What is a Credit Score?
- Personal Finance for Teens
- 2 hours ago
- 2 min read
Author: Clark Fan
Editors: Amie Jin, Winnie Mok
If you have borrowed money from a friend and failed to pay them back once or multiple times, your “credit score” is probably poor. Conversely, if you pay them back on time every time, your “credit score” is very high. That brings us to our topic: what is a credit score? This term usually refers to credit cards, which use credit, a measure of financial trustworthiness in payments typically used to assess a user’s payment reliability, but it can encompass much more than just cards. Specifically, a credit score is a prediction of your payment reliability based on your credit usage. It is a three-digit number between 300 and 850, with the latter considered the most reliable.
This score is determined by specialized scoring models that use financial data from credit bureaus—companies that collect, manage, and sell data on your borrowing and repaying abilities. Some of the most well-known are Equifax, Experian, and TransUnion. Young adults often learn about credit scores from their parents' discussions of credit card payments. In addition to credit history, credit scores also take into account your current unpaid debt, the number and type of loan accounts you have, whether you have filed for bankruptcy, and many other factors. Usually, any process involving customer repayments involves a credit score. As teenagers reach adulthood after graduating high school, knowing this concept is essential for future financial success.
Learning topics like these early means that, in the future, you will not make rash financial decisions that leave you in debt or facing foreclosure. With a high credit score, you are more likely to acquire loans from banks that could prove useful to your current goals, but with a low score, banks will be skeptical of your ability to pay back that money and may not grant your requests. Beyond just getting approved, a strong score often unlocks lower interest rates, saving you thousands of dollars in the long-run. Ultimately, maintaining a healthy credit score is not solely about debt; it is about building a reputation for reliability that gives you the freedom to achieve major milestones, such as buying your first car or moving into your first home.
Sources
Consumer Financial Protection Bureau. “What Is a Credit Score?” Consumer Financial Protection Bureau, 1 Sept. 2020, www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/.
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