Credit
Your credit score determines what you pay for debt, whether you get approved for housing, and sometimes whether you get hired. Understanding how it works lets you optimize it deliberately instead of accidentally.
Credit Scores Explained
FICO Score
Used by 90% of lenders. Range: 300-850.
| Factor | Weight | What It Measures |
|---|---|---|
| Payment history | 35% | Do you pay on time? |
| Credit utilization | 30% | How much of your available credit do you use? |
| Length of credit history | 15% | How old are your accounts? |
| Credit mix | 10% | Do you have different types of credit? |
| New credit inquiries | 10% | Have you applied for credit recently? |
VantageScore
Alternative model used by some lenders. Range: 300-850.
| Factor | Influence |
|---|---|
| Payment history | Extremely influential |
| Age and type of credit | Highly influential |
| Credit utilization | Highly influential |
| Total balances | Moderately influential |
| Recent behavior | Less influential |
| Available credit | Less influential |
Score Ranges
| Range | Rating | What It Gets You |
|---|---|---|
| 800-850 | Exceptional | Best rates everywhere, instant approvals |
| 740-799 | Very good | Near-best rates, easy approvals |
| 670-739 | Good | Average rates, most approvals |
| 580-669 | Fair | Subprime rates, limited options |
| 300-579 | Poor | Denials, secured cards only, deposits required |
Why Your Score Matters (Real Cost)
| Scenario | 750+ Score | 650 Score | Difference |
|---|---|---|---|
| $300,000 mortgage (30yr) | 6.5% → $1,896/mo | 7.9% → $2,178/mo | $101,520 over life |
| $25,000 car loan (5yr) | 5% → $472/mo | 12% → $556/mo | $5,040 over life |
| $10,000 credit card | 16% APR | 26% APR | $1,000/year on $10k balance |
| Auto insurance | Base rate | 20-50% higher | $300-800/year |
| Rental application | Approved | May be denied or higher deposit | $500-2,000 deposit |
What Affects Your Score (In Detail)
Payment History (35%)
The single biggest factor. One late payment can drop your score 50-100 points.
| Payment Status | Impact |
|---|---|
| Always on time | Positive (builds over time) |
| 30 days late | Major negative (stays 7 years) |
| 60 days late | Severe negative |
| 90+ days late | Very severe |
| Collection | Devastating (stays 7 years) |
| Bankruptcy | Catastrophic (stays 7-10 years) |
| Charge-off | Very severe |
Rule #1 of credit: Never miss a payment. Set up auto-pay for at least the minimum on every account.
Credit Utilization (30%)
How much of your available credit you use. Lower is better.
| Utilization | Impact | Example ($10,000 limit) |
|---|---|---|
| 0% | Slightly negative (shows inactivity) | $0 balance |
| 1-9% | Excellent | $100-$900 balance |
| 10-29% | Good | $1,000-$2,900 balance |
| 30-49% | Fair | $3,000-$4,900 balance |
| 50-74% | Poor | $5,000-$7,400 balance |
| 75%+ | Very poor | $7,500+ balance |
Utilization is calculated per card AND across all cards.
How to optimize:
- Pay balance before statement closes (utilization is measured at statement date)
- Request credit limit increases (increases denominator)
- Don't close old cards (reduces total available credit)
- Spread spending across cards if needed
Utilization has no memory. Unlike late payments, fixing utilization improves your score next month.
Length of Credit History (15%)
| Metric | What It Measures |
|---|---|
| Average age of accounts | Older is better |
| Age of oldest account | Older is better |
| Age of newest account | Too new can hurt |
Why you should never close your oldest credit card. Even if you don't use it, it's anchoring your average account age. Put a small recurring charge on it and auto-pay.
Credit Mix (10%)
Lenders like seeing you handle different types of credit:
| Type | Examples |
|---|---|
| Revolving | Credit cards, lines of credit |
| Installment | Car loans, student loans, personal loans, mortgage |
Don't take on debt just for credit mix. This factor is minor. But if you naturally have both types, it helps.
