Understanding Credit Scores: How Financial Habits Impact Loan Rates (Full Transcript)

Speaker 1: Understanding Your Credit Score, presented by WallStreetSurvivor.com A credit score is a simple three-digit number that tells lenders how likely you are to repay a loan. Here are two friends, Leslie and Andy. Leslie and Andy are both 30 years old, living in the same city, working at the same place, and earning the same salary. Leslie is fiscally responsible. She puts a portion of her salary into a savings account every month, always pays her credit card bills on time, and has never missed a payment on the mortgage of her home or her student loans. Andy, on the other hand, is a fiscal mess. Andy lives beyond his means and is always pushing the limit on his credit card, and isn't afraid to miss a payment or two to buy the things he wants. Andy rents an apartment and hasn't even paid off his student loan yet. Now, if both Leslie and Andy came to a banker looking for a loan, which one do you think will get the better rate? Obviously, given their histories, Leslie is more likely to pay back the money she borrows on credit, on time. On the surface, however, Leslie and Andy look pretty similar. Same income, same job, same city. It's only when you dig a little deeper you can get to the good stuff. In order to save time, lenders invented the credit score that takes into account all of your financial history. Banks use your credit score when you apply for any loan, such as a mortgage, a business loan, a line of credit, or car and student loans. Scores typically range from 200 to 850. The higher your score, the better your credit is and the better rates you'll get. The average score in the United States is around 711. A score of around 740 and above usually gives you the best interest rates, and scores of 620 and below usually prohibit you from borrowing any money at all. A good credit score is important to get to get good rates on the money that you borrow. For example, given their spending habits, Leslie's credit score would be closer to 850, while Andy's would be closer to 600. If they both need to borrow $1,000, Leslie's interest rate would be closer to 5%, while Andy's could be as high as 20%. So, while Leslie's monthly interest payments would be $50, Andy's would be $200. You can build good credit by getting a credit card as young as possible, paying off your credit card in full every month, sticking with the same credit card for a long time, and never missing a payment on a loan. To learn more about credit reports and other personal finance topics, head over to wallstreetsurvivor.com.