Your credit is at the center of your entire financial life!

Do you know your credit score? Do you know what affects your credit score? Do you even know what a credit score is?

If you don’t, that’s OK!

Most people don’t really understand the topic of credit. And for good reason, it’s complicated! And unless you studied finance, you probably never learned a thing about it in school.

But you need to understand how it works! Your credit is one the most important aspects of your entire financial life. It affects things like your interest rates, your ability to buy a house or a car, and it can even affect your ability to get a job.

So you need to understand a few things about how it works in order to keep your financial life on track. Below you will find resources to help you gain a better understanding of your credit and how it works, including what you can do to improve your score!

Factors that impact your credit score

First, people often think their age impacts their score, but how old you are has nothing to do with it.

There are five main factors that determine your credit score:

Credit score factors

  • 35 percent: Your payment history
  • 30 percent: Amounts owed
  • 15 percent: The length of your credit history
  • 10 percent: New credit
  • 10 percent: Mix of credit

What damages your score

Let’s look at a few specific behaviors and other things that cause the most damage to your credit score.

Based on the main factors that affect your credit score, here are a few common things that cause it to drop — things you want to be aware of and avoid if you can (and these numbers are estimates, but they’ll give you an idea of how important it is to avoid these things):

  • Late and missed payments: If you’re late on all of your bills in one month – your score could drop by 75 – 125 points.
  • Maxed out credit cards: Reached the limit? That will take somewhere between 20 and 70 points off your credit score.
  • When you apply for a new credit card, your credit score will temporarily drop around 10 to 12 points.
  • Having no or very little credit history: If you’ve never had any type of credit in your name, or you’ve only had a couple of bills or maybe one credit card — you will likely have a low credit score.

Timing is very important with credit. When you have big goals you want to reach, you have to understand what’s going on with your credit in order to make sure you’re financially prepared for them. And this doesn’t just mean saving enough money, because even with a down payment, a low credit score will cause you to pay much higher interest rates — often so high that you can’t even afford the  loan because the monthly payments would be too much.

You have to know how certain mistakes or decisions are going to affect you.

When it comes to credit history, ideally you want to start building credit as early as possible, which is why it’s a good idea for college students to use a credit card to start establishing credit — as long as they can handle it!

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