As I’ve gotten older and advanced in my professional career, I’ve realized something surprising: a lot of high-earning, intelligent people still don’t know what to do with their money. Personal finance is rarely taught in school, yet access to credit is readily available to nearly everyone in our society. Credit is one of the most widely used and misunderstood tools in the financial world. When used wisely, credit can help you grow, build, and protect your financial future, but when misused, it can quickly become a trap.
That’s why I’m writing this 3-part series, to help break credit down into simple, practical terms. Whether you’re just starting out and learning about credit for the first time, trying to clean up past mistakes, or thinking about building credit for your business, there’s something here for you.
Here’s what to expect in this series:
Part 1: What is Credit and How Do You Get Some?
We’ll cover the basics: what credit is, how it works, and why it matters more than you might think.
Part 2: How to Start with Bad or No Credit
A guide to building credit from scratch or repairing it after mistakes.
Part 3: How to Build Business Credit & Leverage Credit for Financial Growth
How to build credit for your business and use it as a strategic tool for growth and opportunity.
Let’s start with the foundation: what credit is, how it works, and why it’s a tool you need to understand.
What Is Credit?
Credit is defined as “the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future”. Essentially, credit is your ability to obtain debt, and by extension, having “good credit” is akin to being trustworthy.
The use of credit is prevalent in our society. If you want to buy the latest iPhone but don’t have $1,000 available in your account, your phone carrier will offer you an installment plan. That means they’re essentially “loaning” you the phone, and you’ll pay it off month by month. Even something as basic as setting up utilities often involves a credit check, where companies check your history of paying bills on time before they agree to provide service.
From credit card use to renting an apartment or buying a car, your credit score has a significant impact on your daily life. Let’s explore how credit is calculated.
Credit Score vs. Credit Report
Credit Score
If you’ve ever financed a car or made a big purchase, there’s a good chance you’ve heard about a credit score. However, many people still don’t understand how they work. A credit score is a three-digit number that shows how likely you are to pay back money you’ve borrowed. The most commonly used version is known as a FICO score, which ranges from 300 to 850. This score is based on a few main factors, like how often you pay your bills on time, how much debt you have compared to your limits, and how long you’ve had credit.
There’s not a true “starting” score. Your credit score doesn’t even exist until you’ve had at least one account open and reporting to the credit bureaus. After about three to six months of credit activity, your first score will be generated. Most people see their first score land somewhere between 500 and 700, depending on how they’ve used their credit so far.
Checking your credit score
You can check your credit score online without harming your credit. This action is referred to as a “soft inquiry,” and it differs from a “hard inquiry,” which typically occurs when you apply for new credit, such as a mortgage or credit card. Most free credit apps, such as Credit Karma and NerdWallet, display a VantageScore, which is a newer type of score created by the three major credit bureaus: Experian, Equifax, and TransUnion.
While VantageScore and FICO scores both range from 300 to 850, they’re calculated slightly differently. That’s why you might see one score listed on a free app and a different number when a lender pulls your credit. In most cases, the numbers will be fairly close, but it’s beneficial to know the difference, especially since FICO remains the most commonly used score by lenders.
Credit report
While your credit score gives a quick snapshot of your financial health, your credit report tells the whole story. It includes your entire credit history, including the accounts you’ve opened, the amount you owe on them, how frequently you make payments, and whether those payments are made on time. It also indicates whether you’ve ever had accounts sent to collections, filed for bankruptcy, or applied for multiple new accounts within a short period.
Lenders, insurance companies, and even landlords often review your full credit report before making decisions on whether to lend money to you. It provides them with a more detailed view of how you manage your money over time.
Your credit report is also an excellent tool for catching errors or signs of fraud. If someone opens an account in your name or if a creditor reports something inaccurately, you’ll see it on your report, and you can take steps to fix it.
Everyone is entitled to one free credit report per year from each of the three major credit bureaus. You can access yours at AnnualCreditReport.com. You can choose to pull all three reports at once, while others space them out across the year to monitor for changes.
Why Credit Matters
Credit plays a role in more areas of your life than you might think. If you want to rent an apartment, landlords often check your credit to make sure you have a history of paying bills on time. If you want to buy a car or a home, lenders will look at your credit score and your credit-to-income ratio to decide whether to approve you for a loan, and on what terms. The better your credit score, the better your interest rate, which can save you thousands of dollars over time.
Can You Live Without Credit?
Now, if you’ve ever followed Dave Ramsey or other debt-free influencers, you’ve probably heard the argument: “You don’t need a credit score. You can live without it.” Dave Ramsey is famously known for saying he doesn’t have a credit score and that you don’t need one to be financially successful. And technically, he’s not wrong. You can live without credit.
