How to Understand Credit Scores
Last month, you read that credit was a loan that must be paid back over time. Credit can be very helpful when making purchases, such as a home or a car. Credit also can be a challenge if you don’t use it properly—meaning if you don’t pay it back in a timely manner. If you aren’t responsible with your credit, not only will you pay more for your purchases in the end, but you’ll also hurt your credit score.
A credit score is a number used to evaluate financial risk. It measures how likely you are to pay back your debt. When you apply for a loan, one of the first things a financial lender will check is your credit score. That lender wants to be sure that you will pay back your loan on time.
You won’t have a credit score until you take out your first loan or credit card — but once you’ve established credit, make sure you treat it with care.
Building a Good Credit Score
Credit scores range from 300-900. Just like a test score, the higher the number, the better the score. Here are some things you can do to build a good credit score:
- 1) Proper use – Pay your bill on time and in full.
- 2) Low balance – Use only 25% or less of your available credit. For example, if you have a credit card with $500 available credit, try to keep your balance of debt at $125 or less.
- 3) Employment – Your job history will affect your score. If you are employed consistently, then you are more likely to pay your bill and are less of a risk.
- 4) Time – The longer you’ve had time to build a good credit history, the higher your score. This can work against you if you abuse your credit card and start bad habits.
- 5) Credit Reports – A credit report is a complete financial history of your debt – past bills, payments, and total debt. You are able to get a free credit report from each of the major credit reporting bureaus once a year. The three credit reporting bureaus are Equifax, Experian, and TransUnion. This will help you know exactly what lines of credit you have and how well you’ve been paying off your loans. How do you find your credit score? You can visit the websites of any of the credit reporting bureaus mentioned above to get a free credit report, but you may have to pay to see your credit score. Some credit card companies also may provide this information for you. We recommend that you get advice from an adult to choose the best method for you.
Almost all credit card companies charge late fees if you don’t pay your bill on time. Some even raise your interest rate if you pay late. Randy learned this the hard way. We’re going to show you how much he would have saved had he paid one bill on time. Randy spent $40 on some sweet new shoes that were on sale for $50. He used his credit card because he didn’t actually have the money. He decided it was okay to use his credit card since he was going to save $10 on the shoes. The next month he got a statement showing his outstanding balance and requiring a minimum payment of $12. He forgot to pay it and was charged an additional $15 late fee. He paid the $15 late fee and the minimum amount due of $12 on his next statement. He now had spent $27, but his balance had only decreased to $28. He paid off the balance in full the following month.
Randy’s Payments: Challenge: Late fee $15 Minimum payment +$12Do you use a credit card? If so, what is your top expense?
$27 Let us know by emailing firstname.lastname@example.org Remaining balance ($40 – $12) +$28 with your answer. Total amount paid by Randy = $55 + interest
Because Randy decided to use credit and forgot to make Have you started your own business? We want to know! his first payment, he ended up spending around $55 (plus You could end up on our show or be profiled in a future a little bit of interest) on his new shoes. His missed payment edition of The Vault. Visit www.bizkids.com, and click on was reflected in his credit history and affected his credit s the “Show Us Your Stuff” link to submit your info. core. In addition, the credit card company raised his interest rate because he had missed his payment and they thought lending him money was more of a risk than they had before.
The state with the best average credit score is Minnesota with a score of 721, according to www.nationalscoreindex.com. Check out the interactive map to find how your state rates. Most credit scores range between 300 and 900. A score below 500 is considered to be very bad; below 619 is poor; from 620-680 is okay; 680-699 is good; and above 700 is excellent.
What Are Teens Doing?
According to the 2007 JA Interprise Poll™ focusing on personal finance, of teenagers with credit cards, “only 2.4% admitted to occasionally skipping payments.”
To make sure you know what you’re doing with credit, take the JA Credit Card Quiz online at www.japersonalfinance.com/gsjapf/activities/quiz.jsp?key=Activity4Quiz.
M1 Designs – Chris Walsh and Blake Blair Seattle, Washington
Chris and Blake, both juniors in high school, realized they could turn their artistic abilities into a business.
They started painting cool designs on sneakers and their friends’ Xboxes, and then grew their business to include T-shirts. To grow their design business, they had to take a loan from Blake’s dad, who made the boys sign a contract and agree to pay him back with a little interest. It was their first experience with credit, and they learned there’s a lot more pressure to building a successful business when you have to pay someone back. Check out their website at www.maneone.com
Nick Barr Fishing Guide Lacey, Washington
Nick has been a bass fishing enthusiast ever since he was a little boy. When he was 14, he started a business as a fishing guide by borrowing money from his grandparents, who took out a loan on Nick’s behalf. Nick researched loans for his grandparents from a variety of institutions and finally chose his local credit union. He used this money to purchase a boat and fishing equipment. Nick’s goal is to build his name and reputation into a brand synonymous with bass fishing. As long as he maintains his good credit, he’s off to a great start.