The Ultimate Guide to Personal Finance

Credit, Credit Scores and Credit Reports

Which comes first, your credit or your first credit card? That’s not much easier to answer than, “Which came first the chicken or the egg?”

The reality is that your credit comes after your first credit card or loan. No loans, no credit cards means no credit.

There’s credit—an advance to buy something—and then there’s your credit—aka your credit file.


Credit is essentially a loan from a bank or other financial institution, including a credit card issuer. These entities are collectively known as creditors or lenders and extend credit to you in the form of:

  • Installment loans —aka installment credit—such as a mortgage or car loan
  • Lines of credit or credit cardswith a maximum usable credit limit—known as revolving credit
  • Credit arrangements are utilities, memberships (think gym) and service agreements (think cellphone)
  • Charge cards that are like credit cards, but have to be paid in full each month

Your Credit—Your Credit Scores and Credit Reports

Your credit file is information about how you use credit—your loans and credit card. Your credit file—actually files, plural—is kept by the three major credit bureaus—Experian, Equifax and TransUnion. You have a file at each bureau. And each bureau’s file may be different because some creditors only report to some bureaus. Your credit report is an account of everything in your credit file, which includes:

  • Your credit card and loan account records, including payment history, balances, credit limits and open and close dates
  • Your basic information, such as name and address
  • Information on applications you’ve made for credit within the last three years—called hard inquiries
  • Information on your public records, if any, such as bankruptcies, tax liens and lawsuit judgments involving debts from the last 7 to 10 years

Your credit scores are calculated using the information in your credit file. A scoring model is run against your information and other peoples’ general information to essentially give you a 3-digit numerical score and a ranking, such as “good.”

You have multiple scores and there are multiple scoring models. Each credit bureau uses different models that use different algorithms to generate a score. The FICO® Score model and VantageScore models are the most common models and scores. Scores from both range from 300 to 850 and bad or very poor to excellent or exceptional and break down as follows:

illustrations showing the differnces between vantage score and fico score

While the credit bureaus provide credit scores, so do FICO and VantageScore and other companies. Scores can even be industry-specific, such as the auto industry, the mortgage industry, and are averaged across all bureaus by some companies. Generally, all your scores are similar.

Your credit score is a bit different than the credit-based scores used by the insurance industry.

There are five main factors—or ingredients—from your credit file that make up the bulk of your credit score. Like any recipe, your score uses more of some ingredients than others.

a pie chart showing the percentages of the five main factors that make up the bulk of your credit score

Payment History

Payment history is just what it sounds like—your history of making payments whether on time or not. It’s the biggest ingredient in your credit score making up a full 35% of your score all by itself. Payments that matter are those reported to the credit bureaus and include credit card and line of credit payments and installment loans, such as a car payment or mortgage.

Rent and utility payments only factor in if your utility company or landlord reports your payments to the bureaus. Most don’t. But some do. You can ask your landlord to report your payments.

On-time payments help your credit score. Late payments and missed payments lower your credit score. Late payments that lead to collections, liens, foreclosures, bankruptcies and judgments hurt your score too. A negative item, like a late payment, lien and other item listed here, stay on your report for up to seven years. Chapter 7 bankruptcies stay for 10 years.

Debt Usage or Credit Utilization

Your debt usage or credit card utilization ratio is the second biggest ingredient in your score. Your ratio is the amount you’ve charged on your credit cards compared to the total credit limits on your cards. The maximum ratio that lenders and creditors like to see is 30%. The ideal is 10% or less.

Say you have three credit cards with a combined credit limit of $10,000. A credit card utilization ratio of 30% means you haven’t charged more than a total of $3,000 across all the cards. 10% is no more than $1,000 on all the cards combined.

credit utilization ratio of $30,000 divided by $10,000 equalling 30%

Credit Age

Credit age is a lesser ingredient in your score. It makes up roughly 15% of your final score.

Credit age isn’t how long you’ve used credit , but how long ago—in years and months—the oldest recorded account on your credit file was opened. Your score also factors in the average age of all your accounts.

Accounts can be open and in use, unused or closed. Accounts closed by your creditor due to a lack of payment or other delinquency come off your credit file in seven years. Accounts you close by choice may come off your file or stay on it indefinitely. Typically though, an account you close falls off your file in 10 years.

A tip: Before choosing to close a credit card or line of credit, consider the impact on your score. Closing a revolving credit account lowers your credit limit and can increase your credit utilization. So, you might be better off leaving unused accounts open.

Account Mix

The mix of account you have makes up 10% of your score’s recipe. Your account mix has ingredients of its own. You want revolving credit accounts, installment loans and maybe even open credit.

  • Revolving credit accounts include credit cards and home equity lines of credit.
  • Installment loans are loans with a fixed payment schedule for a set term or number of years and include mortgage loans, home equity loans, auto loans, student loans, personal loans and credit builder loans.
  • Open credit, such as a store charge card , rent or utility payment, is an account that should be paid in full each billing cycle.

There’s no magic formula for account mix. Creditors simply want to see that you’ve successfully handled a variety of types of credit.

Credit Inquiries

The final factor in your credit score is credit inquiries. Credit inquiries happen when you or a business accesses your credit report.

There are soft credit inquiries soft credit inquiries and hard inquiries . A hard inquiry happens when you apply for a credit card or loan and the creditor looks at your credit file. Each hard credit inquiry reduces your credit score by five or ten points for one to two years.

Soft inquiries happen when you or a prospective employer look at your credit. Soft inquiries don’t affect your credit score or go on your credit file.

A tip: Credit scoring models view multiple inquiries for a single loan type in a short timeframe as a single inquiry. So, if you’re looking for a mortgage, car, student or personal loan and need to apply for more than one, apply for multiple loans in a two week period.

Watch Your Credit

It’s important to keep an eye on both your credit score and your credit reports.

You can get a free copy of your credit reports from each of the three bureaus annually through The goal of checking your reports is to ensure that the information is accurate and actually yours. If you find an error, you can file a dispute with one or more of the credit reporting bureaus to try and have the error removed from your file. You can also turn to a credit repair company or credit lawyer for help.

You can get a free copy of your credit scores from a variety of places. And you can get your free Experian credit score only here on or directly from Experian itself. You can also get your FICO score and Experian credit report on
for $1.

Your score on is updated every two weeks and includes a free credit report card that shows you how you’re doing in each of the five factors that go into your score and what you can do to improve each factor if needed.

Keeping an eye on your score can alert you to any changes that indicate potential identity theft and other issues and let you act sooner than later.

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