You can (and in many cases should) buy a more affordable car with cash instead of financing a flashy one. You can choose to live without credit cards entirely. And while it might be difficult for the average person to buy a house without a mortgage, you could rent a home and avoid needing a loan altogether.
But here’s the reality: credit doesn’t have to lead to a mountain of debt. While a good credit score increases your access to debt, it also helps you qualify for lower rates, better terms, and more options. It can get you a reliable car with a fair loan, help you lock in a better mortgage rate, or make it easier to qualify for a business loan or line of credit. Good credit simply means you’ve demonstrated you can use money responsibly.
If you’re on your way to building wealth, credit can be used as a tool, not a trap, something that opens doors and gives you leverage, not something that holds you back.
Better Credit Scores = Better Interest Rates
Let’s explore how much money having a good credit score could save you.
Car Loan
NerdWallet recently published an article showing how credit score impacts auto loan interest rates, based on data from the first quarter of 2025.
If you’re buying a $50,000 vehicle and financing it over five years, having prime credit could qualify you for a 6.7% interest rate. That would result in a monthly payment of approximately $983, with a total interest cost of around $8,980 over the life of the loan.
But if you have subprime credit, you might only qualify for an interest rate of 13.22%. That would increase your monthly payment to approximately $1,143, and your total interest paid would rise to nearly $18,600.
That’s more than double the amount of interest, just based on a two-tier difference in credit score. This is exactly why it’s worth working to improve your credit before making major purchases; it can save you thousands of dollars.
Mortgage
NerdWallet’s mortgage rate comparison tool shows that as of mid-2025, the average 30-year fixed mortgage rate for borrowers with “good” credit (scores between 720–739) is around 6.75%. And if you thought the difference in car loan interest was significant, just wait until you see how it plays out with a mortgage over 30 years.
Let’s say you’re buying a $400,000 home and financing the full amount with a 30-year mortgage. At a 6.75% interest rate, your monthly payment would be about $2,600, and over the life of the loan, you’d pay around $540,000 in interest, bringing the total cost of the home to approximately $940,000.
Now, let’s say your credit score falls into the “poor” tier (620–659). In that case, you might only qualify for a 7.75% interest rate. That 1% increase raises your monthly payment to around $2,840, and bumps your total interest paid to roughly $650,000, an increase of $110,000 more in interest over the life of the loan.
That difference in credit score just cost you six figures.
It’s also worth noting that if your credit score is lower, many lenders will require a larger down payment to approve your loan. And while a larger down payment might help you qualify for a slightly better rate, you’ll still likely pay more in interest than someone with stronger credit. Your credit score directly impacts the rate you’re offered, and that rate determines how much your home actually costs you over time.
The Five Factors That Impact Your Score
If you want to start building credit, you need a basic amount of knowledge about what affects your credit score. This is the basic breakdown:
Payment history (35%)
The most significant factor in your credit score is your payment history, which documents whether or not you’ve paid your bills on time. One missed or late payment can cause a noticeable drop in your score, so making consistent, on-time payments is one of the most important things you can do to maintain or improve your credit.
Credit utilization (30%)
This one is my favorite because it’s a factor you can control through discipline. Credit utilization refers to the percentage of your available credit that you’re using. For example, if you have a credit card with a $10,000 limit and a $2,000 balance, your utilization is 20%. The general rule of thumb is to keep your utilization under 30%, but ideally under 10%. Low utilization demonstrates to lenders that you’re not maxing out your credit and can manage it responsibly.
Credit age (15%)
This measures the length of time you’ve had credit accounts open. The longer your history, the better. Less than two years is considered young, and may make you seem higher risk to lenders. Between 3–5 years is decent, 7+ years is considered strong, and over 10 years is excellent. Keeping older accounts open, even if you don’t use them often, can help your credit age.
Mix of credit (10%)
Your credit mix shows lenders that you can handle different types of credit. The two main types are revolving and installment. Revolving credit refers to credit lines and credit cards that offer flexible and ongoing access to funds. Installment credit involves fixed payments, such as mortgages, student loans, car loans, and personal loans.
New credit/inquiries (10%)
Every time you apply for a new credit card or loan, a hard inquiry is added to your report. These can temporarily lower your score. Too many in a short time makes you appear to be a higher risk. In contrast, soft inquiries, like checking your own credit score, don’t affect your score at all.
Conclusion
Credit isn’t something to fear or ignore; it’s a valuable tool. Used wisely, it can help you build security, create opportunities, and save money on interest payments.
In the next part of this series, we’ll walk through exactly how to build credit from scratch and how to rebuild it if you’ve made some mistakes along the way. Whether you’re starting fresh or trying to fix bad credit, I will walk you through it. Then, in Part 3, we’ll shift gears and discuss using credit to grow your financial future, especially if you plan on starting or growing a business. Stay tuned.