High school teaches us a lot of things. Unfortunately, how to operate in the real world is not one of them. Unless you’re planning on being a physics major, do you really need to know the intricacies of how heat works or how far a tennis ball goes if you hit it at a certain angle?
We should be asking the real questions. How do you open up a bank account? What’s a W-2 form and how do you use it to do your taxes – hey, how do your taxes even work? And if any adults around you have ever taken out a loan, or made any big investments, you’ve probably heard the words credit score.
The words are probably about all you know. What is a credit score? How does it work? Why is it so important, and how does it control the direction your life goes? I decided to put together a helpful guide, so that you have some semblance of how the world works before you step into it.
What is a Credit Score?
A credit score, in short, is essentially a grade you’re given that defines your trustworthiness in the world of money and loans. Let’s break it down.
Credit scores range between 350 and 800.
Think about it like this.
A score above 800 is an A or an A+. It’s an incredibly good score, and it means you’re on time with all your payments and can be trusted to take a loan out.
A score above a 700 but below an 800 is B or B+ range, even an A minus if you’re approaching the 800.
A score between 600 and 700, depending where exactly between you are, ranges equivalent from a C- to a B-.
Between 580 and 600, that’s the D range. You’re still passing, but your game could be upped.
And from 350-580, that’s a failing grade. Your credit score is pretty poor.
How is Your Score Calculated?
So now you know what the numbers of a credit score correspond to. But how is it determined? According to this article, there are five factors.
These factors can be condensed into one statement. Essentially, your credit score is determined by how often you have made all your payments on time, whether you owe any money, and how many lines of credit you have opened. Each of these instances contribute to your overall credit score.
Want to know more about how exactly the system was set up? Check this investopedia article on the FICO system out.
Top Three Things you Need to Know
- Keeping a good credit score can save a lot of money in the future. Lenders can decide whether to inflict you with a high interest or lower interest rate based on your credit score. Don’t know what to do to keep a good credit score? Check this article out.
- If your credit score is in the low 600s and lower you will be considered a subprime borrower, and therefore will be subject to higher rates of interest or shorter repayment periods.
- Pay everything you owe on time! It keeps your credit score up and will save you a lot of pain.
For more information about how the coronavirus pandemic has impacted credit scores, check out this link.