Chapter 8: Credit
A credit score is a number from 300 to 850 that rates a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. Creditworthiness is how a lender determines if you will default on your debt obligations, or how worthy you are to receive new credit. Your creditworthiness is what creditors look at before they approve any new credit to you.
Creditworthiness is determined by several factors including your repayment history and credit score. Some lending institutions also consider available assets and the number of liabilities you have when they determine the probability of default.
In the United States, the three major credit bureaus are Equifax, Experian, and TransUnion. These companies collect and maintain consumer credit information, which they use to create credit reports. Lenders use these reports to assess a borrower's creditworthiness. While each bureau may have slightly different data due to varying sources of information, they all serve the same fundamental purpose—providing a financial snapshot of a consumer’s borrowing behavior.
A credit score is calculated using several components. The most heavily weighted factor is your payment history—whether you've paid past credit accounts on time (35%). Next is amounts owed, or credit utilization (30%), which refers to how much of your available credit you're using. Other factors include length of credit history (15%), new credit inquiries (10%), and credit mix (10%), which considers the variety of credit types you hold, such as credit cards, mortgages, and auto loans. Understanding these components can help you improve and maintain a healthy credit score.
To build and keep a high credit score, you should always pay your bills on time, keep your credit utilization below 30%, avoid opening too many new credit accounts in a short period, and maintain a mix of credit types. Regularly checking your credit report for errors and disputing any inaccuracies is also essential. Many financial apps and websites offer free access to your credit score and report—use them to stay informed and proactive about your financial health.