Credit – Your Lifeline To Financial Success

Buried under a mountain of debt? Trying to climb out of the pit of despair? Not sure where to start?  Fear not! I’m here to help.

Debt can feel debilitating. It can feel crushing, like the walls are closing in. Like a prison. I know I’ve been there and fought thru it. Let me guide you out of this hole you dug yourself into.

credit - lifeline to success

How did I do it? I had to focus on 3 things:

  • Setting a budget and sticking to it
  • Paying in cash for as much of my expenses as possible (Cash is King! 😊)
  • Rebuilding my credit so I can take advantage of lower interest loans to payoff debt faster.

I’ve talked about the 1st 2 items in previous articles. Follow the links above to learn more. I’m going to focus this article on teaching why a good credit score is important and why a good credit rating is a lifeline for financial success.

What is Credit?

First off, let’s define exactly what is credit, a credit score, and why is it important for financial success.

Per Experian, credit is the ability to borrow money or access goods and services with the promise you’ll pay for it later. Lenders (aka creditors) grant credit to individuals based on their confidence that a person can be trusted to pay back what is borrowed plus interest charges applied (they need to make their cut as well! 😊).

If a person is worthy of a creditor’s trust, then that person is said to be “creditworthy” and have “good credit”. In other words, it’s a system that is solely based on the faith the creditor has in the borrower’s ability to pay back a loan or service borrowed.

The faith in paying back a loan is based on a person’s credit history which the record a person has accumulated about the timeliness of borrowing and paying back loans. Credit history is summarized on a credit report provided by the 3 main credit bureaus – Experian, TransUnion, and Equifax. Banks, credit card companies, and other creditors report borrowing history to these 3 credit bureaus.

Information on the credit report includes:

  • Number of credit accounts (credit cards, car loans, student loans, mortgages, personal loans, etc.), borrowing limits, and outstanding balances
  • Amount of the loans taken out and how much has been paid back to date
  • Timeliness of monthly payments
  • Any severe financial setbacks such as car repossessions, bankruptcies, student loan defaults, and mortgage foreclosures

Creditors summarize this credit report data into a scoring system known as a credit score. A credit score is a 3-digit number that assigns a rating from 300 to 850. The higher the number, the better the score and the more likely a person is to receive better credit terms.

Why is Good Credit Necessary?

Good credit is necessary if a person plans to borrow money for major purchases such as a car, a home, or taking out additional personal loans. A higher credit score can mean better interest rates and loan terms including credit cards. Many card issuers reserve the best rewards and rates for customers with great credit.

Lenders are not the only ones concerned with credit scores. For example, it is typical for a landlord to check a potential tenant’s credit rating to determine not only how large of a security deposit to require but also to verify the tenant has a good probability of paying the rent on time. Insurance companies use credit scores as a factor in determining insurance rates. Even employers have been known to check credit scores as a factor in determining hiring decisions. Practically speaking, a person’s entire adult life revolves around their credit score.

Below is a sample chart showing how credit scores impact various aspects of our life. I found this chart from that shows just how much a credit score impacts interest rates and loan terms.

how credit score impacts intereste rates

This is why it is so important to build up a good credit rating over time. It could mean the difference between financial success and living in your parent’s basement until you’re 50! This would really suck and make you feel like the person in the picture shown! 😊

person upset with living with parents

For example, the difference between taking out a 30-year, fixed-rate $250,000 mortgage with a 670 FICO score vs a 720 FICO score could save over $26,000 in interest payments… this is HUGE!

What is a Good Credit Score?

Determining a good credit score is relatively easy.  One of the most common scoring models is the FICO Score model which places scores in the range of 300 to 850. FICO breaks up the scores into the following credit bands:

Exceptional: 740 and above

Very Good: 680 to 739

Good: 620 to 679

Fair: 550 to 619

Poor:  549 and Below

FICO also uses the following criteria to develop a person’s credit score.

Payment History

Making one-time additional payments on your credit account can help improve your credit score. However missing payments, having an account sent to collections, or filing for bankruptcy could hurt your credit score.

Credit Usage

The number of accounts that carry a balance impacts your credit score. What also impacts your credit score is how much owed and the percentage of the credit limit being currently used factor into assessing credit usage.

Length of Credit History

This includes the average age of all credit accounts as well as the age of the oldest and newest account.

Account Types (aka Credit Mix)

This considers whether installment accounts (i.e. car loans, mortgage, etc.) as well as revolving accounts (i.e. credit cards) are being managed. Showing the ability to successfully manage both types of accounts can help improve your overall credit score.

