Your credit score plays a major role in your financial life, but understanding what it is and how it works can sometimes feel complicated. Don’t worry—let’s break it down into simple terms so you can get a clear picture of how your credit score impacts you. Whether you're looking to buy your first car or just trying to get a better handle on your finances, knowing what goes into your credit score is a huge step toward making smart financial decisions.
A credit score is a number that represents your financial trustworthiness. Lenders use it to decide how risky it is to lend you money. The higher your credit score, the less risky you seem, which typically means you’ll get better deals when borrowing money—like lower interest rates on loans or credit cards.
But credit scores aren’t just for loans. They can also impact other parts of your life, like renting an apartment or even getting set up with services like internet or utilities. For example, a company may check your credit to see if you need to pay a deposit when signing up for internet service. So, your credit score can affect things you might not even think about.
Your credit score isn’t just one number—it’s made up of several factors that give a full picture of how you handle money. Here’s a breakdown:
Payment History (35% of your score)
This is the most important factor. Lenders want to see that you make your payments on time. If you’ve missed payments or have accounts sent to collections, it could hurt your score. On the other hand, making your payments on time is a huge win and makes up 35% of your score.
Credit Utilization (30% of your score)
Credit utilization is the ratio of how much credit you’re using compared to how much credit you have available. For example, if you have a $1,000 credit limit on your credit card and you’re using $500, your utilization is 50%. Ideally, you want to keep this number under 30%. The lower your utilization, the better your credit score will look.
Length of Credit History (15% of your score)
How long you’ve had credit also matters. A longer credit history can help your score because it shows you’ve been able to manage credit over time. If you’re just starting, don’t worry—every credit journey starts somewhere. Just be patient and make sure you manage your credit well.
New Credit (10% of your score)
Opening new accounts can temporarily lower your score. It’s important to be mindful about how many new accounts you open and when. Applying for lots of credit in a short period of time can hurt your score, so it’s best to take it slow and avoid rushing into too many new credit applications.
Types of Credit (10% of your score)
This refers to the different kinds of credit you have, like credit cards, car loans, or a mortgage. Having a variety of credit types can help improve your score, but it’s not something you need to overdo. Just make sure you’re managing the credit you do have responsibly.
A good credit score can unlock better interest rates and more financial opportunities. Whether you’re applying for a loan, renting an apartment, or setting up services, your credit score plays a key role in what you can access. A higher credit score means you’re more likely to get approved for loans and credit cards with favorable terms, saving you money in the long run.
On the flip side, a lower credit score can make things harder. You might have to pay higher interest rates, or you might not be able to get the services you want without paying extra deposits. That’s why it’s so important to start building your credit early and manage it well.
There are a lot of misconceptions out there about credit scores. Here are a few myths we want to clear up:
Myth #1: You need multiple credit cards to build credit.
Some people think the more credit cards you have, the better your score will be. But that’s not true! All you really need is one credit card or one revolving line of credit, and as long as you manage it well, that’s enough to start building your credit.
Myth #2: Carrying a balance on your credit card is good for your score.
Another common myth is that you need to carry a balance on your credit card to improve your score. In reality, it’s better to pay off your balance in full every month. If you carry a balance, you’re paying interest, which can add up quickly. Paying off your balance before the due date keeps your credit utilization low, which is great for your score.
Myth #3: A high credit score guarantees you’ll get approved for a loan.
While a high credit score certainly helps, it doesn’t guarantee approval. Lenders also consider other factors, like your income, employment history, and the size of the loan you’re applying for. But a higher credit score definitely improves your chances of approval and can help you get better terms.
If you're new to credit or looking to improve your score, here are some helpful tips:
Start with a Credit Builder Loan or Secured Credit Card
If you’re just starting out, a credit builder loan or secured credit card is a great way to begin building your credit history. These products are designed to help you build a positive payment history, which is key to raising your credit score.
Make Payments on Time
This is the most important step. Paying your bills on time shows that you can manage your debt responsibly and is one of the biggest factors in your score.
Keep Your Credit Utilization Low
Try to keep your balance below 30% of your credit limit. If you’re using more than that, it could hurt your score. If you can, pay off your balance in full each month.
Avoid Opening Too Many Accounts at Once
Opening multiple credit accounts in a short period of time can negatively impact your score. It’s better to pace yourself and only apply for credit when you really need it.
Be Patient
Building or improving your credit score takes time, so be patient and stay consistent. As long as you keep up with your payments, manage your credit responsibly, and avoid applying for too many new accounts, your score will grow.
Visit First Alliance Credit Union, we’re here to help you take control of your financial future. Whether you’re just starting to build your credit or looking to improve your score, we offer products like secured credit cards and credit builder loans that can help you get on the right track.
A good credit score can make a big difference in your financial life, and with the right tools and knowledge, you can take the steps needed to build and improve it. The sooner you start, the easier it will be to achieve your financial goals.