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Economics & Personal Finance
Credit Scores Explained for Teenagers
FICO ranges, payment history, and utilization
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A credit score is a number that estimates how likely a person is to repay borrowed money on time. Many lenders use FICO scores, which range from 300 to 850, to decide whether to approve credit cards, car loans, apartment applications, and sometimes utility accounts. A higher score can make borrowing easier and cheaper because lenders see less risk. Teenagers who understand credit early can avoid costly mistakes before they need major loans.
Key Facts
- FICO scores range from 300 to 850, with higher scores showing lower lending risk.
- Payment history is the largest factor: about 35% of a FICO score.
- Credit utilization is about 30% of a FICO score and can be estimated by utilization = credit card balance ÷ credit limit.
- A common goal is to keep credit utilization below 30%, and below 10% is often even better.
- Length of credit history, new credit applications, and credit mix together make up about 35% of a FICO score.
- Teens can start building credit responsibly by becoming an authorized user or later using a secured credit card with on-time payments.
Vocabulary
- Credit score
- A credit score is a number that predicts how likely someone is to repay borrowed money on time.
- FICO score
- A FICO score is a widely used credit score model with a typical range from 300 to 850.
- Payment history
- Payment history is the record of whether a borrower has paid bills and debts on time.
- Credit utilization
- Credit utilization is the percentage of available revolving credit that a person is currently using.
- Secured credit card
- A secured credit card is a card backed by a cash deposit that lowers risk for the lender and can help build credit.
Common Mistakes to Avoid
- Missing a payment or paying late, because payment history is the biggest part of a FICO score and late payments can stay on a credit report for years.
- Using most of a credit limit, because high credit utilization can make a borrower look financially stressed even if the bill is eventually paid.
- Applying for many credit cards at once, because multiple new credit checks in a short time can lower a score and signal higher risk.
- Thinking a debit card builds credit, because debit cards use money already in a bank account and usually do not report repayment behavior to credit bureaus.
Practice Questions
- 1 A student has a credit card with a 125 balance. Calculate the credit utilization percentage.
- 2 A teen is an authorized user on a card with a 700. What is the utilization rate, and is it above or below the 30% guideline?
- 3 Explain why paying a credit card bill on time every month can help a credit score more than having a high income.