Understanding Credit Scores: A Teenager's Guide
What is a credit score?
Luckly, your credit score has nothing to do with cringeworthy TikTok or how many likes your March photo dump on Instagram gets. A credit score is a three-digit number that represents your creditworthiness. It's a numerical evaluation of your credit history, financial behavior, and ability to repay debts. This score is calculated based on various factors, including your payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries.
Why is it important?
Your credit score plays an important role in your financial life, even from a young age. It influences your ability to borrow money, obtain a credit card, buy a car, rent an apartment, or even get a job in some cases. Basically, it's like your financial report card that lenders, landlords, some employers, and potential partners (the smart ones at least) use to evaluate your reliability and trustworthiness.
How does it work?
Just like with grades in school, your credit score can range from poor to excellent. Unlike grades at school, no one is going to remind you to “stay on top of” your credit choices; you are solely responsible. Typically, scores above 700 are considered good, while those below 600 may be seen as risky. Your score is determined by the information found in your credit report, which is compiled by credit bureaus based on your credit history. so, how do you land on the excellent side of that credit score line? Read on to find out.
Factors affecting your credit score:
1. Payment history: This is the most significant factor, accounting for about 35% of your score. It reflects whether you pay your bills on time and in full.
2. Credit utilization: This is the ratio of your credit card balances to your credit limits. Ideally, you should aim to keep this below 30%.
3. Length of credit history: The longer you've had credit accounts, the better it is for your score.
4. Types of credit: Having a mix of credit accounts, such as credit cards, student loans, and car loans, can positively impact your score. KEEP IT WITHIN YOUR BUDGET.
5. New credit inquiries: Applying for multiple new credit accounts within a short period can lower your score.
Why should teenagers care?
Even though you might not be thinking about buying a house or a car just yet, building good credit habits early on can set you up for financial success in the future. For example, having a solid credit history can make it easier to qualify for student loans or secure lower interest rates on future loans. Remember the wise words of Marcus Aurelius, “everything we do now, echoes in eternity.”
Moreover, understanding credit scores will set you up to make informed financial decisions and avoid common blunders, such as accumulating excessive debt or missing payments. Having responsible financial habits from a young age, you'll be better equipped to navigate the craziness of adulthood and achieve your long-term financial goals.
Dreaming of that 850,
Arjun Lakireddy
