Financial Literacy 101: Do you understand your credit score?
April is Financial Literacy month, which means it's the perfect time to ask: What is financial literacy?
One great definition comes from the President's Advisory Council on Financial Literacy: It's "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being."
With that in mind, we're dedicating our first blog in a four-part series to the topic of understanding your credit rating. After all, learning about and building credit is essential for enjoying financial success.
The credit rating scale
First question: What is a good credit score?
To understand that, you first need to know how the traditional credit rating scale works. In the U.S., credit scores are based on the FICO model, developed in 1989. The scale ranges from 300 to 850, and is determined by three national credit bureaus: Experian, Equifax and TransUnion. Payment history is the most important factor here, followed by the amount owed, length of history, the number of new accounts and the mix of credit types. Unfortunately, these credit types are limited to credit cards, personal loans, car loans and mortgages.
Just about everyone knows that higher scores are better. But how high is a "good" credit rating? Experian, one of the three major credit bureaus, considers anything above 670 to be good, with 580-669 deemed "fair." Anyone with a score below this mark is likely to run into trouble, which can include high credit card fees, loan denials and required deposits for utilities.
"Myths surrounding credit scores are very common."
If any of this is new to you, don't feel bad - you are definitely not alone. A recent worldwide survey of 150,000 adults found that when it comes to financial literacy, the U.S. finished in 14th place, The Wall Street Journal reported. What's more, a separate study from San Diego State University found that most 20-somethings weren't able to answer three basic financial questions concerning the stock market, interest rates and inflation, according to a Time report. And myths surrounding credit scores are very common, as Chase contributor Farnoosh Torabi highlighted. For example, he pointed out that many believe that higher incomes automatically build credit ratings, which is simply not true - salary is irrelevant.
That's why it's so important to improve your financial literacy. Only with a better understanding of what credit is and how it's determined can you discover lesser-known ways to build your credit rating. Did you know that nontraditional credit can be used to improve your traditional credit rating? To learn how, check back for the next entry in our Financial Literacy 101 series.