New Credit Inquiries (10%)
| Inquiry Type | Impact | Duration |
|---|---|---|
| Hard inquiry (applying for credit) | 5-10 point drop | Stays 2 years, impacts for 1 year |
| Soft inquiry (checking your own, pre-approvals) | No impact | Not visible to lenders |
| Rate shopping (mortgage/auto within 14-45 days) | Counted as one inquiry | Scored as single event |
Rate shopping exception: Multiple mortgage or auto loan inquiries within a 14-45 day window count as one inquiry. The scoring models know you're shopping, not seeking multiple loans.
Building Credit
Starting from Zero
| Step | Timeline | Action |
|---|---|---|
| 1 | Month 1 | Open a secured credit card ($200-500 deposit) |
| 2 | Month 1 | Set up auto-pay for full balance |
| 3 | Months 1-6 | Use card for small purchases, pay in full |
| 4 | Month 6 | Check if card converts to unsecured; request limit increase |
| 5 | Month 6-12 | Apply for a beginner unsecured card |
| 6 | Month 12+ | Continue responsible use; score should be 650+ |
Secured Credit Cards
| Card Feature | What to Look For |
|---|---|
| Annual fee | $0 or low |
| Graduates to unsecured | Yes (returns your deposit) |
| Reports to all 3 bureaus | Essential |
| Deposit | $200 minimum |
Authorized User Strategy
Being added as an authorized user on someone's well-established card can boost your score:
- You inherit the card's history and limit
- You don't need to use the card
- Both parties' scores can be affected
- The primary holder is responsible for payments
Best for: Young adults added to a parent's oldest, lowest-utilization card.
Credit Builder Loans
Small loans designed to build credit:
- Bank holds the loan amount in savings
- You make monthly payments
- After paying off, you get the money
- Payments are reported to credit bureaus
Available at credit unions and through apps like Self.
Credit Cards
Using Cards Wisely
| Do | Don't |
|---|---|
| Pay full balance every month | Carry a balance |
| Use for budgeted purchases only | Spend more because it's a card |
| Set up auto-pay for full balance | Pay only the minimum |
| Track spending in budget | Ignore statements |
| Use purchase protection perks | Open cards for sign-up bonuses you can't meet |
Rewards Optimization
| Spending Category | Best Card Type | Typical Reward |
|---|---|---|
| Groceries | Category card | 3-6% back |
| Dining | Category card | 3-4% back |
| Travel | Travel card | 2-5x points |
| Gas | Category card | 3-5% back |
| Everything else | Flat-rate card | 1.5-2% back |
Simple Reward Strategies
Beginner (1 card):
- 2% flat cashback on everything (Citi Double Cash, Wells Fargo Active Cash, Fidelity Rewards)
- No categories to track, no activating, simple
Intermediate (2 cards):
- 2% flat card for general spending
- Category card for your top spending area (groceries, dining, travel)
Advanced (3+ cards):
- Rotating category card (Discover it, Chase Freedom Flex)
- Category-specific cards for top spending areas
- Flat-rate card for everything else
Value per year on $30,000 annual spending:
| Strategy | Annual Rewards |
|---|---|
| No rewards card | $0 |
| 1% cashback | $300 |
| 2% flat cashback | $600 |
| Optimized 2-3 cards | $800-1,200 |
Credit Card Traps
| Trap | How It Works | Defense |
|---|---|---|
| Minimum payment | Keeps you in debt for decades | Always pay in full |
| Balance transfer fees | 3-5% upfront on transferred balances | Calculate if savings exceed fee |
| Annual fee cards | Fee eats rewards if spending is low | Only if rewards > fee by $50+ |
| Store cards | 25-30% APR, opened for 10% discount | Almost never worth it |
| Cash advance | 25%+ APR, no grace period, fees | Never use |
| Deferred interest | "No interest for 12 months": if not paid in full, ALL interest charged retroactively | Pay before promo ends |
| Penalty APR | One late payment → rate jumps to 29.99% | Auto-pay minimum at least |
| Foreign transaction fees | 3% on international purchases | Use no-FTF card abroad |
When to Close a Card
Close if:
- Annual fee you can't justify
- The card tempts you to overspend
- It's a store card you don't use with an annual fee
Keep if:
- No annual fee (even if unused)
- It's your oldest account
- Closing would significantly increase utilization
Credit Reports
The Three Bureaus
| Bureau | Website | Notes |
|---|---|---|
| Equifax | equifax.com | Largest data breach in history (2017) |
| Experian | experian.com | Widely used by auto lenders |
| TransUnion | transunion.com | Commonly used by card issuers |
Not all lenders report to all three. Your scores may differ between bureaus.
