Lesson 28 - How Credit Scores Work
Your credit score is like a financial reputation number. It tells lenders how risky or reliable you are when it comes to borrowing money. A good score can save you thousands in interest, while a bad one can close doors to loans, apartments, or even jobs.
Case study: Mia’s first credit card
Mia, 20, got her first credit card with a €500 limit. She used it carefully, buying groceries and paying the full balance every month. After a year, her credit score climbed into the “good” range. Later, when she applied for a car loan, she was approved at 5% interest instead of 12%. Over the life of the loan, this saved her more than €2,000. Her story shows the power of building credit early and managing it responsibly. A small piece of plastic, used wisely, can open big opportunities.
What is a credit score?
A credit score is a three-digit number, usually between 300 and 850, that summarizes how well you handle debt. Higher is better. Banks, landlords, and sometimes even employers check it. It’s built from your financial history, not from luck.
What makes up your score?
Different countries have different systems, but the logic is similar everywhere. In the US, the FICO score is the most common. It looks at five key factors:
Mini-case study: Two friends, two outcomes
David and Jonas both graduated at 22. David had a credit score of 740 because he always paid bills on time. Jonas had 580 because he missed payments on his phone bill and maxed out his credit card. When they both applied for apartment rentals, David was accepted immediately. Jonas was rejected twice and finally had to pay a bigger deposit. Same age, similar income, but credit score made the difference. This shows that credit scores don’t just affect loans – they also influence where you can live and how much freedom you have.
Visual: How score affects loan costs
Here’s how much a €10,000 loan for 5 years costs at different credit score levels.
Higher credit scores lead to lower interest rates, which means lower total payments.
How to build and protect your score
- Always pay at least the minimum on time – late payments hurt most
- Keep balances below 30% of your credit limit
- Don’t close old accounts too quickly – history matters
- Limit new credit applications
- Mix of credit types helps, but only borrow what you can handle
Summary
- Your credit score is your financial reputation number
- It’s built mostly from payment history and how much you owe
- A good score saves money and opens opportunities, a bad one costs more
Key Terms
Further Learning
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