It’s common for people to resolve to start something new that improves their life at the beginning of a new year. In our December Financial Sense¢ call, we asked our students to tell us about their New Years resolutions for 2022. We’ll be covering some of their most common responses, and ways to achieve them, in the next few weeks. Our topic this week is our credit reputation.

In an ideal world, we’d all have, or are able to save, enough money to afford all of the things we need and want. There are times, though, when borrowing money and paying it back, usually with additional charges called interest, may be an option if lenders decide we’re worthy to borrow money from them. Lenders make those decisions by examining the reputation we’ve developed from our behavior in the past. Lenders use credit reports to understand how much money we’ve borrowed in the past, how much we may be borrowing now, and how we’ve paid it back. Credit scores are numbers used to summarize the information in our credit reports in a consistent way, making it faster and easier for lenders to make borrowing decisions.

Credit Reports

Credit reports are documents lenders use to understand how much money we’ve borrowed in the past, how much we may be borrowing now, and how we’ve paid it back. Three companies in the U.S., Experian, Equifax, and TransUnion, keep track of our past and current credit activity and provide credit reports to lenders. We’re also entitled to receive free copies of each of our credit reports for our review, in accessible formats including large print, Braille,, and audio, once a year by visiting www.anualcreditreport.com, or by calling (877) 322-8228. TTY service for people who are deaf or hard-of-hearing is also available by calling ((800) 821-7232.

When it comes to paying bills, many of us make mistakes such as missing payments. Lenders also make mistakes. Finally, criminals may try to steal our identities and use them to borrow money in our names. Any of these can appear on our credit reports making it difficult or impossible for us to borrow money when we need too. Experts recommend that we review our credit reports regularly so we can spot and correct any issues we may find.

We can correct our own mistakes by making the payments we missed and asking the company or collection agency to correct the missed payment on our credit reports. Missed payments usually disappear from our credit reports after seven years if we fail to spot them or if we’re unwilling or unable to get the collector to correct the missed payment on our credit reports.

We can correct inaccurate information on our credit reports by reporting the issue, in writing, to the organization who reported the issue and to the credit bureau who issued the credit report.

If we believe we’re a victim of an identity crime, the Identity Theft Resource Center, ITRC, can help us through their web site, www.idtheftcenter.org, or by calling (888) 440-5530.

Credit Scores

Credit reports contain a great deal of information about how much money we’ve borrowed in the past, how much we may be borrowing now, and how we’ve paid it back. Credit scores are numbers used to summarize that information, making it faster and easier for lenders to make borrowing decisions. There are a number of formulas used to calculate credit scores and, while they have a lot in common, they can have significantly different results. We don’t have control over which credit score formula a lender chooses to use, but it’s important to be aware that different formulas will result in different scores. It’s even more important, though, to be aware of how the decisions we make impact our credit scores.

On time Payments

On time payments make up the largest portion of most credit scoring formulas. The best way to raise our credit scores is to consistently make on time payments. Missing even one payment, or making even one late payment,  will significantly lower our credit score as soon as the missed or late payment appears on our credit reports. The impact lessens as the missed or late payment falls further into the past, and usually disappears when the missed or late payment is removed from our credit reports after seven years.

Credit Utilization Ratio

Credit utilization ratio refers to the difference between the credit you are using and the credit you could be using. It’s the second-most important part of our credit scores. One of the best ways to increase our credit score is to use credit sparingly and to pay it back as quickly as possible. One of the best ways to lower our credit score is to use too much credit and take a long time to pay it back.

Revolving lines of credit, such as credit cards, give us permission to borrow money from them at any time just by swiping the card. This privilege isn’t unlimited, though. The credit limit is the largest amount of money we’re allowed to borrow from a credit account at any given time. When we reach this limit, we won’t be allowed to borrow any more money until we’ve paid back some of the money we’ve already borrowed. Many of refer to this as “maxing out” our credit. This will lower our credit scores, though they’ll rise again quickly as we quickly pay back the money we’ve borrowed.

