Module 4: Credit Scores Decoded

The 3-Digit Number That Controls Your Life

Your credit score is a number between 300-850 that tells lenders how risky you are to lend money to.

Why it matters:

• Getting approved for credit cards, car loans, mortgages
• Your interest rates (good score = lower rates, save thousands)
• Renting an apartment (landlords check it)
• Sometimes job applications (employers can check it)
• Insurance rates (yes, really)

A 760 credit score vs a 620 can mean $100,000+ difference in interest on a 30-year mortgage.

Credit Score Ranges

The 5 Factors (FICO Score)

1. Payment History (35%) - Most Important

What it is: Do you pay your bills on time?

Impact: One late payment can drop your score 50-100 points.

How to win: Pay everything on time, every time. Set up autopay. Even $5 missed can hurt you.

2. Amounts Owed / Credit Utilization (30%)

What it is: How much of your available credit are you using?

The rule: Keep utilization under 30%. Under 10% is even better.

Example: If your credit limit is $10,000, keep your balance under $3,000 (ideally under $1,000).

Pro tip: Pay off your credit card before the statement date to keep reported utilization low.

3. Length of Credit History (15%)

What it is: How long have you had credit accounts?

Impact: Longer is better. Average age of accounts matters.

Don't do this: Closing old credit cards (it shortens your history)

Do this: Keep your oldest card open, even if you don't use it much.

4. New Credit (10%)

What it is: How many new accounts have you opened recently?

Impact: Opening multiple accounts in a short time looks desperate.

Hard inquiries: Each credit application creates a hard inquiry (drops score 5-10 points for a few months)

Exception: Rate shopping for mortgages/auto loans within 14-45 days counts as one inquiry.

5. Credit Mix (10%)

What it is: Do you have different types of credit? (credit cards, auto loan, mortgage, etc.)

Impact: Minor factor. Don't take out loans just to improve this.

Natural approach: It'll improve over time as you make major purchases.

Free Ways to Check

AnnualCreditReport.com - Free credit report from all 3 bureaus once/year (official government site)

Credit Karma - Free scores (TransUnion + Equifax) updated weekly

Your bank/credit card - Many now offer free FICO scores

The 3 Credit Bureaus

• Equifax
• Experian
• TransUnion

Each may have slightly different information. Check all three annually for errors.

Dispute Errors

Found a mistake? You can dispute it for free:

1. Contact the credit bureau online
2. Provide evidence the information is wrong
3. They have 30 days to investigate
4. If validated, it gets removed

Common errors: Accounts that aren't yours, incorrect late payments, already-paid collections

Myth #1: "Checking my credit hurts my score"

False. Checking your own credit is a "soft inquiry" and doesn't affect your score.

Only hard inquiries (from lenders when you apply for credit) affect your score.

Myth #2: "Closing credit cards improves my score"

False. Closing cards reduces your available credit (increases utilization) and shortens your credit history. Both hurt your score.

Myth #3: "I need to carry a balance to build credit"

False. You don't need to pay interest to build credit. Just use your card and pay it off in full every month.

Myth #4: "Income affects my credit score"

False. Your salary, savings, and net worth don't affect your credit score. Only your borrowing behavior.

Starting With No Credit History

Option 1: Secured Credit Card

Put down $200-500 as collateral. Use it like a normal card. Pay in full each month. After 6-12 months, upgrade to unsecured.

Option 2: Credit Builder Loan

Some credit unions offer these. You "borrow" money that gets held in savings. As you pay it back, it builds credit.

Option 3: Become an Authorized User

If a family member has good credit, ask to be added as an authorized user. Their history can help yours.

Timeline: Building Good Credit

6 months: Enough history to get a basic credit score

12 months: Can qualify for better credit cards and small loans

24 months: Good credit score (700+) if you've done everything right

7 years: Most negative marks fall off your report