When you get a car loan or apply for a mortgage, the loan officer will ask you about your credit score. The value of this figure has huge implications on someone’s finances, particularly on loans and interest rates. It can even be a deciding factor for things like apartment rentals or property leases.
America’s average credit score has been improving each year, but those who are 18 to 29 years old have the lowest credit score average of all age groups. Young people with low credit scores could spend more money paying off interest than saving for a future.
If you have kids, you can help them secure their future financial stability by giving them a few lessons on credit scores and how they can start improving it from a young age.
What is a Credit Score?
A credit score represents someone’s ability to pay back debts and loans. You’re considered more trustworthy and responsible with your money if you have a higher credit score.
Many institutions use different algorithms to calculate credit scores, but the most accepted and used are the ones calculated by the Free Isaac Corporation, or FICO. A FICO credit score ranges from 300, the worst possible, to 850, which is the best.
How do they Calculate Credit Scores?
FICO uses five factors with different weights to determine your credit score. In order of most to least important, they are as follows:
Payment history: Whether or not you pay your bills on time. It’s better for your score to pay on time. Missing even one or two payments can have a big impact on this.
Amounts owed: The total amount of how much money you owe. It’s much better to not have a lot of debts, and if you do, prove that you can pay them off responsibly.
Length of credit history: How long you’ve been using credit. Your credit score is better the longer your history is because this indicates that you know your way around credit and its intricacies.
Mix of credits: Having different kinds of credits helps your score, if you can prove you’re paying them on time.
New credit: Your score can take a hit if you open multiple lines of credits, like different bank loans or credit cards.
What Does a Particular Credit Score Mean?
After they’ve calculated your credit score, you’ll get a number between 300 and 850. Depending on how high or low it is, your credit score can determine several important financial factors. Some benefits are available to people with credit scores that aren’t good, such as getting a loan from the Federal Housing Authority. Others are only available to certain credit score ranges.
- An exceptional credit score (800-850) gets you the lowest interest rates for things like credit cards, car loans, and mortgages. Banks and loan companies consider you to be low risk because you consistently pay the few debts you have on time.
- You can have a very good credit score (740-799) by paying most of your bills on time and get low interest rates.
- The average American has a good credit score (670-739). If you have this credit rating, you’ll get competitive but not ideal, interest rates.
- A fair credit score (580-669) means that most banks and lenders will still approve you for loans and credit cards, but your interest rates will be a little high.
- Having a poor credit score (300-580) makes approval for new credit cards, loans, and mortgages unlikely. Landlords might doubt your ability to pay rent or utilities if you have this credit rating and deny apartment or home rentals.
Your children’s financial future is just as important as their health and upbringing. Although a nest-egg or college fund can do a lot for them, an education can benefit them for a longer time. Teach them about financial responsibility, and hopefully they’ll make decisions that will help them thrive.