Credit impacts multiple areas of your financial life—whether it’s applying to rent an apartment, buying a car, or getting pre-qualified for a mortgage. Your credit score follows you and serves as a mirror for lenders, revealing how reliable a borrower you are.
For something this important to be a reflection of your financial identity, it’s crucial that you truly understand what a credit score is, what actions affect it, and how to improve your score in the future. In this article, we’ll break down credit scores and help you navigate how to understand them.
Key things that go into your credit score include your payment history, credit usage, credit history, credit mix, and new credit. Each one plays a key role in contributing to the outcome of your credit score number, which typically ranges from 300 to 850.
Your payment history considers how often you’ve made on-time, full payments. It’s the total recap of how well you’ve managed your credit thus far, which indicates a good portion of your score because it gives a big picture of how reliable you are at borrowing money and paying it back.
Credit usage, also known as credit utilization, is how much you’ve borrowed from the line of credit you’ve been given. For example, you might have a $3,000 credit limit on your credit card. If you go over 30% of your credit utilization, it shows you’re heavily relying on your credit, meaning you’re depending on it more for what you need.
Credit history, not to be confused with payment history, looks at your credit itself and how long you’ve had it. It’s looking at how long your credit has been open.
Credit mix refers to the diversity of your credit portfolio. It shows the types of credit you have, such as credit cards, mortgages, and auto loans.
The final contributing factor to your credit score is new credit. When you choose to open a new card or take out a loan, you’re opting in to add new credit to your portfolio.
Several factors may be negatively impacting your credit score, so here are the key things you may want to avoid:
Paying $35 instead of $3,500 right off the bat might seem tempting, but it's not a wise idea. Instead of paying only the minimum payments on your credit card or student loans, aim to pay as much as you can, or even better, pay off the debt in full. This may not work with things like student loans, but even increasing the amount over the minimum can make a significant impact in the long run to help you a) not get too comfortable with debt and b) make sure you’re being responsible and aware of how much debt you have.
While your credit card may say you can borrow up to a certain amount, it’s important to only use 30% or below of that amount. For an even better score and to avoid going over, aim to spend only 10% of your available credit. Going over 30% can bring your score down because it shows lenders that you’re too dependent on credit.
One of the fastest ways for you to tank your credit score is to forget to make your payments. Whether you’ve missed your payment entirely or by several days, missing payments can drop your score because it’s alerting lenders that you’re either not paying attention or unable to make the payment. To avoid missing payments, set up automatic payments or add reminders to your calendar or phone to pay on time.
Using a single credit card may be more manageable than multiple cards, but it could negatively impact your credit score. Having a variety of credit, such as student loans, a credit card, and other payments, helps keep your score stable. Using only one card increases your chances of higher credit usage. It also carries a higher risk of something going wrong when you put all your eggs in one basket with a lender. Plus, the more credit you have, the more it reveals about your reliability as a borrower. While a strong credit mix can be good for your financial health, having multiple credit cards or frequent credit use may not be. Since credit at the end of the day is just debt, it’s important that you’re not opening multiple credit cards or taking everything out on loans that you could be paying for in full.
Sometimes, a drop in your score may not indicate that something is wrong. This can happen after you’ve paid off a major debt, like student loans or your mortgage. While you might be expecting your score to rise, don’t worry if it goes down once you’ve paid it all off. Remember, the goal isn’t determining how much debt you have, it’s not having any debt at all!
If your salary has risen recently, be sure to keep up with your credit limit as well. If you’re in a situation where you’re paying more expenses, such as a new baby in the family or gaining financial independence as a young adult, you could have an increase in expenses, such as rent, insurance, or other necessities.
As you spend more on your card, you’re risking increasing your credit utilization, even though you’re being responsible. That’s why it’s important to up your credit limit by letting your credit card company or financial institution know what your new net income is.
Keeping your budget in control is key to improving your credit score. How much you take on credit reflects how much you depend on it, whether you have the cash elsewhere or not. To keep your credit score in a good spot, aim to use only 10% of your credit limit. For example, even if your credit limit is $5,000, you only need to spend $500. Remember, just because you have that much credit does not mean you should use it all at once. Having the discipline to spend only 10% keeps your mindset in check and could help you avoid avoidable credit card debt.
