Credit is one of the most important topics to teach kids and often one of the most difficult to explain. A credit score will impact your child's financial opportunities in the future, and a good score can make their life easier down the road. But what is a credit score? And how do you explain credit scores to your kids?
What is a credit score?
A credit score is a number between 300-850 that shows lenders how responsible you are with your money. Your credit score is calculated using your credit report, which shows your financial history. When you apply for a loan or line of credit, your approval is dependent on how good your credit score is. Beyond approval, your credit score will also impact the interest rate and the total amount you’ll pay in fees to borrow money.
What is a good credit score?
Credit scores fall in a range, and whether your score is considered good or not may depend on the loan you’re trying to get. The better your credit score, the better your approval odds for bigger loan amounts. Some types of loans, like a mortgage, usually require you to have a minimum credit score. A better score will lower your interest rate and help you get a better loan.
A typical credit score range is:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
How credit scores work
You build good credit when you stick to good money habits. Paying your bills responsibly, using credit wisely, and keeping your total debt down are all ways to raise your credit score over time. Your past and present money habits determine your score. A mix of your accounts, debt usage, credit age, payment history, and several other factors will determine your overall score. When you talk to your child about credit, you can help them understand that their credit score works like a grade that shows how much effort they put into good study habits.
Three different credit bureaus determine your credit score (Experian, Equifax, and Transunion) by putting together your credit report and updating it regularly. While each credit bureau may have slightly different information or ways of scoring, they’re all based on the same factors.
What is a credit score used for?
When you need to borrow money and apply for credit, your lender will use your score to decide how trustworthy you are with money and if you’ll be responsible when paying it back. Banks will use your credit score to determine whether to give you a car loan, mortgage, credit card, personal loan, or any other kind of credit.
Read more articles about talking to kids about credit and borrowing here.