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, 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 based on your credit report.

Your credit score is based on a mathematical formula. Here's an illustration:

Your friend Steve always asks you for pop money 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.

Get a free copy of your credit report!

Even if he intended to pay you back, he doesn't even have any money to pay you back with. He doesn't have a part-time job or an allowance!

With that information, you know you'll never see that $10 again. And you know he'll just end up asking for more anyway.

Congratulations! You've just used an informal credit score. You've decided not to loan 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 their credit. They use a credit score based on your credit report.

Your credit score shows how much money you borrow, 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?

Unpaid speeding tickets? Big Deal

A credit score is a big deal because as you get older, it can affect many things about your life, like:

• Getting a job;

• Renting an apartment;

• Buying a house or car;

• Getting phone service or car insurance.

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.

So?

Why should you care?

Life is full of many necessities far more important—and far more costly—than pop. The day will come when you need to buy a car, pay your way through college, or buy a house. Most people don't have enough cash lying around to pay for these things all at once.

That's where credit comes in.

How about that car?

With a good credit score, you may be able to drive that car away today.

Suppose you want to buy a car. Let's say you're feeling flashy and you're checking out a used shiny black sports car in good mechanical condition. It costs $10,000 but you only have $6,000 saved. You're out of luck, right?

Not necessarily. With a good credit score you may be able to buy the car anyway. You'll use your $6,000 for the down payment. The car dealer may work with you and your credit union so you can borrow the rest.

You'll have to pay it back, of course, but you can drive away today with a great car that has the look you want. You get the car in exchange for your promise to make payments every month on what you still owe.

If your credit score isn't good, instead of driving away in a new car with a promise to pay later, you'll have to find other ways to make purchases.

Sometimes this means paying all in cash, even for purchases in the thousands of dollars. Other times it might mean begging your parents or friends for a loan. And other times it might mean being completely out of luck.

Build your credit score

Building and keeping a good credit score is easy. Here are tips for building a good score, and pitfalls to avoid:

Practice these good habits now.

Make sure you pay your bills on time. If a bill is due on May 1, that means it's due at the billing agency on May 1. Some billing agencies give you a couple extra days (called a grace period).

The best habit you can develop is to pay early, every time. Your credit score takes a hit with every late or unpaid bill.

Don't borrow more than you can reasonably pay back. Some people get so excited about getting new things with credit that they get carried away and can't pay it back.

If you can't pay for it today, or in the next six months, don't buy it. Simple as that.

Have a repayment plan before you get a loan. Will you pay a certain amount every month? Can you pay it with one big check? Do you need to stretch it out over time?

Make these decisions before you get the loan.

It's all about freedom

A good credit score means freedom: Freedom to buy what you want and freedom of knowing that you're covered in case of a big disaster.

And really, isn't freedom what it's all about?

by Jennifer L. Krempin