“Bad credit costs good money”
“It takes years to build good credit, but only days to ruin it”
“Your credit score follows you everywhere”
Here are a few common sayings about credit that many people may be familiar with. Personally, I found credit daunting and intimidating while growing up, largely due to many misleading statements that aren't necessarily true. For instance, I avoided checking my credit report for a long time because I was told that doing so would lower my score. This is one of the biggest myths surrounding credit.
That’s why I'm writing this post—to help people understand credit, how it impacts financial well-being, and to boost peoples’ confidence in managing their credit scores.
Your credit score does matter, don’t get me wrong. In fact, it is a three-digit number that significantly influences your financial life, as it affects everything from buying a car to finding a place to live. This number can literally cost you thousands of dollars in high interest rates or fees. However, we’re going to try to make it less daunting by breaking it down.
What is a credit score?
First, let’s clarify what a credit score is. It’s similar to school grades, reflecting how you manage your finances. Scores range from 300 to 850, with higher being better. The most common type is the FICO score, though there are others.
Your credit score is based on real financial behaviors, such as paying bills on time, how much credit you use, and the length of your credit history. For instance, a lower score may result from not having credit cards open long enough to establish a good history.
Factors that influence your credit score
Let's break down the factors that influence your score because this is where things get really practical. While exact scoring can vary, here is our general overview of how your score is calculated. Think of it like a pie chart, where some pieces are bigger than others.
Payment history (35%)
The biggest slice – about 35% of your score – comes from simply paying your bills on time. Seriously, just being punctual with payments can make a massive difference!
Credit utilization (30%)
The next biggest piece is about how much of your available credit you're actually using. Here's a tip I learned the hard way: just because you have a $5,000 credit limit doesn't mean you should use all of it. Actually, using less than 30% of your available credit is ideal.
Other important factors
The rest of your score comes from:
- Length of credit history (15%)
- New credit applications (10%)
- Types of credit you have (10%)
Why these numbers matter
I know this might feel like a lot of numbers and percentages, but understanding these basics can truly change your financial life. I've seen people's eyes glaze over when talking about credit scores, but stay with me here—because when you start seeing how each of these pieces works together, you can start making informed decisions that will benefit you for years to come.
Remember, these aren't just abstract numbers—they translate into real-world opportunities and very real dollars saved or spent.
What your score really means (and what it doesn't)
A good credit score can save you money in specific situations, but it's just one piece of your financial picture—and not always the most important one. Think of your credit score as a tool that can help unlock certain financial opportunities, but remember that it doesn't tell the whole story of your financial health.
When you need a loan for a car, home, or business, lenders use your credit score as part of their decision-making process. If you have good credit, you're more likely to qualify and receive better interest rates. For example, a 100-point difference in credit score could mean paying thousands less in interest on a home loan. Beyond loans, your credit score can affect other areas too: landlords often check it for rental applications, insurance companies might factor it into premiums, and some employers review credit reports during hiring (with your permission).
But here's the important part: you can have a great credit score while carrying lots of debt, or you might be living paycheck to paycheck but maintaining a good score by making minimum payments. Your credit score doesn't reflect your savings, income, or overall financial stability—it simply shows how well you play by the credit system's rules.
The real-world impact of this system can be significant. Having a low credit score is like swimming upstream—everything becomes more expensive and complicated than it needs to be. Imagine walking into a car dealership, excited about getting a new vehicle, only to find out that your monthly payment is hundreds of dollars more than what someone with better credit is paying for the exact same car. Or picture applying for your dream job, only to have your credit history become a potential roadblock, especially in industries like finance or government jobs.
The reality is that while your credit score can significantly impact various aspects of your financial life—from the interest rates you pay to the opportunities available to you—it's just one metric among many that contribute to your true financial well-being. Understanding this balance is key to making informed financial decisions that go beyond just chasing a perfect score.
Credit score and major financial decisions
Now, let's talk about some major life decisions where your credit score really comes into play:
- Housing: Whether you can rent or buy a home.
