How does a credit score work?

Your credit score is based on your history of meeting financial commitments. A poor credit score can have significant consequences down the road. It can impact your ability to do the things you would like to do, such as rent an apartment, apply for a line of credit, qualify for a mortgage, and so on. Therefore, it’s important that we manage this score appropriately. Be aware of how your habits today could impact your credit score in the future — ensure you pay your bills and meet all of your other financial obligations on time.

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Video transcript

Today, I’m going to talk to you about something you’ve probably heard of before — your credit score. 

What is a credit score?

A credit score is a three-digit number assigned to you that tells lenders how likely you are to pay back money that you borrow. They use this number to decide whether to lend money to you or not. The number is between 300 and 900. The higher your number, the more trustworthy you are and the more likely lenders will lend to you. In general, if you have a score above 650, you are likely to receive a loan. 

How is my credit score determined?

How do they determine your credit score? Well, it’s a combination of different factors. They look at your history of borrowing money. Do you pay it back quickly and on time? They also look at past bills like your cellphone bill, your utilities and internet to see if you pay these on time. They also look at the length of your credit history and the types of credits or loans you have.

How do you build credit?

The best way is to start early and create a good credit history. Since you will start with no credit history, it is unlikely that lenders will want to lend to you right away. You can solve this by getting a secure credit card. This is a credit card backed by money you put in. For example, if you put $500 into a secured credit card, the bank will hold onto the $500 for collateral and issue you a credit card with a $500 limit. If you don’t pay the credit card, they take the $500. Once you get a secured credit card, start using it regularly and paying it off on time. 

How to build a good credit rating

Some ways to build a good credit rating include: 

  • Not missing payments on credit cards or loans
  • Keeping your credit card and loan balances low
  • Not applying for too many loans and credit cards
  • Paying off cellphone bills, utility bills and other bills on time

There you go, now you’re ready to start working on your credit score.