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A good credit score for your age depends on how old you are. If you are above the age of 21, your credit score should fall between 600-750. The older you get, the less power potential lenders will see in you as an applicant because lenders take into account many years, not just one year like they would for someone who is 20 years old.
If having a credit score of 750 is not possible, you should aim for at least 620. Having a Fair Isaac Corporation (FICO) score of 620 or above will mean you are typically offered the best available rates on loans and other types of credit. It also means that your probability of being approved for unsecured consumer credit is high, around 80%. Furthermore, the likelihood that you will be missing payments in the coming 12 months is less than 2%.
In some countries, credit scores range from 300 to 850 (although some credit scores may go as high as 900), and the exact number for a person depends on his or her specific situation. If an individual has a FICO score of 120, this would be considered fair; if an individual has a FICO score of 780, this would be considered very good; and if an individual has a FICO score of 730, this would be considered excellent.
The lower the credit score - especially below 620 - the greater chance an individual will have difficulty obtaining loans and other forms of financing for school or housing down-payment, cars, etc. Higher credit scores indicate that an individual has carefully managed his or her finances.
What is a credit score?
A credit score is a calculated number used to predict the likelihood that someone will repay their debts.
The theory behind this is that people with lower credit scores are more likely than those with higher ones to default on their payments, so the riskier the lending institution perceives an applicant's chance of repayment, the higher interest rate they'll require in return for extending credit.
Those who have poor payment histories typically need better rates than those who've maintained good payment records in order to borrow money -- even if they're "risky" or not likelier to pay back what they borrow?a person applying for credit may be required by lenders to buy an insurance policy called "credit life insurance" which covers loan payments in case of death.
A credit score is shared among many different companies, including banks, phone companies, cell phone carriers, landlords, insurance agencies and even employers. A credit report is the raw data behind the score that is filed with one of the three major credit bureaus (Equifax, TransUnion or Experian).
The company or individual who's pulling your file to evaluate you for an account must ask permission first! That means if you refuse to allow certain companies access to your data on one bureau they cannot pull it from another bureau. This doesn't happen often today because usually there are software programs vendors who manage all of this for each of these types of business.
A credit score is a number that shows lenders how good of a risk you are. The better the score, the lower your risk to lenders and the more likely you'll be approved for loans and credit cards.
Credit scores may range from 300-850. Higher scores represent lower risk to lending institutions and may qualify people with high scores for credit products with lower interest rates or down payments than those with poor scores. Higher FICO® Scores mean:
You will have access to many more financial programs such as car loans, mortgages, personal loans, student loans, etc. It will cost less to use your current bank checking account.
Why do people need credit?
People need credit to establish themselves in the world of business, so they can purchase homes and cars, start their own businesses or invest in someone else's business.
Credit is simply a way to borrow money. Depending on the terms of the loan, you might pay interest now or pay interest later.
A lot of banks are willing to lend more money than they can afford to risk out in loans since they're not allowed to gamble with it - they have to follow the rules and make sure that there's no chance for major loses, meaning bankers don't want their bank failing. The government makes this possible by letting banks bundle these loans together into securities, which investors can buy according to how risky they think it is.
Banks need money continually flowing through them otherwise their customers' accounts would run dry at some point because customers always need access to their funds.
People also need credit because it's the only way people have of showing that they are trustworthy to buy things or get loans from more financially stable compatriots. When someone goes to purchase an expensive item on a credit card, they are effectively betting their future earnings on whether they'll be able to pay off their debt before interest charges accumulate - not exactly a great bet if you don't have money coming in every month!
Advantages of having a high credit score:
By having a good credit score, you are able to take on more debt. For example, if you have an excellent credit score, one can take out a home mortgage with little or no down payment.
A high credit score tells lenders that you are reliable and trustworthy, which increases your chances of being approved for loans at better interest rates than other borrowers. That means faster approval times and lower monthly loan payments for your everyday purchases like buying food or clothing, repaying debts accumulated from emergencies like medical costs not covered by insurance , paying back tuition fees so as to afford university courses.
