Building and improving credit is an important financial skill because credit affects borrowing, housing, insurance, and sometimes job opportunities. This cheat sheet explains what lenders look for when deciding whether to approve credit and what interest rate to charge. It helps students understand how daily choices, such as paying bills on time and keeping balances low, shape long-term financial options.
Key Facts
- A credit score is a number that estimates how likely you are to repay borrowed money on time.
- Payment history is one of the most important credit factors because late or missed payments can lower a credit score.
- Credit utilization equals current credit card balance divided by credit limit, then multiplied by 100.
- Keeping credit utilization below 30% is a common guideline for protecting or improving a credit score.
- Available credit equals credit limit minus current balance.
- Interest cost for one year can be estimated with simple interest: interest = principal x annual interest rate x time.
- A credit report lists credit accounts, balances, payment history, credit inquiries, and public record information.
- Improving credit usually requires paying on time, lowering balances, checking reports for errors, and avoiding too many new applications at once.
Vocabulary
- Credit
- Credit is the ability to borrow money or use goods and services now with a promise to pay later.
- Credit score
- A credit score is a three-digit number that summarizes information from a credit report to estimate credit risk.
- Credit report
- A credit report is a detailed record of a person's credit accounts, balances, payments, inquiries, and certain public records.
- Credit utilization
- Credit utilization is the percentage of available revolving credit that is currently being used.
- Annual percentage rate
- Annual percentage rate, or APR, is the yearly cost of borrowing money expressed as a percentage.
- Hard inquiry
- A hard inquiry is a credit check made when applying for new credit, and it may affect a credit score for a limited time.
Common Mistakes to Avoid
- Paying only after the due date is wrong because late payments can add fees, increase interest costs, and damage payment history.
- Using most of a credit limit is wrong because high utilization can make a borrower look risky even if payments are made on time.
- Applying for many credit accounts in a short time is wrong because multiple hard inquiries may signal financial stress to lenders.
- Ignoring credit reports is wrong because errors, fraud, or outdated information can lower a score if they are not disputed.
- Closing an old account without thinking is wrong because it can reduce available credit and shorten credit history, which may lower a score.
Practice Questions
- 1 A student has a credit card balance of 1,000. What is the credit utilization percentage?
- 2 A borrower owes $800 on a card with an APR of 18%. Using simple interest for one year, about how much interest would be charged if the balance stayed the same?
- 3 A credit card has a 450 balance. How much available credit remains?
- 4 Explain why paying every bill on time for several months may improve credit more reliably than opening several new accounts.