Credit is the word used to define the ability to borrow money. When you borrow money and need to repay it, it is called a loan. For young people, the most common reasons for borrowing money are to buy a car, or if you plan to go to college, to get a student loan. Credit is also important if you want to rent an apartment or even for some jobs.
Your credit score measures what is known as creditworthiness – or in other words, how risky you are to the lender or to the landlord of your apartment building. Think of it this way. Let’s say that your friend, Luke, asks to borrow your favorite pair of shoes. If Luke returns them later than he promised with a hole in the bottom, chances are you won’t take the risk the next time he asks to borrow something.
However, let’s say your friend Alex asks to borrow a pair of shoes. Then he returns them the day he said he would, and the shoes are in perfect condition – in fact, he even cleaned them up for you. Chances are you would feel comfortable if Alex asked to wear your shoes again.
That’s how your credit score works. If you pay your bills on time and pay the minimum amount or more, you become a better credit risk, like Alex. If you pay bills late or don’t pay enough on them, now you are like Luke, and your score reflects that.
Credit score ranges from 300 to 850, with 300 being a poor score and 850 being an exceptional score. It is based mostly on your payment history and then the total amount of debt you have. There is also some consideration given to your credit history, how many requests you have made for more credit like completing a new credit card application, and the types of credit you are using.
In addition to getting a loan, there are a couple other ways a credit report is used. A landlord looks at your credit report, or history, to see if you are likely to make your rent payments on time. Some employers look at your credit report too. For instance, they may use it to gauge if you’re trustworthy and responsible with money.
If you are wondering what your credit score is, you can obtain a free credit report once every 12 months from each of the three credit bureaus: Equifax, Experian and TransUnion. It takes a while to turn a bad credit score around so it’s really important to pay your bills on time and monitor your score.