Recent Activity

This is in regards to whether new accounts have recently been applied for or have been opened.

The FICO criteria scoring allocation is shown below.

FICO Score

As can be seen above, 65% of a person’s credit score is determined by how much is owed and how timely payments have been made.

How Do I Improve My Credit Score?

Why I’m glad you asked! 😊

As shown above, just by managing how much debt is carried on credit lines and ensuring timely payments has a big impact on credit score. Although these are not the only ways to improve overall credit score.

You can:

  • Manage the number and types of accounts open.

If you have few credit accounts, make sure the account opened will be reported to credit bureaus. The types of accounts can include but not limited to:

  • Revolving accounts such as credit cards and home equity lines of credit
  • Installment accounts such as student loans, auto loans, mortgages, etc.
  • Apply for accounts only when needed.

While you need to manage how many accounts to get a better score, it must be tempered with when to open new account. This is because applying for a new account leads to a credit inquiry which can impact credit scores a little. Usually the impact is minimal on applying for a single line of credit. However, applying for many different types of loans in a short amount of time could lead to a larger score drop.

  • Manage the average age of accounts.

The longer an account is open, the more it improves a credit score. Be careful not to close accounts too early since this can impact credit scores. FICO scores consider the age of the oldest account, the age of the newest account, and average age of all accounts. FICO scores consider how long an account has been established as well as how long it has been since an account has been used.

  • Manage reporting errors

Reporting errors can severely damage credit scores and are more common than you think. In fact according to, 1 in 4 people have errors that are significant enough to impact credit scores.

  • Increase credit limits

Going back to earlier statements, not only can the amount owed be lowered but a request to increase credit limits can also help credit scores. This is because credit bureaus look at the percentage of total credit limits actually being used. They look for a low percentage (<30%). There are 2 ways to affect this percentage: payoff the debt or increase the credit limit….. ALWAYS look at both sides of the equation! 😊

How to Get Started?

Just starting your life and want to know how to get started? The easiest and fastest way to build a credit history is using credit cards. Using credit cards wisely can quickly and efficiently build up a credit history.

Climbing the Credit Score Mountain

However, it is important to ensure that low interest credit cards are acquired. This is just in case a rough patch occurs where you may be unable to payoff debt completely in a month.  That way the accrued interest does not bury you in debt.

Below are ways to get a low interest credit card.

Apply for Low Interest Rate Credit Card

Shop around for savings. Research credit cards with the lowest APR. If you don’t have excellent credit, you probably won’t get it but knowing a card’s APR will help in the future when credit scores improve.

Keep in mind that credit cards with the lowest interest rates may have other benefits such as rewards or cash back. Consider what’s most important to you when deciding which card to build up a credit history with.

Remember to not only look at large national banks (i.e. Citibank) but also look at credit unions and specialty lenders too. Leave no stone unturned.

Apply for an Introductory Zero Percent APR Credit Card

A 2nd option to choose is finding a credit card with an introductory zero percent APR on purchases and balance transfers. Use this to either make large purchases that can be paid off before the introductory period expires or to transfer and pay off higher interest credit card debt.

A drawback with this strategy is the zero percent rate does not last forever. Ensure to take the necessary steps to payoff the debt before this rate expires. If you don’t, the rate will jump up to a very high level.

Ask Current Credit Card Issuer For Better Rate and Increased Limit

A 3rd option is to work with your current provider to get a lower interest rate and may be even ask for a spending limit increase. Both can help to increase your credit score.

It’s simple. Call the customer service number on the back of the credit card (yes, people do use their phone to actually make a phone call! Lol 😊) and ask the customer service representative to lower the interest rate on your credit card. They may say no but they may say yes! I’ve done this several times and I’d estimate that I received what I asked for about 80% of the time.

Don’t forget, getting the rate is half the battle. Keeping it is the challenge. Don’t miss payments and keep a good relationship with your credit card company. It can pay off big dividends in the long run.

Climbing the Mountain

So, there you have it. Some simple, actionable steps that can be taken immediately to improve your credit score, lower your interest rate, and put you on the path to financial success.

Climbing the Credit Score Mountain

Building a credit history is like climbing a mountain. It’s rough getting started. Then there are alternate patches of smooth sailing and treacherous terrain to overcome. Slowly and surely, it can be done. Just stay focused and be deliberate in your actions. Remember, the road to success begins with a single step…..

Live the Life You Love, Want, and Deserve! 😊