The Buck Starts Here: The basics of credit scores

the_buck_starts_here_editorial_bannerImage: the_buck_starts_here_editorial_banner

In a Nutshell

This episode of the podcast dives into what makes up credit scores, the kinds of credit scores that exist and some strategies to help build scores. Listen below or read the transcript.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.
Advertiser Disclosure

We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

Podcast originally posted in June 2021. Transcript published on April 29, 2022.

The Basics of Credit Scores The Buck Starts Here

Podcast Host and Credit Karma Content Strategist Gaby Lapera and Editor Evelyn Pimplaskar discuss some of the fundamentals of credit scores, such as what they are, factors that can drive your scores up or down and strategies for improving them. Learn more about improving your credit scores here: https://www.creditkarma.com/advice/i/quick-tips-build-credit

Gaby: Hello. Welcome to the inaugural episode of “The Buck Starts Here,” a podcast about personal finance for everyone. My name is Gaby Lapera. I am a kind of jack of all trades at Credit Karma — a content strategist, which doesn’t really mean much to most people. But joining me here on the phone is Evelyn Pimplaskar, our fabulous money editor.

Hello, Evelyn, how are you?

Evelyn: I am good. How are you this morning?

Gaby: I am really good. And I’m really excited to have you here because we’re going to talk about credit scores. And you might be sitting out there in listener-land, being like: “Why are these ladies going to talk to us about credit scores?” And the answer is because, you know, we work for Credit Karma, and we know a lot about credit scores and we want to help you know a lot about credit scores too.

But before we do that, I have to read you some legal stuff. So please buckle up, listen to this beautiful disclaimer. The views expressed here are those of Credit Karma’s Editorial team who are associated persons of Credit Karma Inc. They do not represent the views of Credit Karma Inc. or any of its subsidiaries or affiliates.

Any information provided by podcast guests does not reflect the views of Credit Karma Inc., its Editorial team or any of its subsidiaries or affiliates. This podcast is for educational purposes only and is not intended to be used as financial, credit or legal advice. It does not constitute an offer for any product.

You should not make any decisions based solely on what you hear on the show. Each person’s situation is different, and you should do your own research. Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our opinions on the show. Credit Karma’s marketing partners do not review, approve or endorse our content.

Financial products can change over time. So listeners should check terms and conditions for current information. The information on the show is accurate to the best of our knowledge when it’s recorded.

OK, we’re done. Just kidding. That’s not the whole podcast. Now we’re actually going to talk about credit scores.

Evelyn, I would like to ask you, “What is a credit score?”

Evelyn: To understand what a credit score is, I think we first need to look at what a credit report is. So a credit report is basically a history of how you have used credit in the past. It contains a lot of information from different companies that have reported about their action — their interactions with you.

If you have, you know, an auto loan in the past where you used a credit card, those companies can choose to report that information to the credit bureau and the credit bureau consolidates that information into your credit report. And a credit score is basically an analysis of that information on your credit report.

It is a number that is generated using some complex algorithms that the credit bureau applies to generate that number. So a credit score is basically a snapshot of your credit history at a certain point in time.

Gaby: Yes, that totally makes sense. I think that there are some things that we should, in the words of Wikipedia, “disambiguate,” which is one, that there are multiple credit bureaus.

So I think everyone has heard of — well, maybe not. You know what? Let’s not assume anything. The three biggest credit bureaus that American consumers may have interacted with are Experion, Equifax and TransUnion. Those are the big three, but there are literally dozens of other credit-reporting agencies, which is what they’re called in official fancy talk.

And if you want a whole list of all of the ones that exist, you can actually go to the CFPB, which is the Consumer Financial Protection Bureau — one of my faves. And they have a list of all active CRAs in the country operating right now.

So first of all, you have three different bureaus. That means you have a minimum of three different credit reports. And then to complicate things, you can have different credit-scoring models. So, for example, if you’ve heard someone say, “What’s my FICO® score?” that is one type of credit-scoring model.

Another type is VantageScore. And when we say credit-scoring model, that is essentially just the algorithm that Evelyn mentioned earlier that helps people figure it out — well, helps the credit bureaus figure out what your credit score should be.

To further complicate it, there are versions of all the models. So there’s like VantageScore 1.0, or like, I think FICO® Score 8 or something like that. Don’t hold me to that. They change over time and different lenders could be using different models. And then, there are also different types of scores — depending on what you’re trying to do. Evelyn, would you like to weigh in?

Evelyn: Right. And the three national credit bureaus, those scores are generally FICO or, or VantageScores that you will get from those large bureaus, the national credit bureaus. So the specialized bureaus, a lot of them will have their own algorithm to generate their own scores and those different, not national, specialized credit-scoring companies.

