October 16 is Get Smart About Credit Day—a perfect time to learn how credit works and why it matters for your financial well-being. Here’s what goes into your score, why it’s important, and how you can build healthy credit.

What Makes Up Your Credit Score?

While the exact formulas are unknown, credit scoring models like FICO and VantageScore generally focus on five main areas:

  1. Payment History (35%): This is the most important factor. Consistently paying your bills on time has the biggest positive impact on your score. Late payments, collections, and bankruptcies can significantly lower it.
  2. Amounts Owed (30%): This looks at how much debt you have across all your accounts. A key part of this is your credit utilization ratio—the amount of credit you're using compared to your total available credit. It’s wise to keep this ratio low, ideally below 30%.
  3. Length of Credit History (15%): A longer credit history generally helps your score. This factor considers the age of your oldest account, your newest account, and the average age of all your accounts.
  4. Credit Mix (10%): Lenders like to see that you can responsibly manage different types of credit, such as credit cards, auto loans, and mortgages.
  5. New Credit (10%): This factor looks at how often you apply for new credit. Opening several new accounts in a short period can be a red flag and may temporarily lower your score.

Why Good Credit Matters

Having a good credit score can save you a significant amount of money over your lifetime. Here’s why it’s so important:

Easier Loan Approval:

A strong score increases your chances of getting approved for mortgages, car loans, and personal loans.

Lower Interest Rates:

The higher your score, the lower the interest rate you'll likely be offered. This means lower monthly payments and less money paid in interest over the life of the loan.

Better Credit Card Offers: 

You can qualify for premium credit cards with better rewards, perks, and lower interest rates.

Beyond Borrowing:

Good credit can also impact other areas. Some landlords check credit when you apply to rent an apartment, and some insurance companies use credit information to help set premiums.

How to Build and Maintain Good Credit

Building good credit is a marathon, not a sprint. It takes time and consistent, positive habits. Here are some practical tips to get you started:

  1. Pay Every Bill on Time: Set up automatic payments or reminders for all your bills, including credit cards, loans, and utilities. This is the single most effective way to build a good score.
  2. Keep Credit Card Balances Low: Aim to use less than 30% of your available credit limit. For example, if you have a card with a $5,000 limit, try to keep your balance below $1,500.
  3. Become an Authorized User: If you are new to credit, a parent or family member with good credit habits may choose to add you as an authorized user on one of their cards. Their positive payment history can help you build your own.
  4. Keep Old Accounts Open: Even if you don't use a credit card often, keeping the account open can help lengthen your credit history and keep your credit utilization low.
  5. Check Your Credit Reports Regularly: You are entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) every year. Review them for errors and dispute any inaccuracies you find.
By understanding these fundamentals and putting them into practice, you can take control of your credit and build a stronger financial foundation for the future. If you have any questions on credit for consumer lending, please contact our Consumer Lender.