- Loans: Whether you can get a credit card, personal loan, private student loan, car loan, or mortgage.
- Interest rates: The interest rate you’re charged on loans
- Job opportunities: Whether you can get a job offer
- Utilities: Whether you can set up utilities in your home without paying a large deposit
- Car insurance rates: Whether your car insurance rates will increase
Also, when it comes to credit cards, a good score doesn't just mean approval—it means access to the cards with the best rewards, lowest interest rates, and sweetest perks. Think cash back, airline miles, or points you can use for travel or shopping.
Steps to improve your credit score
The good news? No matter where your credit score stands right now, you can improve it. Think of it like getting in shape—it takes time and consistency, but small actions add up to big results.
1. Set up automatic payments
- Make it impossible to miss a payment
- Set payment dates right after your payday
- Keep a small cushion in your checking account
- Start with minimum payments if you need to
2. Tackle your credit card balances
- Aim to keep balances below 30% of your credit limit
- If you have $1,000 limit, try to stay under $300
- Pay more than the minimum whenever possible
- Consider the "snowball method": pay off the smallest balances first
3. Monitor your Credit report
- Look for errors or suspicious activity
- Dispute any inaccuracies you find
- Remember: checking your own score doesn't hurt it
4. Build strong credit habits
- Keep old accounts open to maintain credit history
- Avoid applying for new credit unless necessary
- Mix up your credit types (cards, loans, etc.)
- Create a monthly budget to stay on track
Pro tip: Set calendar reminders for these tasks. Small, consistent actions over time will have a bigger impact than trying to fix everything at once.
How long Does it take to improve a credit score?
Remember how I mentioned that checking your credit report won't hurt your score? Make it a habit to review your credit report regularly. It's like giving your financial health a check-up. You'd be surprised how many people find errors on their reports that are dragging down their scores unnecessarily.
And one last thing—be patient with yourself. Your credit score didn't drop overnight, and it won't improve overnight, either. But every positive step you take is progress toward better financial opportunities.
The human side of credit
Let's talk about something that often gets swept under the rug when we discuss credit scores and debt—how it actually feels. The weight of poor credit and mounting debt isn't just financial—it can make you feel like you're failing at being an adult, like somehow you missed the class where everyone else learned how to manage money perfectly. Trust me, you're not alone in these feelings, and they're completely normal.
Building financial confidence
But here's what I've learned and what I really want you to take away from all of this: financial confidence isn't about knowing everything—it's about knowing you can figure things out when you need to. It's like learning to ride a bike; at first, it seems impossible and scary, but once you realize you can do it, that confidence spills over into everything else. This is what experts call financial self-efficacy, and it's actually more important than knowing every detail about how credit scores work.
Your next steps
Remember, your credit score is just a number—it's not a measure of your worth as a person. Start where you are, use the resources available to you (including this guide!), and take one small step at a time. Whether it's setting up that first automatic payment or checking your credit report, each action builds momentum toward better financial well-being.
Financial well-being isn't just about the numbers—it's about creating a life where money stress doesn't keep you up at night. That journey starts with a single step, and you've already taken it by learning more about how credit works and how you can make it work for you.
Take control with our new credit tool
Good news! We've made it easier than ever to stay on top of your credit score with our new credit monitoring tool. Think of it as your personal credit command center, where you can:
• Track your credit score in real-time and see all your debts in one clear dashboard
• Experiment with "what-if" scenarios to understand how different actions could impact your score
• Get early warnings about potential identity theft or credit issues before they become problems
The best part? This isn't just another credit monitoring service. It's a powerful tool designed to help you take control of your financial future. Want to know how paying off that credit card might affect your score? Curious about what would happen if you opened a new account? Our simulator lets you explore these scenarios without any real-world impact.
Read the full blog on our new tools and if you're interested in learning more and helping you're employees take control of their financial lives, chat with us!