Credit Age

Credit age refers to how long we’ve been using credit. Lenders feel that they’re able to trust someone to use credit wisely again if they’ve proven that they’ve already been using credit wisely for a long time. One of the best ways to raise our credit scores is to start using credit sparingly early in life and consistently pay it back without missing or making any late payments, but if we’re just starting out we may still have relatively low credit scores. This is normal and our credit scores will continue to rise as we gain more experience using credit wisely. It’s important, however, to leave our credit accounts open, even if we’re not currently using them, since closed accounts will disappear from our credit reports making it appear as if we haven’t been using credit for as long as we have.

Credit Mix

There are many ways to borrow money including credit cards, personal loans, student loans, car loans, and home loans. Lenders feel that we can be trusted more if they’ve seen that we’ve wisely borrowed, and paid back, money in a number of different ways. One of the best ways to raise our credit scores is to start using credit sparingly early in life and consistently pay it back without missing or making any late payments, but if we’re just starting out we may still have relatively low credit scores. This is normal and our credit scores will continue to rise as we gain more experience using credit wisely in different ways. Because of this, it’s important to leave our credit accounts open, even if we’re not currently using them, since closed accounts will disappear from our credit reports making it appear as if we haven’t been using credit in as many ways as we have.

Credit Inquiries

A credit inquiry is a request for a copy of our credit report from one or more of the three credit bureaus, Experian, Equifax, or TransUnion. Credit inquiries fall into two categories: soft and hard inquiries. Soft inquiries don’t impact our credit score, while hard inquiries may decrease our credit score, especially if there are too many hard inquiries in the last two years.

Soft Inquiries

A soft inquiry occurs when we request a copy of our credit report for ourselves. Soft inquiries do not impact our credit score. It’s important for us to request our credit reports regularly to insure that the information on them is accurate. Three companies in the U.S., Experian, Equifax, and TransUnion, keep track of our past and current credit activity and provide credit reports to lenders. We’re entitled to receive free copies of each of our credit reports for our review, in accessible formats including large print, Braille,, and audio, once a year by visiting www.anualcreditreport.com, or by calling (877) 322-8228. TTY service for people who are deaf or hard-of-hearing is also available by calling ((800) 821-7232.

It’s also easy to obtain summaries of our credit reports through a number of sources including our bank, usually through their mobile banking app, credit card company, also through their mobile app, and any number of online services such as Credit Carma or freecreditreport.com. Despite their names, though, many of these services aren’t entirely free and may even be identity theft scams. www.anualcreditreport.com is the only federally mandated and authorized way to request copies of your credit reports online. It is a section 508 and WCAG 2.0 compliant site, sponsored by Experian, Equifax, or TransUnion, offering alternative text for images, a “skip to” link to skip past links, and content and forms structured to work well with screen readers and screen magnification programs. A complete list of accessibility features can be found at www.annualcreditreport.com/accessibility.action.

Hard Inquiries

A hard inquiry occurs when someone else requests copies of your credit reports when you apply for services with them. This typically happens when we apply for a credit card or loan, but it can also occur when we apply for a job or rent an apartment.

A hard inquiry may slightly decrease our credit score, though the impact is relatively short-lived and hard inquiries disappear from our credit reports entirely after two years. A successful approval for credit may increase our credit score enough to offset the decrease caused by the hard inquiry, though, because it may change our credit utilization ratio. One of the best ways to raise our credit scores is to start using credit sparingly early in life and consistently pay it back without missing or making any late payments, but if we’re just starting out we may still have relatively low credit scores. This is normal and our credit scores will continue to rise as we gradually apply for new sources of credit once or twice a year.

Putting It Together

Lenders use our credit reputation to decide whether or not to lend us money. They do this by using a mathematical model called a credit score to summarize our credit reputation. There are many different mathematical models used by different lenders. The best way to improve our credit reputation and increase our credit scores is to:

1. Make all of our payments on time.
2. Use credit sparingly so we can be sure we can always make all of our payments on time.
3. Apply for new sources of credit no more than once or twice a year so we can keep the number of credit inquiries on our credit reports in the past two years low.
4. Apply for different types of credit including credit cards, student loans, personal loans, car loans, and home loans, so we can show lenders that we’ve used a broad mix of credit sources wisely.
5. Keep at least one credit card account open as long as possible so we can show lenders that we’ve been using credit wisely for a long time.