What is a good credit score?

Understanding the credit system: A guide for middle school students

Imagine your friend wants to borrow your favorite video game. You’d probably think: Can I trust them to return it? Will they take care of it? If they’ve borrowed stuff before and returned it on time in good condition, you’ll probably say yes. If not, you might say no. That’s exactly how the credit system works in the real world, except instead of games, it’s money.

What is credit?

Credit is when someone lets you borrow money with the promise that you’ll pay it back later. It’s used for things like buying a car, going to college, or even getting a phone plan. You might not have the cash right away, so credit helps you get what you need now and pay over time. 

What is a credit score?

Your credit score is a number that shows how trustworthy you are with borrowing money. It’s kind of like a grade on your report card, but for money. It usually ranges from 300 to 850. The higher your score, the more likely banks or companies will trust you and offer better deals.

Here's a breakdown:

• 750–850: Excellent – You’re doing great.
• 700–749: Good – You’re doing well.
• 650–699: Fair – Not bad, but needs work.
• 600–649: Poor – You’re having trouble.
• Below 600: Bad – Lenders won’t trust you easily.

How is your credit score calculated?

It’s based on a few key things:

• Payment History (35%) – Do you pay your bills on time?
• Amounts Owed (30%) – How much do you owe compared to how much credit you have?
• Length of Credit History (15%) – How long have you been using credit?
• New Credit (10%) – Have you opened a lot of new credit accounts recently?
• Credit Mix (10%) – Do you have different types of credit (like a loan and a credit card)?

How to build credit

Even though middle schoolers aren’t using credit yet, it’s helpful to know how it works so you’re ready when the time comes. Here are smart ways to build good credit later:

• Get a credit card with a low limit when you're old enough (usually 18). Start small, like using it for gas or a phone bill, and pay it off every month.
• Always pay your bills on time. That includes phone plans, subscriptions, and anything else with regular payments.
• Don’t borrow more than you can pay back. Only spend what you know you can afford to repay.
• Keep old accounts open. The longer you’ve had credit, the better your score gets.
• Check your credit reports for mistakes. You can do this for free once a year to make sure everything looks right.

What hurts your credit?

Just like missing homework or being late to class affects your grades, certain things can hurt your credit:

• Missing payments: Paying late or not at all is one of the worst things for your credit.
• Maxing out your credit card: Using up all your available credit makes lenders nervous.
• Applying for too much credit at once: It looks like you’re desperate for money.
• Defaulting on loans: That means you stopped paying, and it can wreck your credit for years.

Why credit matters

Good credit helps you:

• Get approved for apartments, loans, and phones.
• Pay less in interest (extra money you pay when you borrow).
• Get better job offers – yes, some employers check credit!

Bad credit makes life harder. You may be denied for things you need, or you’ll have to pay a lot more in fees.

Final thoughts

Think of credit as your financial reputation. The way you treat money now, even with things like saving and budgeting, can help you make smart choices later. Start with good habits early, and by the time you need credit, you’ll be ready to use it wisely.

Banks vs credit unions

Banks vs. credit unions: Understanding the similarities and differences

When it comes to managing money, many people use either a bank or a credit union. Both are financial institutions where you can save money, get loans, and handle other financial tasks. However, they operate differently and have distinct features. Let’s explore the similarities and differences between banks and credit unions in a way that’s easy to understand.

Similarities between banks and credit unions

• Savings accounts: Both banks and credit unions offer savings accounts where you can keep your money safe and earn a little interest over time.
• Checking accounts: They both provide checking accounts that allow you to deposit money, write checks, and use a debit card to make purchases or withdraw cash.
• Loans: Whether you need money to buy a car, go to college, or purchase a house, both banks and credit unions offer loans. You borrow money and pay it back with interest over time.
• Online services: Both institutions have websites and apps that let you check your account balances, transfer money, and pay bills online, making managing your money convenient.

Differences between banks and credit unions

Ownership:

• Banks: Banks are for-profit businesses owned by shareholders. Their goal is to make money for these shareholders.
• Credit unions: Credit unions are non-profit organizations owned by their members. When you open an account at a credit union, you become a member and part-owner.

Profit distribution:

• Banks: Profits made by banks go to their shareholders in the form of dividends.
• Credit unions: Any profits made by credit unions are returned to members through lower fees, higher interest rates on savings, and lower interest rates on loans.

Eligibility:

• Banks: Anyone can open an account at a bank, provided they meet the bank’s requirements.
• Credit unions: To open an account at a credit union, you usually need to meet certain criteria, like living in a specific area, working for a particular employer, or belonging to an organization.

Service focus:

• Banks: Banks often offer a wider variety of services, including international services and business accounts, and they tend to have more branches and ATMs.
• Credit unions: Credit unions may have fewer branches and ATMs, but they often provide more personalized service and are known for helping their members with financial education and support.

Interest rates and fees:

• Banks: Banks may have higher fees and offer lower interest rates on savings compared to credit unions.
• Credit unions: Credit unions generally have lower fees and provide higher interest rates on savings accounts because they return profits to their members.

Choosing between a bank and a credit union

When deciding whether to use a bank or a credit union, consider what is most important to you. If you prefer a wide range of services and easy access to branches and ATMs, a bank might be the better choice. However, if you value lower fees, higher savings rates, and a community-focused approach, a credit union could be the way to go.

In conclusion, both banks and credit unions serve the essential function of helping people manage their money. While they share some similarities in the services they offer, their differences in ownership, profit distribution, eligibility, service focus, and fees make each suitable for different needs. Understanding these differences can help you make an informed decision about where to keep and manage your money.