A credit card is the way most of us access credit, enabling everyday purchases that we’ll pay off later. But credit also enables other kinds of financing, like buying a home, leasing a car, paying for college, or even getting a phone on a mobile plan.
Credit can play a big role in our lives. Many major events - and modern conveniences - rely on understanding credit and using it well.
Let’s cover the fundamentals and answer a handful of common questions.
Your credit score measures your past history of using credit and repaying debts. It’s a number that signals your “creditworthiness” - how trustworthy you are and how lenders can expect you to pay off future debts.
In the US, credit scores are calculated and reported by three companies - Equifax, Transunion and Experian - which together are called the “credit bureaus.”
Lenders report your payment history to the credit bureaus, noting late and missed payments and how used or misused your credit. And lenders also report your good behavior, like consistent, on-time and in-full payments, following the terms of your loan or credit agreement.
Based on that reporting, the credit bureaus compile your credit report, an overview of your credit history that creditors, insurers, employers and others, including you, can see.
You can establish your credit history by getting a credit product, like a credit card or a loan - almost any credit tool that has a credit agreement. Once you get started, use your credit responsibly and keep at it. The more good behavior you demonstrate, the higher your credit score.
On your credit report, your good and bad credit behavior is weighted at different levels. Your credit score looks at specific behavior and adds them proportionately:
This is how often you’ve made scheduled payments and how often you’ve made them on time.
Your credit utilization tracks how much credit you use relative to the credit available to you. Most experts recommend using no more than 30 percent of your available credit at any given time.
This looks at the average time you’ve maintained all your accounts.
How many different types of credit you have is also a factor, weighted here.
How many new accounts you’ve recently opened is another determinant.
From your credit report, the credit bureaus assign you a credit score, from 300 to 850. The higher your score, the more credit you could be offered, along with better terms and rewards.
Here’s a common ranking of credit scores:
Build your credit with Bright.
Your credit score can have a wide-ranging impact. Your score can determine the loans and financing available to you, which play a big part in determining the kind of home you can afford, the kind of car you drive, and which schools you or your family can attend with tuition rates. Your credit score can also determine, in part, the apartment you rent and even your phone’s mobile plan.
Many employers check the credit scores of prospective hires, and insurance companies use them, in part, to set your rates.
Even applying for a credit card can impact your score: creditors can request them whenever you apply, and too many requests can sometimes hurt your score.
If you’re looking for more ways to boost your score, review a few simple tips here. We’ll look at the basics of good credit behaviour and talk about things to avoid to keep your score healthy.
You can also try adding the Bright Credit Builder - every payment counts toward raising your score. When you work with the Bright app, the Bright Credit Builder adds a new line of credit with on-time payments built in - one of the best things you can do to boost your credit score.
With the Bright Credit Builder, your utilization is never reported to credit bureaus, the new line helps diversify your credit history, and it never expires, offering long-term stability, especially when other accounts get closed. To get started, download the Bright app, connect your accounts and add the Bright Credit Builder.
If you’ve got more questions - and you’re thinking big picture - read more about why your credit score matters here.
With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.