New Chapter 4: Understanding Credit
What Influences Your Credit Score
Your credit score isn’t random — it’s calculated based on specific factors that show how you’ve handled credit in the past. Understanding these factors can help you focus on the habits that make the biggest impact and avoid the ones that can drag your score down.
1. Payment History (Most Important Factor)
This is the single biggest influence on your credit score. Lenders want to see that you pay your bills on time, every time. Late payments, missed payments, defaults, and accounts sent to collections can all hurt your score significantly.
It’s a common myth that carrying a balance on your credit card helps your score. This is false. In reality, carrying a balance only means you’re paying unnecessary interest. To protect your score and your wallet, always try to pay your credit card bill in full each month.
2. Credit Utilization Ratio
Your credit utilization ratio is the percentage of your available credit that you’re currently using.
Example: If you have three credit cards with $5,000 limits each, your total credit limit is $15,000. If your total balances add up to $12,000, your utilization is 80% — and that’s very high in the eyes of lenders.
Even if you pay it off in full each month, consistently using most of your available credit can signal that you rely heavily on borrowed money. A good rule of thumb is to keep your utilization below 30% of your total limit (and under 10% if you’re aiming for top-tier scores).
3. Length of Credit History
The longer you’ve been using credit responsibly, the better. Your credit history begins the day you open your first account, and lenders like to see a long track record of good habits. Closing old credit accounts can shorten your history and potentially lower your score, so think carefully before cancelling your oldest card.
4. Types of Credit Accounts
A healthy credit mix can help your score. This might include revolving credit (like credit cards), installment loans (like car loans or student loans), and a mortgage. Having different types of accounts shows lenders that you can manage various kinds of credit responsibly.
5. New Credit Inquiries
Every time you apply for new credit, the lender checks your report — this is called a “hard inquiry.” Too many hard inquiries in a short time can hurt your score, as it may suggest you’re desperate for credit or taking on too much debt at once.
6. Public Records and Collections
Negative marks like bankruptcies, foreclosures, liens, and accounts sent to collections can significantly damage your score and stay on your credit report for years. While some situations can’t be avoided, it’s best to prevent them whenever possible.
7. Register to Vote (in certain countries)
In places like the UK, being registered to vote can slightly improve your score because it helps verify your identity and address.
The takeaway: Focus on paying your bills on time, keeping your credit use low, and building a long history of responsible credit use. Over time, these habits can raise your score and help you access better rates and borrowing options.
-
Add a short summary or a list of helpful resources here.