Interest rates on mortgages and car loans will be lower than those for people with a lower credit score. It's common to see interest rates on new cars up to 3% higher for people with bad credit, getting them an extra $5-$7 thousand over the course of the loan. Interest rates on home mortgages can be as high as 1-2%, costing an extra $1000-$2000 over the 30-year duration of the mortgage. Renters are also often denied rental applications if they have a low credit score.
The most serious of all consequences of a bad credit score is the inability to get a home mortgage, which carries with it an interest rate that can be 3-5% higher than for someone with excellent credit.
A lower credit score doesn't give you an advantage in borrowing money to buy an automobile or other large items - at least not when compared with the rate charged by the government's Department of Motor Vehicles, or DMV. For example, in California if you have an exceptionally low FICO scores considered ‘poor’ by FICO standards (Below 630), your interest rates will likely still be about 13 percent even though they may be only 8 percent federally guaranteed.
How to improve your credit score?
To improve your credit score, you should avoid charge-offs, late payments, and any reason for the lender to believe you may go bankrupt.
The first important thing is to stop procrastinating and make a list of your current debts (e.g., credit cards). Then make a monthly budget that includes all sources of income including bonuses, food stamps, alimony etc., as well as all necessary expenses including rent or mortgage payment(s), utilities bills, groceries etc.
Anyone living paycheck to paycheck will have a hard time because they'll always be one step behind - essentially chasing their tail - owing someone money at any given point in time.
In addition to this, you should maintain a low balance on your credit cards. Keep an eye out for any errors in how you're listed on the account. Only open up at most three new credit accounts per year, or once every two years if that feels like it's affecting your score too much.
Pay off your balances entirely each month before the due date (interest won't start accumulating). It will be easier to maintain a lower balance this way, and each time you pay off the entire balance before it's due, you'll see an immediate increase of 10 points in your credit score.
Furthermore, you should contact the credit bureaus to verify your identity and complete any disputed lines of information. For each account, pay on time and for at least the minimum payment for at least six months to increase the length of your history with that company.
Consider paying off balances if you can afford it or keep them low enough so there's room for negotiating higher limits. As long as you use the card responsibly, any derogatory items should be removed after six years.
A common concern is whether there are cards worth increasing a limit on (saving money in interest payments) even if they carry lower credit scores (equifax). The short answer is "yes." This could be because other factors outweigh potential interest rates differences.
Conclusion:
Teaching kids about credit means teaching them to not be tempted by the short-term offer, and instead teach them that a long-term plan with a large enough down payment is a safer financial option in the long run. Too many people become constrained into going with whatever best deal they can find, with no thought given to future consequences, and this personal finance lesson will help prevent your child from making similar mistakes. The basic idea behind this lesson is to make children aware of how much for example for houses go up in price each year because of inflation - meaning you'll never be able to come up with enough money on your own.
It's really up to the parents on how they want to teach their kids about credit. For example, if a parent wants their child to automatically have a savings account from birth and they will teach them about "saving up" until there's enough for a birthday present or a bigger item later down the line, then explaining how credit cards work will be secondary. On the other hand, if a parent does not have room in their budget for savings accounts but is going to purchase items with cash and offer some help with money when needed so that there are no limits placed on what can be bought, then talking about using credit might make sense since it doesn't involve waiting around for something special like saving an allowance does.
There are tons of free websites out there to help kids learn about credit, but you should start teaching them about the basics as soon as they can understand. You might want to tell them not to use their real name or picture when they sign up for accounts so their information stays private. Explain things like monthly payments and interest rates. Tell them that having credit includes risks - how easy it is for someone else to take control of your account if you're careless with your password or PIN.
Disclaimer:
(1) All content found in my articles, including text, images, audio, or other formats were created for informational purposes only. The content is not intended to be a substitute for professional financial advice. Always seek the advice of a qualified financial adviser. Never disregard professional financial advice or delay in seeking it because of something you have read in my publications. My publications do not recommend or endorse any specific loans, mortgages, credit cards, lenders or opinions. Reliance on any information in my publications is solely at your own risk.
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