Numbers. From quiz scores to GPA’s to SAT’s, we are constantly being defined by numbers. While they are important, there is one number that will likely have a bigger effect on your life than any other - and you probably have no idea what it is. Your credit score, a number determined using the FICO (Fair Isaac Corporation) scoring model, is used by the three credit bureaus that track your financial history. Your score can range from 300 to 850. The higher the number, the better you look to potential lenders.
You might not think that this is important to consider while you are in high school; but it actually is, because it takes time to build a good credit score. In the not so distant future, your score will affect whether you are approved for a credit card or a car loan, and how much interest you’ll pay for both. Further down the road, it will be used when you apply for a mortgage, business or education loan. Someday, probably sooner than you think, you will want the highest credit score possible.
Let’s imagine the day you’re ready to buy a car. You’ve saved some money, but not enough to buy a car that you’d call reliable, and certainly not a new car. Using data from the myfico.com website, a person with a credit score of 589 could borrow $16,000 for five years and pay $370 per month. On the other hand, a person with a score of 690 could borrow $20,000 for the same five years and only pay $373 per month. That’s $4,000 more, for just $3 a month! How is that possible? Banks charge less interest to clients with better credit history, and interest rates really matter. Considering this example was about a small car loan, imagine what it could mean for a home mortgage.
Getting a job is the first step to building your credit history, because your income determines how much you can borrow. Banks and lenders want to know that you have been making money, whether it be from a part-time or full time job. Once you have developed an income history, the next step is to apply for a credit card to start building a credit history. Now listen closely, you must make sure you always pay on time! It’s just as easy to ruin your credit history by failing to pay your bills. Start with small purchases each month, and always pay your bill.
There are different kinds of credit cards, and you should learn which is best for you. If you don't have much income history, but have some money saved, you can apply for a secured credit card, where you deposit money into a bank account that acts as your guarantee to the bank that you will pay your bills. Debit cards don’t count towards your credit score, which is why a secured credit card is a better way to go.
As we reach the age when we will be taking out loans, whether that be for a car or a college education, the most important thing to remember is to pay on time. If you miss payments you could be hit with penalties that compound on each other, even if you pay the future payments on time. For this very reason, it is crucial that you always pay on time. Having late payments on your history decreases your credit score, which will only make things harder for you in the future.
Everyone has the chance to improve their credit score if they understand how, and start taking the necessary steps. Ask your parents for help, do your research, and remember, the most important rule - always pay on time!