I guess I shouldn’t call them bureaus. They’re credit-scoring companies. They basically will be generating a score for a specific purpose. For example, if you are applying to rent an apartment, that landlord may go to a credit-scoring company that specializes in aggregating that kind of information and generating a credit score that will speak to your reliability as a renter.

So different credit-scoring companies will generate a score based on what they specialize in. But the ones that most people are familiar with and that you will be seeing if you access your credit score, it’s likely either a version of FICO or a version of your VantageScore.

Gaby: Yes, that is absolutely correct. So the main takeaway from this part of the episode is: You have so many credit scores, but the ones that you’ll most likely care about are your FICO or VantageScore.

We spent a lot of time talking about this thing, but we haven’t really given anyone a “so what?” So what, why should we care about our credit scores?

Evelyn: Ah, well, credit scores are very important for a number of reasons. And let me just say that credit scores are actually important, and your credit history is actually important — whether you currently use credit, if you are planning on applying for credit, it’s important. So your credit scores and your credit history are factors in whether or not you can get approved for new credit.

And I think that’s probably a function that most people know that, “Hey, I want to go apply for an auto loan [and] need to check my credit score because that’s going to matter.”

Credit scores can also factor into other financial aspects of your life. In addition to whether or not you get approved for credit, your credit score and your credit history can affect the interest rate that the lender offers you. And that’s very important because a good credit score can make you eligible for some of the best rates.

Gaby: Yes. And that means saving so much money over time. Imagine you have a 30-year mortgage. And even if the difference is only like a couple of percentage points, that’s literally thousands of dollars that you’re saving because your credit score is better, which that feels raw, I’ve got to say.

Evelyn: And you know, a lot of people will look at — when they’re applying for new credit, they’ll look at the monthly payment and say to themselves, “Is this something that I can afford on a monthly basis?” And that is a very important question to ask yourself, obviously. But you need to go beyond that and look at the total cost of the money that you’re borrowing over the life of the loan or the term of the credit.

And the interest rate directly affects how much that loan is going to cost you. If it’s five years, 10 years, you know, 20-year mortgage, 30-year mortgage, the interest rate really will affect how much that loan costs you, and your credit score affects that interest rate.

Gaby: Yes. Another thing that credit scores could affect are security deposits — like whether or not you have to pay one, or if you do have to pay one, how much for things like utilities or mobile phones. Again, we’re not saying that that’s true in everyone’s case and every single case ever, but that’s something that could totally happen.

Evelyn: I’ll give you an example. I just switched my phone carrier and yes, they checked my credit. But before they checked my credit, they mentioned that there might be a deposit required. After they checked my credit, no deposit required. So that’s just an example of how, you know, your credit score and your credit history can affect some very everyday things.

Gaby: Yes. And I actually think that now’s kind of a good time to pause and explain why credit scores exist in the first place, because we’ve really only explained it from the consumer’s perspective, which frankly I think is the most important perspective. But I think in order for consumers to understand what’s really going on, they have to know why companies care so much.

And what it boils down to is that credit scores are a shorthand way for companies to decide whether or not you’re financially trustworthy, whether or not you’re going to pay them back if they extend you credit of some kind. And the reason that they kind of exist at all is because back in the day, credit decisions were made by your local banker.

And you knew that guy. It’s like Jimmy Stewart in “It’s a Wonderful Life.” Like everyone knows everyone in that town. The banker can decide, “Yeah, Frank doesn’t make a ton of cash, but he’s trustworthy. And even if it takes him a long time, I know he’ll pay me back.”

As society got more spread out, people had a harder time making those decisions, especially when things got more national. There’s a whole history of banking here that I wish we could get into — because I’m really cool — but we’re not going to do that.

So this is essentially just a way for companies to figure out whether or not to lend to you, and that can feel terrible. I 100% acknowledge that it can feel really bad when you end up checking your score and it’s lower. I guess I should say, the higher your credit score, generally, the better. It’s not like golf.

Evelyn: Absolutely. But let’s look at the flip side of that too — the fact that there’s a credit score that is factoring into your lender’s decision. It actually can be a good thing for consumers because your credit score is something that you do have some control over. You can take steps to make that credit score as good as it can possibly be.

So, you know, it can be overwhelming to realize that, “Wow, here’s something that is so important to my ability to borrow money.” But at the same time, you have the power to affect that. You have to take control of it. Hopefully, this conversation we’re having can help people understand better how to do that.

