What is a Credit Score?

CASH KID

Nov 13 2023 • 8 mins

What’s a credit score? Do you know? When do you get one and how is it calculated? And why does your score even matter? Well, turns out, it does. Find out those answers in more in season 2 episode 5 of the Cash Kid Podcast. Learn more about your ad choices. Visit megaphone.fm/adchoices

Transcript

What’s a Credit Score?

Welcome back to another episode of the Cash Kid Podcast. Whether you're listening from Amazon Music, Apple Podcasts, Spotify, the Cash Kid Podcast website, or wherever you like to listen from, we’re glad you are here!

This is episode 5 of season 2 where each week we dive into different financial terms we need to know to become cash kids. This week, what is a credit score? Do you have a credit score? If so, how is it calculated? What’s a good score? And can you just ask people what their score is? Those answers and more coming up. Plus, another book review this week. The Cash Kid Podcast is underway!

Intro tease:

So you’ve got some cash. Maybe from an allowance, or that money your grandma gave you for your 7th birthday. Here you go, sweetie. Thanks, Grandma.

Whatever it is, what are you going to do with it? Spend it, hide it away… or maybe invest it? Let’s start learning how to make that money grow.

Time to learn how to be a cash kid.

Last week we discussed the difference between debit and credit. We stated that credit is money that’s borrowed from a lender in return that you agree to pay it back, usually with interest. But how well you pay it back, how often, and how much credit you have all can feed into your credit score.

Now, for kids my age, we don’t have credit scores yet. But, let’s compare it to an adult’s grade point average or GPA. At my age, we worry about our GPA by the grades we get in school. It’s based on how well we perform in our classes. A credit score is kind of similar.

A credit score is a prediction of your credit behavior. Like, how likely are you to actually pay back a loan on time. Let’s say you turn 18 and open a simple credit card with a $5,000 limit. If you spend it all but then forget to pay it back, or at least make the minimum payment each month… guess what… your credit score will take a hit and start to go down.

Credit scores range from 300 to 850.

I tried figuring out why “these” numbers. I mean why not start at zero? But I haven’t found a clear answer yet.

So, just remember the score ranges from 300 to 850. The higher the number the better. A score below 700 is considered “fair” credit… we’ll equate that to getting a “C” average. Anything around 700 to 800 is good,... say an A-B average and over 800 is considered exceptional or A+.

In 2022, the average FICO Score in the U.S. reached 714. There are actually several sites where you can check your credit score at any time.

But how can you achieve those higher numbers? Many times this is a mystery to most. I’ve learned most adults don’t even know what their score is. And why does it even matter what your score is? We’ll discuss this more coming up, after this book review from my Mom.

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This week we are spotlighting an activity book. The title is “Investing for Kids Activity Book” by Justine Nelson. It has over 65 activities about savings, investing, and growing your money that kids can easily work through to get a concept of how money works and how they can work to make it. Each workbook activity takes less than 5 minutes. The book can be found on sites like Amazon and Wal-Mart for less than ten dollars. Stocking stuffer for sure that will pay dividends!

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Thanks Mom! Alright. So, why does your credit score matter? It matters because companies use your credit score to decide on whether to offer you money to borrow to make purchases like a house, or a car.

Like our $5,000 dollar credit card example earlier where he forgot to pay it back or make payments on time. Say that same person went to try and buy a car and needs a loan to do it, which would be another line of credit. The car dealership will look at his credit score and say, “Hey, your score isn’t great because you show as being behind in paying back your debt.” So, no car for you!

There are actually several factors that impact your credit score. Here are some. Your bill-paying history is one. Like in our example, how well do you pay your bills?

Another factor is how much current unpaid debt you have. So how many lines of credit do you have open and how much do you still owe on each of those?

Also, the number and type of loan accounts you have. We’ll just say most adults have a car loan and a mortage (your house payment). If you have those two but you pay the balances each month, on time, then this type of practice can increase your score.

Another factor is how much of your available credit are you using. So if you have a $5,000 dollar credit card and it’s maxed out that month but you pay it back within the month, that can help your score. But if you don’t, and let’s say you have three cards all maxed out… that isn’t going to help.

Trust me… we could go on and on about the ins and outs of a credit score. At this age, the moral of the story is this. Building credit is good. It’s a way to show you are financially responsible. But getting lines of credit with the intention of not having the income to pay it back and pay it off, well, that’s gonna affect your score… it’s the same as not listening in class and studying and it affects your GPA.

And one more thing to touch on about how having a lower score can hurt you. See, when you open a line of credit, you are given an interest rate. This is basically a fee you pay for borrowing the money. The higher your credit score the lower the interest rate, which means the less amount you will be charged by the lender as a fee for borrowing money. But the lower your score, well the higher the interest rate. Here’s a quick example.

Let’s say you have a good score and get a nice low-interest rate of 5% on a $5,000 loan that you need to pay back within 5 years. You’ll pay a total of $661 in interest.

But if you have bad credit then on the same $5,000 loan let’s say you are given a 10% interest rate and you’ll pay $1,347 in interest. See the difference?

Same loan amount, but because you are trusted less, you get charged more. Build trust, build a better score… it matters.

And I asked the question, can you ask someone what their credit score is?

Dad: “No, that’s not something people do.”

Was the answer I was given. So, it’s mostly between you and the lenders. So don’t go around asking people their scores. But, discuss this with your parents and have an open conversation about how you want help to build a good score one day. Listening to The Cash Kid Podcast, we can guarantee will help.

Cash Kids, we have more terms, discussions, and skills to learn. Thank you for tuning in to this episode. If you have a question, please, reach out to me at cashkidspodcast@gmail.com and I’ll answer it in a future episode. You can also reach out via our website at cashkidpodcast.com.

Follow us on Instagram and wherever you are listening, leave a review! We need your help reaching a larger audience and building the financial skills of the next generation.

Cash Kid, out!

Disclaimer:

The information presented represents the views and opinions of the guests. This show does not intend to provide personal investment advice through this podcast. This content has been made for informational and educational purposes only. To make a full and informed investment decision, we advise you to speak with a financial advisor and for kids, definitely your parents first before investing.