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Practical steps and habits that help people build a positive credit score over time.
Imagine you want to borrow your friend's favorite video game, but they say no because last time you borrowed something, you forgot to return it for a month. Did you know banks do the exact same thing with money?
Think of a credit score as your 'financial GPA.' It is a number that tells banks and businesses how much they can trust you to pay back money you borrow. When you use a credit card or take out a loan, you are the borrower, and the bank is the lender. If you are reliable, your score goes up. If you are risky, your score goes down. A high score is like having a 'gold star' on your financial record, making it easier to buy a car or a house later in life. Most scores range from to . The higher the number, the better your 'financial reputation' is!
Quick Check
In your own words, what does a credit score represent to a bank?
Answer
It represents your financial reputation or how much the bank can trust you to pay back borrowed money.
To build a great score, you need to practice three main habits. First, Pay on Time. Even being a few days late can hurt your score. Second, Keep Balances Low. Just because a bank says you can borrow $\$500$ doesn't mean you should! Using only a small part of your limit shows you are responsible. Third, Length of History. The longer you have an account and keep it in good standing, the more it proves you are consistent. It’s like a long-term friendship; the longer it lasts, the stronger the trust becomes.
1. Maya borrows $\$20$ from her older brother to buy a book.
2. She promises to pay him back next Friday.
3. Maya sets a reminder on her phone for Thursday.
4. She pays him back on Thursday afternoon.
Result: Maya's brother trusts her more and will likely lend to her again. This is exactly how 'Paying on Time' works with a bank!
Quick Check
Why is it better to borrow only $\$50\?
Answer
It shows you are responsible and not 'maxing out' your debt, which keeps your credit score healthy.
What happens if you don't follow the golden habits? Two things: Late Fees and Interest. If you miss a payment, the bank charges you a fee. But the bigger problem is a low credit score. With a low score, banks see you as 'risky.' To protect themselves, they charge you a higher Interest Rate. Interest is the 'rent' you pay to use the bank's money. If you have a low score, you might pay $\$5,000\ for the exact same car because their interest rate was lower.
Imagine two people borrowing $\$100\ plus $\$5\.
2. Person B (Low Score): Pays back the $\$100\ in interest because the bank thinks they are risky. Total cost = $\$125\ more expensive for Person B!
Sam has $\$60\ phone bill on time today.
2. Choice B: Buy a new $\$55\ late fee).
If Sam chooses B, he loses $\$10$ AND his credit score drops because the payment was late. Choice A is the only way to protect his financial reputation.
Which of these is a 'Golden Habit' for a good credit score?
If Sam has a low credit score and wants to buy a car, what is likely to happen?
Using only $\$10\ credit limit is better for your score than using $\$90$ of that limit.
Review Tomorrow
In 24 hours, try to list the three 'Golden Habits' of credit from memory and explain why interest is more expensive for people with low scores.
Practice Activity
Ask a parent or guardian to show you a monthly bill (like electricity or water). Look for the 'Due Date' and discuss what would happen if that bill was paid one day late.