Gaby: Yes, that is my main hope for this show as well. I think that is a perfect segue into the next portion of our show, which is, I think that in order to understand how to improve your credit scores — plural, because you have many — I think it’s important to understand generally: What kind of factors are credit bureaus looking at when they’re putting together these models that come up with the credit scores?

I will say that credit bureaus’ algorithms are kind of a black box — they’re like protected industry secrets. So we can’t tell you exactly how important any of these things are or anything. But the credit bureaus have said that these are things that they consider when they’re putting together their credit scores.

So what goes into a consumer credit score? So for FICO or VantageScore, these are the things we’re talking about.

Evelyn: So speaking very generally, everybody’s credit situation is different. Every credit-scoring company can have its own model. It can have its own factors and how much it weights each factor can vary. But generally speaking, the things that go into a credit score include payment history, credit utilization ratio, the average account age of all of your accounts, the mix of credit that you’ve used, the types of credit that you’ve used, and the amounts of credit on each of those accounts, and the number of inquiries and the type of inquiries that your account is showing.

So let’s go into those and break each one down a little bit. By far the most important one — consistently credit bureaus tell us this — is payment history. How reliable have you been in the past at paying off your past credit, according to the terms of the agreement? In other words, if you took out a loan for two years and you had to pay $500 a month on that loan, did you do that?

Did you pay $500 a month every month until the loan was paid off? That is by far the most important factor — your reliability in repaying the loan.

Gaby: Right. Which makes sense from their perspective, right? Because it shows a pattern of behavior.

Evelyn: Exactly.

Gaby: Yes. And so the next one is credit utilization ratio or credit use ratio, if you want to be less stuffy. And that’s basically, if you take all of your open accounts — so all of your credit cards — and then you divide how much you’re actually using over that total amount — that is your credit use ratio.

So imagine in our very simple scenario that you have exactly one credit card and you have a $1,000 credit limit. If you were to spend $300 on that credit card, you would have a 30% credit use ratio. Rule of thumb — this is from the CFPB — is that you want to try to keep your credit use ratio below 30%. Sometimes I hear this misstated as you want to keep it at 30%, and that is definitely not true. The lower your credit use ratio, the better. Because if you’re constantly getting very close to your limit — so almost a 100% credit use ratio — it shows the companies that you’re maybe struggling with cash flow.

Evelyn: Right. Exactly.

Gaby: And that feels super unfair sometimes, especially if — back to our original example — imagine you have one credit card but your credit limit is $300 — or even lower. Say it’s $100 — because that makes the math even easier — and you spend $30. That’s 30% of your credit limit. That would have been groceries for me in grad school for one person when I was only eating rice and beans, essentially. So it can feel like a super tricky thing to manage, for sure.

So what I would do in my situation — and you should figure out if this works for you — is sometimes when you’re trying to build credit, and you’re trying to show that you have that payment history because you’re kind of in a Catch-22, you have to show that you’re paying off your credit cards regularly in order to build payment history, but you don’t want to get too close to your credit limit. Try and pick a bill that’s super, super low to put on your credit card and just have it on auto pay and then don’t use it for anything else.

So, for example, if you have, say, Spotify Premium — that’s 10 bucks a month. Even if you only have on a $100 credit limit, $10 a month is 10% — only use that credit card for that [and] nothing else. Show that you pay it off every month. That’s one way to build credit.

Evelyn: Well, you know, there are multiple ways to improve that ratio. And we’re not recommending any one over another because every person’s situation is unique.

They need to determine this for themselves. But there are a couple of things you can do. One is the suggestion that you just made. Another one would be to apply for another credit card that will increase the amount of your available credit. And then as long as you keep your usage ratio under that 30%, that will help improve your credit utilization ratio.

That’s one way that you can do it. Another way is to pay down any debt that you have on your existing credit cards. That can help improve your utilization ratio.

Gaby: Oh, yes! This is actually a really great point, Evelyn. This gets to another myth that I’ve heard about credit utilization. Just a credit score myth in general, which is that people say that it’s good to carry a balance from month to month, that it helps you build your credit. Carrying a balance month to month has nothing to do with whether or not you’re going to help build your credit.

That’s a myth invented by, I don’t know who. But the point is that when you carry a balance from month to month, you’re more likely to end up having a higher credit card utilization ratio. And so … you know … that’s not helping you at all. And we haven’t gotten through all the credit score factors yet, but carrying a balance is not one of them.

Evelyn: Right. Carrying a balance is not a factor in a positive credit score.

Gaby: No. The only person that that benefits is your bank, who gets more interest payments out of you. That’s it. That’s the only person that helps.

