janae] And it still isn't, Bobby. - [Narrator] And you
ignored your credit report. Whereas Janae paid her bills on time. - [Janae] Thank you. - [Narrator] She kept her
credit card balances low. - [Janae] Mm-hmm. - [Narrator] And she kept
an eye on her credit score. - [Janae] They ran a credit
check on me before I moved and my credit score helped
me to rent my new place. The score is a reflection
of the choices I've made. - [Bob] So Janae, how
can I be more like you? Can credit scores change? - [Janae] They absolutely can. - [Bob] Okay. How? I assume there's not some magic wand. - [Janae] There isn't, but there are a lot of steps you can take. You can enroll in a
financial literacy course. - [Narrator] Like this one! - [Janae] Exactly. You can monitor your credit
with websites and apps like Credit Karma. And if you see something
weird, you can dispute errors. Like one time, my credit
report showed a boat loan. - [Bob] You don't have a boat. - [Janae] I never had a boat, but it dinged my credit and
I successfully disputed that. I said, "That's not me,"
and they verified it. So there's that. But you'll also need to work on your debt. I can get you the name of a
credit counselor if you want. - [Bob] I'd appreciate
that very much, Janae. - [Janae] Yeah. On second thought, I
might want another coffee. Can I get you anything? - [Bob] That's very kind, Janae, but I can't be opening up a
new line of credit right now. - [Janae] You goober. It's on me, come on. - [Narrator] And so we
leave our two friends to untangle the twisted bonds of credit to demystify the conundrum of risk to master their money
and improve their lives. Remember that your credit score is one of the keys to
your financial happiness. But a bad score is not destiny. You have the power to change it. Use credit responsibly,
pay off your bills, and if needed, seek credit counseling. This has been "A Tale
of Two Credit Scores." Thank you, and goodnight.