Most of us graduate high school knowing how to calculate the hypotenuse of a triangle but remain clueless about credit scores—a number that impacts nearly every financial move we make as adults. I still remember my confusion when applying for my first apartment and being asked for a credit check. "Credit what?" was my embarrassingly honest response.
The Basics of Credit That Schools Skip Over
Credit is essentially borrowed money that you agree to repay later, usually with interest. Think of it as a financial reputation system that lenders use to decide if they trust you with their money.
When you use credit—whether through credit cards, student loans, or car financing—you're making a promise to pay it back according to specific terms. How well you keep that promise determines your creditworthiness.
What Actually Makes Up Your Credit Score?
Your credit score isn't some mysterious number assigned by financial gods. It's calculated based on specific factors tracked in your credit reports:
- Payment history (35%): Do you pay bills on time? This has the biggest impact.
- Credit utilization (30%): How much of your available credit are you using? Lower is better.
- Length of credit history (15%): Longer credit histories provide more data about your borrowing patterns.
- Credit mix (10%): Having different types of credit (revolving accounts like credit cards and installment loans like mortgages) can help your score.
- New credit (10%): Opening several credit accounts in a short period can indicate higher risk.
According to Experian, one of the three major credit bureaus, the average FICO score in America reached 716 in 2021—but many young adults start well below this benchmark simply due to limited credit history.
The Credit Catch-22 No One Warns You About
Here's something frustrating they definitely don't teach in school: You need credit to build credit. It's like needing job experience to get your first job.
Last year, I helped my younger brother navigate this exact problem. With no credit history, he couldn't qualify for most credit cards, yet without a credit card, he couldn't build credit. We found a solution through a secured credit card, where he deposited $300 as collateral for a $300 credit limit.
There are several ways to start building credit from scratch:
- Become an authorized user on a parent's credit card (if they have good credit)
- Apply for a secured credit card
- Consider a credit-builder loan from a credit union
- Use services that report rent payments to credit bureaus
How Your Credit Score Affects Your Financial Life
The impact of your credit score extends far beyond qualifying for loans. Here's what's at stake:
Interest Rates: The Hidden Cost of Poor Credit
When I bought my first car, I was shocked at how different the monthly payment would be based solely on my credit score. According to myFICO, on a $20,000 5-year auto loan, someone with excellent credit (720-850) might pay around $400 per month. With poor credit (589 or less), that same car could cost $520 monthly—an extra $7,200 over the life of the loan.
Beyond Loans: Surprising Ways Credit Affects You
Your credit score can influence:
- Housing options: Landlords check credit before approving rental applications
- Insurance premiums: Many insurers use credit-based insurance scores to set rates
- Employment opportunities: Some employers review credit reports (with permission) for certain positions
- Utility deposits: Poor credit may require larger security deposits for services
- Cell phone contracts: The best deals often require good credit
A TransUnion study found that 26% of millennials have been denied housing and 14% have been turned down for jobs due to their credit history.
What's a "Good" Credit Score?
Credit scores typically range from 300 to 850, with higher numbers indicating lower risk to lenders. Here's a general breakdown:
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: Below 580
Most lenders consider anything above 670 to be "good" credit, though the best rates and terms typically go to those with scores above 740.
How Do I Check My Credit Report?
You're legally entitled to one free credit report annually from each of the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. During the COVID-19 pandemic, this was expanded to weekly free reports, a benefit that has been extended through December 2023.
When reviewing your report, look for:
- Accounts you don't recognize
- Late payments you believe were made on time
- Incorrect personal information
- Accounts that should have aged off your report
About 20% of Americans have errors on their credit reports that could affect their scores, according to a Federal Trade Commission study.
Common Credit Myths Debunked
Let me clear up some misconceptions I once believed myself:
Myth: Checking your own credit hurts your score. Truth: Your own inquiries are considered "soft pulls" and don't impact your score.
Myth: Closing old credit cards helps your score. Truth: Closing accounts can actually hurt your score by reducing your available credit and shortening your credit history.
Myth: You need to carry a balance on credit cards to build credit. Truth: Paying your balance in full each month still builds positive payment history without costing you interest.
Myth: Co-signing a loan doesn't make you responsible for payment. Truth: Co-signers are equally liable for the debt and their credit will suffer if payments are missed.
The Bottom Line
Understanding credit isn't just about avoiding financial mistakes—it's about creating opportunities. Good credit makes life measurably less expensive and opens doors that might otherwise remain closed.
I wish someone had sat me down in high school and explained all this. Instead, I learned through trial, error, and a few costly mistakes. Don't wait for the education system to catch up—take control of your credit education now.
Disclaimer: This content is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial professional before making significant financial decisions.