You've heard of taking credit. Giving credit where credit is due. You probably wouldn't make it through high school without a little extra credit. Do you know there's another kind of credit, the kind that lets you borrow money for big purchases such as a car?
If you can get it, and what you will pay, depends on a special kind of grade. It's called a "credit score."
What's a credit score?
Your credit score is a lot like the A, B, and Cs on your school report card. Just like your grades show what kind of student you are, your credit score is a personalized report that shows what kind of money manager you are.
Your credit score is a three-digit number that helps lenders decide whether to lend you money or not. It's based on a mathematical formula—but mostly, it's based on your habits and the past use of credit.
Here's an illustration:
Your friend Steve always asks you for money to get a soda during study hall. No matter what day it is, he's always hitting you up for an extra dollar. And he never pays you back. Steve just asked you for $10. Should you give it to him?
Before you decide, consider his track record:
- He asks you for money all the time.
- He's never paid you back.
- And then he always asks for more.
Even if he intends to pay you back, he doesn't even have any money to do so. He doesn't have a part-time job or an allowance!Get a free copy of your credit report
From that information, you know you'd never see that $10 again and he'll end up asking for more anyway.
Congratulations! You've just used an informal credit score. You've decided not to lend Steve the money based on his credit habits, which in this case aren't such good ones.
This is the same way that credit agencies decide whether to let you use credit. They use a credit score based on your credit report.
Your credit score shows how much money you've borrowed, how much you owe, and how well you've done at paying it back. It follows you wherever you go and can change over time.
What does it do?
A credit score is a big deal because as you get older, it can affect many things about your life, like:Unpaid speeding tickets? Big Deal
That's because your credit score helps lenders, employers and landlords determine how likely you are to pay your bills on time, every time.
The better your score, the more options you will have. With a good credit score you'll earn a better interest rate on your loans too...