Checking Your Reports
- Free weekly reports: AnnualCreditReport.com (official, authorized by law)
- Free scores: Credit Karma (VantageScore), most banks/cards provide FICO
- Frequency: Check all three reports at least once per year
What to Look For
| Item | Check |
|---|---|
| Personal info | Name, address, SSN correct |
| Accounts | All accounts are yours |
| Balances | Match your records |
| Payment history | No false late payments |
| Inquiries | All hard inquiries authorized |
| Collections | No accounts you don't recognize |
| Public records | No bankruptcies or judgments that aren't yours |
Disputing Errors
20% of credit reports contain errors. Dispute process:
- Identify the error on your report
- File dispute with the bureau (online, mail, or phone)
- Bureau has 30 days to investigate
- Creditor must verify or the item is removed
- If not resolved, escalate to CFPB (consumerfinance.gov)
Always dispute in writing with documentation. Keep copies of everything.
Identity Theft Protection
Prevention
| Action | How |
|---|---|
| Freeze your credit | Free at all three bureaus; prevents new accounts |
| Use strong, unique passwords | Password manager (Bitwarden, 1Password) |
| Enable 2FA | On all financial accounts |
| Monitor accounts | Weekly check of transactions |
| Shred documents | SSN, account numbers, pre-approved offers |
| Don't share SSN freely | Only when truly required |
| Use virtual card numbers | Many banks offer disposable numbers |
Credit Freeze vs. Fraud Alert
| Feature | Credit Freeze | Fraud Alert |
|---|---|---|
| What it does | Blocks all new credit inquiries | Requires extra verification for new credit |
| Duration | Until you lift it | 1 year (extended: 7 years for victims) |
| Cost | Free | Free |
| Effort | Must freeze/unfreeze at each bureau | Set at one bureau, shared to all three |
| Protection level | Strongest | Moderate |
Recommendation: Freeze your credit at all three bureaus. Temporarily lift when you need to apply for credit. It's free and the strongest protection available.
If You're a Victim
- Freeze credit at all three bureaus immediately
- File FTC report at IdentityTheft.gov
- File police report
- Contact affected financial institutions
- Place extended fraud alert (7 years)
- Review credit reports for unauthorized accounts
- Monitor accounts closely for 12+ months
- Consider IRS Identity Protection PIN
Credit Score Recovery Timeline
| Negative Event | Score Drop | Recovery Time |
|---|---|---|
| Maxing out a card | 10-45 points | 1-2 months (pay it down) |
| Hard inquiry | 5-10 points | 3-6 months |
| 30-day late payment | 50-100 points | 12-18 months |
| Collection account | 50-100 points | 2-4 years (impact diminishes) |
| Bankruptcy (Chapter 7) | 130-240 points | 4-6 years |
| Foreclosure | 100-150 points | 3-7 years |
Time heals credit damage. Recent events impact more than old ones. Keep building positive history and negatives fade.
Key Takeaways
- Never miss a payment. It's 35% of your score and the damage lasts 7 years
- Keep utilization under 30%. Under 10% is ideal
- Don't close old accounts. History length matters
- Pay credit cards in full every month. Rewards only work if you don't pay interest
- Check credit reports annually. Dispute any errors
- Freeze your credit. Strongest identity theft protection, free
- Rewards are a bonus, not a reason to spend. Never spend more to earn points
- Build credit early. Start with a secured card if needed