"The consumer's goal should not be to ‘raise my score xxx number of points,’ but rather it should be improving the range your scores fall and fluctuate within..." said Jonathan Jones, Financial Counselor at Leaders Credit Union.
While you should avoid using a single credit avenue and maintain a strong credit mix, you don’t want to have too many open credit cards or other lines of credit. Every time you open a new account, it can ding your credit score because it means you’re now relying on more credit (or more debt). Staying loyal to two or three accounts can help you maintain credit diversity, but don’t go overboard by opening accounts at every store you shop at or for every online promotion you see.
Errors on credit reports can happen, so it’s important that you do regular check-ins to make sure everything looks right with your transactions, loans, and other financial information. Fraud is also common, so catching these things early could help protect you from having a significant unexpected dent in your credit score.
Whether you’ve seen a credit hack from a social media influencer on Instagram or TikTok or heard advice from relatives about point systems, there are many sources that claim to have the “ultimate way” of using credit, but how do you know which ones are safe to follow? This can be tricky in our digital age, with so many opinions, ideas, theories, and claims that try to make money decisions easier and more rewarding.
A key thing to remember is that while it may claim to be easier, that doesn’t necessarily mean it is safer. Risking the safety of your credit could really negatively impact your score in the future if the “hack” isn’t what you thought it would be. Here are some “credit hacks” that aren’t trustworthy:
One “credit hack” to watch out for is the 15/3 hack: make half a payment on your credit card bill 15 days before it’s due, then pay the remaining half 3 days before it’s due. This strategy doesn’t actually boost your credit, so don’t depend on it as a fix to a low credit score.
Another unreliable credit hack involves opening several prepaid cards in hopes of showing “proof” of responsible spending habits. Some people use prepaid Visa or Mastercard cards to pay for necessities and bills, such as rent or existing credit card balances, believing this will make them appear more financially responsible despite a poor credit history. However, this strategy does not improve credit because prepaid cards typically do not report positive payment history to credit bureaus, nor do they erase negative marks already on a credit report.
When you’re trying to improve your credit score, don’t open and close several cards at once to get deals. Constantly opening new lines of credit could actually lower your score, not improve it, because it shows you’re relying too much on debt for your finances. Also, if a pattern emerges in the deals and closings, that can be a negative sign to the credit card companies.
When you’re seeing different credit scores, you’re actually seeing what different credit bureaus are looking at through their own lens of what’s impacting your credit. In the United States, only private companies pull credit reports and credit scores, since there is no official government entity that manages them. Some of these private companies include:
These companies also use different scoring models, such as FICO or VantageScore.
"You don't have just one credit score," said Jonathan. "You literally have hundreds of different potential credit scores at any given time based on which scoring model is being used and differences in your credit data."
Think of credit as a key. It can unlock doors to better deals, discounts, rates, and overall financial stability. If you choose to throw away the key, you won’t be able to open the door to access those things. This is why having good credit is essential for your overall financial health.
Here are the financial opportunities that could improve when you have a better credit score:
Making wise decisions now will impact you in the future, whether you realize it or not. That’s why we want to help you make better, well-informed decisions so you can stay out of debt and feel confident in your financial journey.
Q: What factors affect my credit score?
A: The main factors affecting your credit score are your payment history, credit usage (utilization), length of credit history, credit mix, and new credit accounts.
Q: What actions hurt your credit score?
A: Missing or late payments, only paying the minimum balance, using over 30% of your available credit, relying on a single credit card, and opening too many credit accounts at once can lower your credit score.
Q: How can I quickly improve my credit score?
A: Pay off your credit card balances in full, keep your credit utilization below 10%, and request a higher credit limit if your income increases.
Q: Why do I have different credit scores?
A: Different credit bureaus might use different credit score models, but they should be close to the same number. There might be slight differences depending on how they calculate your information.
Knowing how to manage your credit score can be overwhelming if you don’t know where to start. Reach out to one of our Financial Champions at a branch or call 731-664-1784 for help. For a deep dive into your financial situation and to have a holistic understanding of your credit score, book a financial counseling appointment.
Ready to choose a new credit card? Check out our free credit card comparison guide. To learn more about your credit score, read our other article, “How to Build Credit: Understanding Credit Scores, Credit Reports, and Different Types of Credit.”
Leaders is federally insured by the NCUA.