Chapter 1: Impacts to Your Credit: Payments, Balances, and Credit History
In order to get better control of your credit, you need a good grasp on what credit is and how it works. This part of the conversation defines credit and outlines the key components of a credit score.
Change starts with knowledge, and that's what this chapter is all about. Watch the video and download the Credit Myths: Discredited Guide as a guide and a place to make notes for what credit facts resonate with you.
The DNA of a credit score.
Let's imagine you're getting ready to buy a car. You've saved a good portion of the money to pay for it, but you'll still need a loan to help purchase it from the dealer. Before any lender decides to give you a loan for the car, they will check your credit score.
Your credit score is made up of five key components: payment history (35%), credit utilization ratio (30%), length of credit history (15%), credit inquiries (10%), and credit mix (10%).
This data feeds into a credit report. The report basically indicates the level of responsibility with which you pay your bills and loans. If you have a history of consistently missing payments and you max out your credit cards, you should anticipate a low credit score. On the other hand, if you make your payments on time and you stay under 30 percent of your credit limits, you'll have a higher credit score.
A higher credit score is great, but if you have a lower score, it's not the end of the world. You could make adjustments to improve your credit relatively quickly.
Budgeting Tip: Credit scores range from 300-850. Higher credit scores are favorable to lenders.
Your Chapter 1 Checklist:
- Watch the Impacts to Your Credit: Payments, Balances, and Credit History video
- Download the Credit Myths: Discredited Worksheet
- Get an understanding of what credit is