Credit Tips
Understanding how credit works is the first step toward improving your score and securing better financing.
What Makes Up Your Credit Score?
Payment History (35%)
On-time payments are the most critical factor in your score.
Key Factors
The Five Credit Score Factors
Payment history is the most significant factor in your credit score calculation. It tracks whether you've paid past credit accounts on time.
Why It Matters
Lenders want to know if you've made payments on time in the past, as this is the best predictor of future payment behavior.
What Affects Your Payment History
- Hurts: Late payments (30, 60, 90+ days late)
- Hurts: Missed payments
- Hurts: Accounts in collections
- Hurts: Bankruptcies, foreclosures, repossessions, or charge-offs
- Helps: Consistent on-time payment history
Tips to Improve
- Helps: Set up automatic payments for at least the minimum amount due
- Helps: Use calendar reminders if you prefer to pay manually
- Helps: Contact creditors immediately if you know you'll miss a payment
- Helps: Request a "goodwill adjustment" for one-time late payments if you have an otherwise good history
Time Impact
Late payments impact your score less over time. A 30-day late payment from 5 years ago affects your score much less than one from last month.
Credit utilization represents how much of your available credit you're currently using. It's calculated by dividing your total credit card balances by your total credit limits.
Why It Matters
High utilization can signal financial distress to lenders. It suggests you're relying heavily on credit and might have trouble repaying debts.
Utilization Impact
Excellent
Very Good
Good
Fair
Poor
What Affects Your Utilization
- Hurts: High balances relative to credit limits
- Hurts: Maxed-out credit cards
- Hurts: Closing credit cards (reduces available credit)
- Helps: Keeping balances low relative to limits
- Helps: Paying off balances before statement date
Tips to Improve
- Helps: Keep utilization below 30% (ideally under 10%)
- Helps: Pay off balances before statement date
- Helps: Request credit limit increases (without hard inquiries)
- Helps: Consider a balance transfer if you're carrying high balances
Quick Tip
Utilization has no memory - it's calculated based on your current balances. This means you can improve your score quickly by paying down balances.
Account age considers both the age of your oldest account and the average age of all your accounts. This factor rewards long-term responsible credit use.
Why It Matters
Lenders prefer borrowers with a proven track record of managing credit responsibly over time.
What Affects Your Account Age
- Hurts: Closing old accounts
- Hurts: Opening too many new accounts at once
- Helps: Keeping old accounts open and active
- Helps: Gradually adding new credit over time
Tips to Improve
- Helps: Keep your oldest accounts open
- Helps: Use old accounts occasionally to keep them active
- Helps: Space out new credit applications
- Helps: Consider becoming an authorized user on an old account
Time Impact
Account age is a long-term factor. While you can't instantly improve it, you can protect it by maintaining old accounts and being strategic about new credit.
Credit mix refers to the variety of credit accounts you have, including credit cards, mortgages, auto loans, student loans, and other types of credit.
Why It Matters
Having a diverse mix of credit types shows lenders you can handle different kinds of credit responsibly.
Types of Credit
Revolving Credit
- Credit cards
- Lines of credit
- Home equity lines
Installment Credit
- Auto loans
- Mortgages
- Student loans
- Personal loans
What Affects Your Credit Mix
- Hurts: Having only one type of credit
- Hurts: Closing accounts that add diversity
- Helps: Having a mix of revolving and installment credit
- Helps: Managing different types of credit responsibly
Tips to Improve
- Helps: Don't open new credit just for mix
- Helps: Keep existing diverse accounts open
- Helps: Consider a small personal loan if you only have credit cards
- Helps: Focus on responsible management of existing credit
Important Note
While credit mix is important, it's not worth opening new accounts just to improve it. Focus on managing your existing credit well.
New credit considers recent credit inquiries and newly opened accounts. This factor looks at how often you're applying for and opening new credit.
Why It Matters
Multiple new credit applications in a short time can signal financial distress to lenders.
What Affects Your New Credit Score
- Hurts: Multiple hard inquiries in a short period
- Hurts: Opening several new accounts at once
- Helps: Spacing out credit applications
- Helps: Rate shopping within a short window
Tips to Improve
- Helps: Space out credit applications
- Helps: Do your rate shopping within 14-45 days
- Helps: Check if you're pre-qualified before applying
- Helps: Only apply for credit you need
Rate Shopping
Multiple inquiries for the same type of loan (mortgage, auto, student) within a short period (14-45 days) are typically counted as one inquiry.
Credit Scenarios
See how your credit score impacts auto loan terms and costs.
| Credit Score Range | Approx. Interest Rate | Monthly Payment | Total Interest Paid |
|---|---|---|---|
| Excellent (750+) | 3.5% | $455 | $2,290 |
| Good (700-749) | 5.5% | $477 | $3,630 |
| Fair (650-699) | 9.5% | $527 | $6,620 |
| Poor (600-649) | 14.5% | $589 | $10,350 |
| Very Poor (below 600) | 19.5% | $656 | $14,380 |
Key Takeaway: Improving your credit score from “Poor” to “Good” could save over $6,700 in interest on a typical car loan.
Understand the consequences of a missed payment on your credit score.
Immediate Consequences
- Late fee: Typically $25-$40
- Potential penalty APR increase
- Reported to credit bureaus after 30 days late
Credit Score Impact
- 30 days late: 80-110 point drop
- 60 days late: Additional 10-30 points
- 90+ days late: Further 20-50 points
Recovery time: Late payments stay on your credit report for 7 years, but their impact diminishes over time. With no additional negative items, your score can begin recovering after 12-24 months of on-time payments.
If You Miss a Payment:
Pay as soon as possible, even if late. Contact your lender to explain the situation and ask if they'll waive the late fee as a one-time courtesy (especially if you have a good payment history).
Explore how high utilization affects your borrowing power.
Example Scenario
John has three credit cards:
- Card 1: $7,000 balance on $10,000 limit (70% utilization)
- Card 2: $4,000 balance on $5,000 limit (80% utilization)
- Card 3: $3,000 balance on $3,000 limit (100% utilization)
Total utilization: $14,000 balance on $18,000 total limit = 78% utilization
Credit Score Impact
- Significant score decrease (30-100 points)
- Appears as high-risk behavior to lenders
- May trigger credit limit decreases
- Higher interest rates on new credit
Best Recovery Strategy
- Pay down Card 3 first (maxed out)
- Then focus on Card 2
- Finally, reduce Card 1's balance
- Aim to get overall utilization under 30%
- For best scores, keep under 10%
Quick Recovery Potential: Unlike late payments, high utilization has no “memory.” Once balances are paid down and reported to credit bureaus, your score can recover quickly, often within 1-2 billing cycles.
Test Your Credit Knowledge
Take this quick quiz to test your understanding of credit factors and their impact.