Dafuq Is Credit and How Do You Bend It to Your Will?

We’ve been getting a lot of variations on the same question recently: “How the fuck do I credit?”

How indeed? A lot of our readers are struggling with not only maintaining a good credit score, but with even understanding the whole concept in the first place.

It’s one of the many money terms I have the sneaking suspicion everyone else in my high school class was taught on a day I was absent.

Thus, I’ve been left to figure it out for myself over the years. And what I’ve found is reassuring: it’s not nearly as scary or complicated as you’ve been led to think. But like a pack of trained raptors, it must be treated with care and attention lest it rend you limb from limb.

Unlike that mediocre dudebro at a college party who thinks he can play guitar (you know the guy), we certainly take requests. So here follows a brief primer on your credit, credit score, and credit report. Just for you.

Dafuq is credit, anyway?

Credit is money you borrow to buy goods and services. You get it from a lender, and you pay those bastards back with interest and possibly other fees within an agreed-upon amount of time. When people talk about having “good” and “bad credit,” they’re usually talking about their score (more on that in just a sec).

It usually comes in four forms:

1. Revolving credit. Your basic credit card. You get a maximum monetary limit. You can use up to the limit. And every month you either carry a balance or pay it off.
2. Charge card. Basically like revolving credit only you have to pay the whole balance off every month. No revolutions here!
3. Service credit. This is where you make a deal with a service provider (the electric company, for example). They provide you with a service (electricity), and you pay for that service every month (your electric bill).
4. Installment credit. Your student loans, for example. They give you money, and you repay it with interest in regular installments over a set period of time while you’re working at Starbucks and ruing the day your high school art teacher told you to follow your dreams.

Your credit score and your report are two different things. According to WhatsMyScore.org (which is a great resource for this stuff, FYI), your credit report is a summary of your financial reliability. It takes the form of a biography of your money: your history of paying off debts and other bills.

Your credit score, on the other hand, is the numerical value assigned to you based on your report. This numerical value tells lenders, landlords, and the government at a glance how risky you are as a borrower. The higher your score, the better your chances of getting favorable lending deals and low interest rates. The lower your score, the harder it is to get someone to lend to you at all.

Your score can range between about 300 and 800. Anything above 750 counts as excellent. Anything below 600 and you’re in serious trouble, my dude.

Ok but you kinda are.

The anatomy of a credit score

To most people just starting out adultifying their finances, a credit score seems frighteningly mysterious. How is it determined? Why does it fluctuate? Can you improve it with just any old blood sacrifice, or does the Dark Lord of Creditors prefer virgins?

Wonder no longer, my sweet supplicants of financial solvency. Here is the basic recipe for a credit score. Just add a pinch of salt to taste.

Payment history

Do you pay your bills in full and on time? Great! You’ve just nailed the first and most important part of your score. But start missing your payments, making late payments, or only making partial payments. That score will drop like a stone. So consider setting up automatic payments or a calendar reminder, ok?

35% of your score.

Amount owed

Otherwise known as “utilization,” this is the amount of available credit you have vs. what you’ve used. So if you have a credit card with a $10k limit, but you carry a balance of no more than $1k, that’s a low utilization rate and good for your score. The less available credit you’ve used up, the more it helps your score.

You want to widen the gap between a high credit limit and a low debt balance. This is why simply asking your credit card company to increase your limit is a good idea… if you avoid spending up to your limit. 

30% of your score.

Length of credit history

The longer your credit history, the better your score. That’s why you should open a line of credit as soon as you’re legally of age and then just never close it. 

I got my first credit card at age eighteen. It’s still open, and I use it for little things every once in a while just to keep it from starving to death (or “closing due to inactivity” as my credit card company calls it). As long as I don’t kick the bucket any time soon, I’ve got this one down. 

15% of your score.

Credit mix

Everyone knows ~*~*diversification*~*~ is an important money thing that you should do! In this case, it means having multiple kinds of credit. Cards, student loans, an auto loan, a mortgage, a business loan, the temporary loan of your own immortal soul from the Dark Lord of Creditors, etc.

But for the love of Warren Buffett’s reasonably priced car, don’t just open a bunch of random lines of credit because you want that sweet diversification +1. This is such a small percentage of your overall score that you’re usually fine just ignoring it. 

10% of your score.

New credit

Applying for a bunch of new credit all at once—a mortgage! a car loan! nine different cards!—makes you look like the Evel Knievel of credit. You might as well send notarized letters to creditors saying “I am a huge fucking risk! Lend to me at only your highest interest rates cuz I’m about to blow my whole paycheck buying collector’s edition replica swords from Lord of the Rings on the Interwebz!” Take a more subtle approach and space out your requests for new loans a bit.

