How Credit Works

The Difference Between Score and Report

Credit Score

A credit score is a snapshot of your credit history at a particular point in time, ranging from 300-850. When many people reference credit scores, they are generally referring to their FICO® score. FICO considers your repayment history, the amount of money you owe, the length of your credit history, your credit mix, and any new credit requests. Each of these factors are weighted (like a GPA!) when calculating your credit score. For example, making all of your payments on time is more important to your score than the mix of your credit.

Credit Report

Your credit report is monitored by three consumer credit reporting agencies: Equifax, Experian, and Transunion. Your credit report contains the history of your credit use. Information on your credit report can include any business or company that extended you credit, loans in your name, your payment history, and bankruptcies. Depending on the information, details can stay on your credit report from 7-10 years.

Federal law requires that each agency provides a free credit report every 12 months. To request your free annual credit report go to www.annualcreditreport.com. 

How to Build Credit

1. Consider a secured credit card. This is a credit card you can get through your bank. They will ask you to give them cash upfront as "security" in case you are unable to pay your balance. Works just like a credit card!
2. Consider a regular credit card with a small balance. Emphasis on small balance. A good example of a regular credit card is maybe a Best Buy credit card. You might use a regular card like this to purchase a new laptop for class or other school materials. 

Maintaining Good Credit

1. Pay on time. Timeliness is the most important factor of a healthy credit score. If you can help it, do not be late!
2. Pay your balance every month. If you can't pay the full balance, pay at least the mimum so you don't get charged interest. 
3. Try to only use 30% of available credit. Credit bureaus check to see if you're maxing out your credit cards. Using too much credit can lower your score.
4. Avoid opening mulitple credit cards. Having too many cards makes it more difficult to track your expenses, due dates, and amounts due.
5. Avoid closing open credit accounts. Your score can actually go down if you close too many accounts! You can use a score simulator to estimate how much your score will change if you close an open account.
6. Monitor your credit history and report any discrepancies. If you notice random charges that you didn't make be sure to report that! It could negatively impact your score and affect your purchasing power in the future.

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Helpful Resources

MyFico Credit Education

NerdWallet How to Build Credit

Credit Karma How Credit Works