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All About Credit: Your Credit Score and Credit Report Matters

All about credit
Erik Martin
UpdatedAug 16, 2022
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    6 min read
Key Takeaways:
  • Credit is the ability to borrow money now and repay it later.
  • Credit reports show lenders how you have repaid debts in the past.
  • Credit scores reflect your likelihood of defaulting on (not paying) your debts.

If you ever want to borrow money or use a credit card from a bank, lender, or other financial institution, you’ll need to establish and maintain good credit. Credit is the ability to borrow money now and repay it later.

Want to know how to build credit? Curious what is a good credit score? Eager to learn how to check your credit score and credit reports? Seeking strategies to raise your credit score? Read on for helpful information and tips that can put you in a stronger position to possess a healthy credit rating.

What is credit?

Credit is simply the capacity to borrow funds, use a line of credit, or access services or goods that you will have to repay in the future.

Your ability to earn credit is based on your creditworthiness, which is determined by your history of obtaining, using, and repaying credit accounts. Creditworthiness is often determined based on two important sources: your credit score and your credit report.

You are considered a better candidate for being approved for credit if you have a higher credit score and a relatively clean credit report.

Four primary types of credit exist. These include:

  1. Revolving credit, including credit cards, in which you have a maximum borrowing limit that you cannot exceed. With revolving credit, you are required to make a minimum monthly payment; you can pay any amount above that up to the full balance due. If you don’t pay in full, your balance remainder will carry over to the next month and you will be charged interest.
  2. Installment credit, including mortgage loans, automobile loans, student loans, and personal loans, for a particular amount of cash you pledge to repay (in addition to interest and fees) via consistent set monthly payments across several months/years.
  3. Service credit, which involves agreements with providers of services and utilities, including electric, gas, Internet, cellular, and cable companies; these providers render services or resources to you monthly that you must repay.
  4. Store charge cards issued by retailers that are similar to credit cards but which may not allow you to carry over a balance from month to month.

What is a credit report?

According to the Consumer Financial Protection Bureau (CFPB), a credit report is a statement that contains information and details about your credit activity and existing credit statuses, such as a chronological history of opened and repaid loans and credit cards and the status of your credit accounts.

Your credit report can include details about the number of credit accounts you currently have, credit accounts you have closed, existing outstanding balances, borrowing limits, how much you’ve repaid on these accounts, details on monthly payments made punctually versus late payments, and if you have experienced any bankruptcies, repossessions, or foreclosures.

You have three credit reports you can access for free via the three credit reporting bureaus: Experian, TransUnion, and Equifax. The information on each of these three reports should match and correlate. It’s possible for a creditor to report inaccurate or erroneous information on one of your credit reports. That’s why it’s important to check each of your three credit reports at least annually. If you notice any discrepancies or errors, you can request that your creditor correct them with each credit bureau.

Your credit reports help determine your credit score.

What is a credit score?

Your credit score is a three-digit number that is a reflection of your creditworthiness based on the information in your credit reports.

There are different types of credit scoring models and credit scores. The most common is a FICO score. Another popular credit score model is VantageScore.

What is a good credit score?

Credit scores typically range from 300 to 850. The higher the number, the more creditworthy you are considered and the more likely you will qualify for lower interest rates, lower financing costs overall, and higher borrowing amounts.

FICO scores between 670 and 739 are considered good. Meanwhile, a VantageScore that falls between 661 and 780 is often regarded as a good credit score. Anything higher (for FICO or VantageScore) is deemed excellent. You’ll need at least a good credit score to qualify for many types of financing, including a mortgage loan – depending on the lender and loan (an FHA loan, for instance, often requires at least a 580 credit score if you want to put as little as 3.5% down).

