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UNDERSTANDING CREDIT: HOW IS YOUR CREDIT SCORE CALCULATED

Updated: Feb 8


how is credit score calculated

Let's embark on a journey into the mysterious world of credit scores – that magical number that seems to have a say in everything from buying a car to securing a mortgage. We get it, life is hard, but understanding credit is a crucial skill that we all need in our financial toolkit.


What Is Credit?


Alright, let's start with the basics. Credit is like the golden ticket of adulthood. It's your passport to financial opportunities, unlocking doors to things like buying a home, getting a car, or even taking that dream vacation. In simple terms, credit is your financial reputation – a numerical representation of how trustworthy you are when it comes to borrowing money.


Calculating Your Credit Score


Now that we've cracked the code on what credit is, let's talk about the mysterious credit score. Your credit score is like the GPS for your financial journey – it guides lenders in assessing the risk of lending you money. This three-digit number typically ranges from 300 to 850, with a higher score indicating better creditworthiness.


Calculating your credit score involves a few key factors:


  1. Payment History (35%): Your track record of paying bills on time. Late payments can leave a dent in your credit score, so set those calendar reminders!

  2. Credit Utilization (30%): The ratio of your credit card balances to your credit limits. Aim to keep this below 30% to avoid raising red flags with the credit bureaus and lenders.

  3. Length of Credit History (15%): How long you've been in the credit game. The longer, the better – it's a trust thing.

  4. Types of Credit in Use (10%): A mix of credit accounts, including credit cards, mortgages, and installment loans. Variety is the key to maintaining a good credit score.

  5. New Credit (10%): The frequency of opening new credit accounts. Be mindful; too many inquiries can be a red flag.


Why Does It Matter?


Now, you might be wondering, "Why should I care about this three-digit number?" Here's why maintaining a healthy credit score is crucial:


  1. Lower Interest Rates: A high credit score often translates to lower interest rates on loans and credit cards. That means you'll pay less for the money you borrow – more cash for those avocado toasts!

  2. Easier Loan Approval: Whether it's a mortgage, car loan, or personal loan, a good credit score makes it easier to get approved. It's like having the VIP pass to financial opportunities.

  3. Better Rental Prospects: Landlords often check credit scores before renting to tenants. A solid credit score can help you snag that dream apartment without a hassle.

  4. Access to Premium Credit Cards: With a good credit score, you'll qualify for those fancy rewards credit cards with cashback, travel perks, and all the bells and whistles. Swipe responsibly!


Teaching Your Kids About Credit:


Now that we've covered the importance of credit, let's shift gears and talk about passing on this wisdom to the next generation – our KidVestors. Teaching kids about credit is an essential part of preparing them for the financial rollercoaster of adulthood.


  1. Start Early: Introduce the concept of money management and saving at an early age. Teach them about the value of a dollar and the magic of compound interest. Figure out creative ways to make saving tangible and fun.

  2. Lead by Example: Kids are like sponges; they absorb everything. Demonstrate responsible financial habits, including budgeting, saving, and using credit wisely. Let them see you paying bills on time and making informed financial decisions.

  3. The Credit Talk: As your kids get older, initiate the "credit talk." Explain the basics of credit, how it works, and why a good credit score is important. Use relatable examples – maybe tie it in with their favorite video game or a real-life scenario. (Here's a fun example)!

  4. Hands-On Experience: Once they're old enough, you can encourage them to open a savings account or a prepaid debit card. This hands-on experience will give them a taste of managing money in a digital world.

  5. Mistakes Happen: Teach them that everyone makes financial mistakes, and that's okay. The key is to learn from them. Share stories of your own financial hiccups and how you bounced back.



So now, you've just aced Credit 101. Remember, credit is not just a number; it's a tool that can either be your best friend or your worst enemy. By understanding the ins and outs of credit, maintaining a stellar credit score, and passing on this financial wisdom to the next generation, you're well on your way to financial empowerment. Let's teach our KidVestors to go forth, budget like a boss, save like a pro, and may their credit score always be in their favor!



 

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