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What's a FICO Credit Score?

Do I need one? How do I get a great one?

A credit score is a number between 300 and 850 that is assigned to each person to determine her “creditworthiness.” The higher the score, the more creditworthy a person is – meaning, the more likely she is to be offered a loan or other forms of credit. To formulate this number, credit scoring models evaluate how many credit cards a person has, how long she has had them, how quickly she pays back her card balance, and how much money she owes on her accounts.

A FICO score is the most widely used credit score. In fact, FICO scores are used in over 90% of U.S. lending decisions. As it comes time to apply for student loans, you might be wondering – if I’ve never had a credit card or have only had one for a while, do I even have a credit score? How will that affect my ability to get a loan?

Don’t worry; lenders know that as a high school student, you likely haven’t had the need, or the ability, to build a credit score. For that reason, Federal Direct loans (a type of Federal Student Loan) do not require a credit score for approval, and private lenders evaluate a student who doesn’t have credit based on the credit of her qualified cosigner.

You’re not completely off the hook, though – your credit score will be a key factor in determining eligibility for any lines of credit or loans you might want as an adult. That’s why, as Adam Carroll says in the video, it’s important to start building your credit now.

If you are in the process of building credit, here are a few things to keep in mind:

  • Pay bills on time – Whether it’s a cell phone bill, car insurance, or a car payment, make each and every payment on time.
  • Pay off your credit card every month – Using your credit card isn’t a bad thing – in fact, you can’t earn credit if you don’t buy anything on your credit card! But learning to pay it off in full on time every month will help you establish a healthy habit of avoiding interest fees, which start to accrue if you don’t pay your credit card balance on time. This makes the amount you owe get higher and higher even if you don’t put any new charges on your card!
  • Have a (part-time) job – Even if it’s only for a few hours a week, employment history has an indirect effect on your credit history and can help build your credit reputation. Plus, you'll appreciate the extra cash!
  • Know your credit score – Knowing your credit score puts you ahead of the game. Only 63% of adults report even knowing their credit score. Knowing your credit score also informs you of where you are doing things well and where there are areas for improvement. You should be checking your credit score about once every three months. You can do this for free at websites like freecreditreport.com or creditkarma.com.

Starting to see a theme here?

Long story short: do whatever you can to be smart with money. Pay bills on time, have some source of income (not an allowance), and know your credit score. Doing these things will help you build your credit score and set you up for a better standing with future lenders.