Fortunately, it’s only 10% of your score.

You know who has some great info on this shit? Napkin Finance. If you’d prefer to get this information in napkin-sized, clear as the light of day doodles, check ’em out.

“But what if I have NO credit?”

You might not have any credit score or history to speak of.Especially if you’ve managed to make it into your older years without having to borrow any money or take out a single credit card. According to creditors, you don’t exist.

If you’re, say, the independently wealthy heir to a Saudi Arabian oil dynasty, or even just the adult child of a former-reality-TV-star-turned-unique-threat-to-human-life-on-Earth, you might not need credit! You’re in the incredibly lucky position of being able to afford literally anything you want with the money you already have. No need to borrow, so why worry about your borrowability?

For the rest of us peasants, building good credit is fucking important. And not just if you ever want to make a large purchase like a college education, a car, or a house. Remember that time Kitty and her husband couldn’t rent an apartment because he didn’t have any credit to speak of? Yeah.

Having no credit can cock block any number of adulty decisions in life. Without any, you’ll need someone with a great score to cosign any loans you need. And while that is an option, it’s a risky prospect for both parties involved.

The solution is to start building credit as soon as you’re a legal adult. The simplest way to do that is to get apply for a modest credit card as soon as you turn eighteen. Start using it sparingly and then paying it off every month or billing cycle.

A good way to make sure your credit card spending doesn’t get out of hand is to use it for a recurring monthly expense that you already budget for anyway, like your Netflix subscription or groceries. Just make sure to pay off the card in full every single goddamn month or so help me…

You’ll build up credit without racking up interest. So when it comes time to rent that first apartment or get a car loan, you’ll be able to do it all on your own. With neither a cosigner nor a vomit-inducingly high interest rate.

“What if I have BAD credit?”

Oh shit, son. Now you’ve gone and done it.

So you’ve fucked up your score in any one of a million exciting ways. Maybe you maxed our your VISA card. Or maybe you considered the due dates on your bills to be more like suggestions than a hard and fast rule. And maybe you generously offered to cosign your little brother’s student loan and he couldn’t make the payments.

Whatever your nightmare scenario is, there’s a way out.

But it’s going to take a while.

Based on what factors into your score, the best way to improve a bad score is to increase the amount of credit available to you. Since it’s exponentially harder to open new lines of credit the worse your score is, that means paying off the debt.

And while there are a few methods that will help lessen the pain of paying your debt, nothing short of bankruptcy will make it magically disappear. And declaring bankruptcy is about as reasonable an option as selling your internal organs for debt relief. That is, it’s unreasonable… so don’t get any ideas about that second kidney, you crazy fucks.

Consolidate your debt

If you have multiple debts at varying interest rates, you might be eligible to consolidate them into a single loan at a lower interest rate. This generally works with credit card balances and student loans.

This is an especially good idea given, y’know, the disastrous state of student loans in the country.

The snowball method

Whether you’re his devoted acolyte or sworn enemy, you have to admit Dave Ramsey did something good for the world by popularizing the snowball method. Here’s how it works.

You list your debts in order from the smallest balance to the highest. Continue making the minimum payment on all of the debts. But in addition, throw as much extra cash as you can at the smallest balance.

When it’s paid off, take all the money you were putting into that debt, and throw it at the next biggest balance. Continue on down the list. The size of your payments will snowball as you knock out debts, while the literal amount you’re paying will never rise.

The avalanche method

The logician’s snowball. Instead of snowballing your debt payments starting with the lowest balance, start with the debt that has the highest interest rate. This won’t give you the same sense of satisfaction that comes with the easy win of paying off a small debt balance. But by the power of Grayskull it will save you the most money in the end!

Fix your habits

As you pay off your debts, your score should gradually rise. And after a period of seven years, the factors that brought your score down in the first place will be washed clean from your record

But don’t rest on your laurels once you’ve won the race, dear tortoise. You still have work to do to make sure your credit stays healthy and helpful.

Make building good credit a habit. Pay your bills on time every time. A good way to do this is simply to automate your payments every month.

Keep your balance low or nonexistent. This will avoid interest accruing and keep your available credit as fat as it can be.

Put yourself on a budget or some other method of tracking your income and spending. Make sure you’re not relying on the illusion of “free money” that comes with loans and credit cards.

And maybe sacrifice a goat every few months or so. Just to assure the Dark Lord of Creditors you’re thinking of Him.

Tl;dr?