Credit 101: Everything You’ve Ever Wondered

Credit 101

For many of us credit scores are kind of like vitamins. We all know they’re important to our health, but because we don’t know the exact reasons why we should be taking them, vitamins can be very easy to ignore. The same goes for credit. Plenty of us don’t know a thing about it, and yet everyday decisions like swiping your credit card at the gas station can affect your credit. So you might as well learn how that illusive credit score works.

If that sounds like a daunting task to you, no worries. I’m about to break down the basics of this financial anomaly right here. So for your reading pleasure, here are 10 helpful tidbits about credit:

1. Your credit score is a number between 300 and 850—Basically your credit score says how big of a financial risk you are and how likely you are to repay debt on time. A low score is bad. A high score is good.

2. You actually have three credit scores—Each of the three major credit bureaus—Equifax, Experian, and TransUnion—has a score for you. And since they have separate credit reports of you, all three can have different scores.

3. Credit reports are not credit scores—Credit reports are your history of using credit, opening and closing accounts, your credit limits, and how much debt you have now. The credit bureaus use this information to assign you a credit score (also known as your FICO score).

4. There are five things that affect your credit scores:

  • Payment history—Basically this is if you pay your bills on time.
  • Credit utilization rate—How much of your total credit limit do you use? Maxing out your credit cards is a bad thing, so try to keep your utilization rate between 1 and 20 percent to show you’re using your credit but not dependent on it.
  • Length of credit history—How long have you been using credit? The longer you’ve had credit, the better.
  • New credit—Every time you apply for a new line of credit, an inquiry goes on your report. Applying for lots of accounts in a short amount of time will cause some damage.
  • Credit mix—This revolves around the type of accounts you have—credit cards, auto loans, or mortgages. Having a healthy mix helps your score while having too many accounts or only one can hurt you.

5. You’re entitled to a free credit report once a year—Just visit to see your reports with each of the three major credit bureaus. Since technically you have three credit reports, you can see one every four months. That way you can regularly keep tabs on your credit behaviors and know right away if any credit card fraud is happening on your record.

6. Pulling your own reports and scores DOES NOT hurt your credit—This is a popular myth that a lot of people believe, but the truth is that only hard inquires can hurt your score. This happens when financial institutions check your score to see if they want to lend you money, and having too many of these close together can look like you’re not getting approved for credit. You can preempt this by not applying for new lines of credit very often.

7. You don’t need to have debt to have a credit score—The most important thing in building credit is to be using credit regularly and paying it off responsibly. Good debt like auto loans and mortgage payments can actually help your score, but if you’re paying off your credit card every month, you can steadily grow your credit score without taking on any debt at all.

8. There isn’t one magical trick for raising your credit score—Different credit bureaus calculate your score differently, so there isn’t a one-size-fits-all fix for credit. But generally speaking the best way to keep your credit healthy is to have two or three different forms of credit and to pay off your debt every month without fail. Just remember: you have to be using your credit card to build credit.

9. Having good credit comes with all kinds of benefits—If businesses know that you’re good with your credit, that means they’ll be much more likely to rent you a place, give you credit cards, lower your insurance rates, and grant you loans. The lower interest rates alone will save you thousands of dollars in the long run.

10. Credit scores are always changing—If you have terrible credit now, don’t freak out. A credit score is just a snapshot of what your record looks like today, so you can start making decisions right now that will improve your score tomorrow.

Want to learn more about finances? Check out our awesome blog post on seven helpful tax tips for veterans.