Credit Scores: Your Financial GPA

If your finances had a report card, your credit score would be the grade at the top. Just as schools use GPA to measure your academic consistency, banks and companies use credit score to measure your reliability as a borrower. What exactly does being reliable as a borrower mean? Good question. Reliability means paying your debts and loans back on time, not taking out too much credit at once, and using the credit you do have responsibly without maxing out cards or missing payments.

How is Credit Score Measured?

A credit score is a 3-digit number ranging from 300 (very bad) to 850 (excellent). The higher your score, the more likely a bank or lender is to say, “Sure! We trust you to borrow money and pay it back on time.”

Why Is Being Trusted By Banks Important?

When banks trust you as a borrower, that often means they allow you to borrow money at a cheaper price (Ex. 5% interest rate on mortgage loan instead of 8%). In the long run, that can save you hundreds of thousands of dollars.

Not only that, but good credit gives you more flexibility. You’re more likely to get approved for numerous things such as car loans, student loans, or even renting your first apartment.. Some employers even check your credit to see how responsible you are before hiring you.

Additionally, good credit opens the door to premium credit cards that come with loads of perks. These range from things like cash back on everyday purchases, to travel rewards, all the way to discounts on things like streaming services or food delivery. While lower interest rates save you money in the future, these benefits can actually put money back in your pocket right away. The catch is they’re usually only available to people with strong credit scores, which is just another reason why keeping yours high is so important.

Good Credit	Bad Credit
Lower interest rates	Higher costs
More approvals for loans, apartments, even jobs	More rejections
Better credit cards and perks	Overall harder time renting or buying things

So, What Determines My Credit Score?

Think of your credit score as a big recipe, where 5 different ingredients come together to make one score. However, some ingredients matter more than others. The 5 ingredients are as follows:

1. Payment History (35%)

   
   

   In other words, did you pay your bills on time? This is the biggest piece of your score. It's a bit tricky too. Made and missed payments don't count the same. Making a payment on time is the expectation, so doing so may only impact your score marginally. However, if you miss payments or pay late, your score can drop fast.

2. Amounts Owed, a.k.a. Credit Utilization (30%)

   
   

   In other words, how much of your credit card are you using? Imagine your credit card limit is $1,000 and you spend $900, that’s 90% usage. That's not good. It signals to banks or companies that you may be borrowing excessively, or biting off more than you can chew. Experts say to use less than 30% of your limit, so if you have a $1,000 limit, try to stay under $300.

3. Length of Credit History (15%)

   
   

   Think of this as how long you've had credit for. The longer you’ve been using credit responsibly, the better your score. Because having credit longer can boost can boost your score, many parents will add their kids as authorized users on their cards, so when they pay back debt or loans, it benefits their kids too. However, it's a two way street. If parents fail to pay back loans on time, it can tank their kids' scores before they even turn 18.

4. Credit Mix, a.k.a. Types of Credit (10%)

   
   

   A diverse credit mix shows that you can manage different kinds of credit, such as:

   • Credit cards

   • Car loans

   • Student loans

   • Mortgages (home loans)

   
   

   You don’t need all of these to have a good score, but having a mix shows you’re responsible across many types of loans.

5. New Credit (10%)

   
   

   This pretty much just asks if you've been opening too many accounts or if you've been applying for too many cards recently. Why's this bad? Well, to put it simply, it looks like you’re desperate for money.

Final Thoughts

You might not have a credit score yet, but the habits you build now will totally shape it later. Our advice?

• Always pay what you owe

• Don’t max out your cards

• Start early as an authorized user

• Avoid applying for too many cards at once

• Be consistent over time

  
  

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