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What is a credit score?

A credit score is a number that reflects how responsible a person is with borrowing and repaying money. Banks use this score to decide if they should lend money and what kind of interest rate they should give you. Created by Khan Academy.

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Video transcript

- Your credit score is a measure, some would argue an imperfect measure, of how likely you are to pay for things on time. Let's say you were to take a loan. How likely are you to pay, make the payments on that loan? If you were to get a lease on an apartment, how likely are you to pay rent on time? Now, there are three credit bureaus. They are TransUnion, Experian, and Equifax, and what happens is, is let's say that you have a credit card and as you pay that credit card, pay the balance, or pay the minimum payment on time, or you don't pay on time, that gets reported to these bureaus. These bureaus use an algorithm that comes from a company called FICO. It used to stand for Fair Isaac Corporation, and that gives you a score, and each of the three bureaus will have a score between 300 and 850. If you have a score near the high end of that range, if you're in the high 700s or above, that is an excellent credit rating. People will give you loans. It will be easy for you to lease things, and not only when you get that loan, it will actually be at a lower interest rate. If your credit score is in the 600 to low 700 range, that's decent, you're probably okay, although you might, in certain cases, have to pay a higher interest rate than the people with the excellent credit. And then if your credit score is in the low range, which would be anywhere from 300 to say the high 500s, you're going to have trouble getting a loan, or in many cases getting a lease, or even if you do, you're going to have to pay a higher interest rate. Now, the ways to get as high a credit rating as possible, is pay your bills on time, pay your rent on time, have a long credit history. It's good to have credit. So it's good to have a credit card that has a high limit, but to use as little of that as possible. So good luck (laughs) with your credit scores.