FICO scores are derived based on five categories that each comprise a portion of your score:

  • 35% payment history
  • 30% total debt
  • 15% length of credit history 
  • 10% new credit
  • 10% types of accounts, known as credit mix

How to check your credit score

Per Equifax and the CFPB, there are four main ways to access your credit score:

  1. Request your credit score from your credit card company, bank, mortgage lender, or other financial institution. Many provide your credit score free upon request. Your lender, bank, or credit card may also automatically provide your credit score by accessing your account online.
  2. Use a free credit scoring site or fee-based credit score service.
  3. Buy your credit score directly from FICO or from Equifax, TransUnion, or Experian.
  4. Consult with a non-profit credit counselor or HUD-approved housing counselor. These professionals can often provide you with a free credit report and score and assist you in reviewing them.

How to raise your credit score

Wish you had a higher credit score? There are strategies you can pursue to up your numerical score:

  • Pay your loans, credit cards, and financial accounts on time every month. To ensure timely payments, set up automated payments through the creditor or remind yourself on your phone/computer.
  • Avoid applying for credit you don’t need. If you apply for too many credit accounts over a brief period, it may lower your score.
  • Correct any mistakes or inaccuracies you spot on your three credit reports.
  • Don’t max out your credit limit. Keep your balances low without exceeding your total credit limit. As a rule of thumb, try not to use any more than 30% of your total credit limit.
  • Avoid the impulse to close credit cards/accounts you don’t use. Doing so may lower your score.

How to build credit

If you are young and/or haven’t established a measurable credit history yet, it’s wise to work on building credit and demonstrating your creditworthiness. Even if you don’t need a loan now, the time could come soon when you want to, for example, sign a rental lease, open credit accounts, or finance a major purchase. You may get turned down if you have not developed a decent credit rating.

To improve your chances, consider the following recommendations from the CFPB, especially if you encounter difficulty getting approved for credit:

  • Pay any bills, loans, accounts, and lines of credit you already have on time. Remember that the most crucial factor that affects your credit score is payment history.
  • Apply for a secured credit card. With this card, you deposit an amount of cash, ranging from $50 to $300 into a separate account that the creditor holds on to. This bank or creditor then extends a credit line matching your deposit amount. Make sure the secured credit card issuer reports your use of the card to the three credit reporting bureaus.
  • Apply for a charge card from a retailer like a department store, online retailer, or gas station. These cards are often easier to qualify for but may offer lower credit lines.
  • Pursue a credit builder loan. Here, a credit union or other financial organization will deposit a small amount (typically $300 to $1,000) into a locked savings account; then, you repay the institution via small-dollar payments across six to 24 months – payments that are reported to the credit reporting bureaus. After your loan term ends, you will receive the accumulated cash back in full.
  • Inquire about increasing your credit limit. If you currently have a credit card and are paying your bills on time, request a rise in your credit limit, which can enhance your credit utilization ratio and increase your credit score.
  • Become an authorized user on someone else’s credit card if you get turned down for your own card. Authorized users are added to an existing account and given their own card to charge with. Positive activity on the card will be reflected on your credit report and calculated into your credit score.

Frequently Asked Questions

How many credit cards should I have?


There is no hard and fast rule about how many credit cards you should have. However, the more try to cards you open and use, the more likely it is that you may charge beyond your financial means of repayment, which can harm your credit rating. Still, owning more than one credit card might aid you in keeping your credit utilization ratio for each card lower than the suggested 30% ratio because you’ll spread your charges across different cards.

What is a secured credit card?


With a secured credit card, you are required to first make a security deposit that is typically equivalent to your credit limit. The security deposit amount will be refunded to you if you meet the terms of the card. Secured credit cards offer a great way to establish and build credit and can increase your credit score.

What credit score do I need to purchase a home?


Every loan type and lender has different minimum requirements for qualifying for a mortgage loan, including the minimum credit score you need. According to the Consumer Financial Protection Bureau, some loans/lenders want you to have a credit score of at least 620 unless you have a large down payment. An FHA loan for which you put down at least 3.5% requires at least a 580 credit score.