Evelyn: Right. Or the credit card issuer.

Gaby: Right. Or credit card issuer in case it’s not a bank.

Evelyn: So we’re talking about ways to reduce that ratio. So paying down a balance is definitely one way to improve that ratio. And then another thing is, if your financial situation is positive that you can do this, you can contact the credit card issuer and ask them to increase your credit limit. And that will also improve your ratio. If you go down that path, just make sure that this is a financial decision that makes sense for you.

If you’re going to increase your credit limit and you’re somebody that has a tough time keeping within that limit and not running up the cards, then that may not be the best option for you. But it is one option that you can consider.

Gaby: Yes. I actually wanted to circle back around to one of the options you mentioned, which is apply for another card. If you get it, great, you will have a higher credit card utilization ratio. If you don’t, that is a bummer. But it could also be a bummer for another reason, which is another one of the factors in credit scores, which is inquiries.

Evelyn: Right. So there are two basic types of inquiries on your credit report. There’s what we call a soft inquiry, which is, if you look at your own score, that can be — or your own report — that could be considered a soft inquiry. And it doesn’t affect your credit score.

A hard inquiry occurs when you have actually asked for credit and the potential lender looks at your credit history and asks for your credit score to really evaluate your request for credit. So hard inquiries do affect your credit score. How much they affect it depends on a lot of different things. But again, that soft inquiry doesn’t really affect it. Hard inquiries can.

Gaby: And when we say affect it, we mean it makes it go down. Hard inquiries can make your credit scores go down. And there’s exceptions to this. If you are, for example, shopping for a really big purchase, like a home or an auto loan, there’s a grace period where you can do comparison shopping so you can ask different lenders, “What kind of loan do I qualify for? What kind of interest rates would I get?” And all of those checks are considered one.

The amount of that period, the length of that period rather, depends. But the reason that credit companies care about how many inquiries you have — especially if you have a ton of inquiries in a short period — is because if someone is applying for a lot of credit cards all at once, it could indicate to the credit card company that maybe this person is having some kind of cash-flow issue and they’re just trying to get a lot of cash fast.

And that person for them could be riskier because if they’re having a cash-flow issue, maybe they’re not going to be able to pay them back. That’s why credit companies in general care about inquiries. I think a lot of us would be like, “Why would they even care if I asked anyone else for a credit card?”

You know, that’s why. Probably.

Evelyn: It’s not necessarily that is your situation, but that is the impression that lenders might take away from that scenario.

Gaby: Yes. But I think the other thing that I really want to emphasize is that if you check your own score, that is always a soft inquiry.

Evelyn: Right.

Gaby: You checking your own stuff — that is never going to affect your credit score and you’re protected by the law. You should feel free to check that bad boy as much as you want, because that can only lead to more knowledge. And knowledge is power.

Evelyn: Exactly.

Gaby: Circling back around, average account age is another credit score factor. We still have two more.

Evelyn: Yeah, we have two more, and we kind of skipped over the two middle ones to talk about inquiries, which tend to have the least effect on your credit score. So the other two that we need to talk about are the average age of your accounts and the credit base. So average account age is basically just, how long have you been using credit?

Have you been using it 10 years? Have you been using it 20 years? Have you been using it 30 years? And that is important because it helps the lender understand how you have managed credit over time. And how long you have actually been using credit kind of speaks to your experience with credit.

Gaby: Right.

Evelyn: Someone who has not been using credit for as long, and [who] may be using it really well — and managing it very responsibly. And the longer that you do that, the better it can be.

Gaby: Yes, yes. And this one is one of those ones where there’s like not really a shortcut to it, unfortunately. Like all you can do is continue to have credit over time.

If you are a parent and you want to help out your kid, you could help them build credit earlier by doing things like adding them as an authorized user to your cards. Or, one thing that my parents did is they added me as a co-owner on a car loan when I was 16. And all of those things really helped build my credit up quite a bit.

So that’s definitely something that you can consider. The reason that you hear hesitation in my voice is because you shouldn’t do that if you aren’t going to be able to meet those financial obligations, right? Because that could also hurt your child’s credit scores.

In fact, there’s like a whole terrible portion of the internet where people go because they found out that their parents have stolen their identities and have opened all of these credit cards in their names. And they hit 18 and they realize that their credit score is like 400 and there’s nothing they can do about it without putting their parents in jail. And it’s really, really terrible. And it makes me super sad, but hopefully you’re listening to this because you want to help your children.

Wow. I really derailed. I’m so sorry. Evelyn, anything else to say about average account age?

Actually, I do have one more thing to say. One thing that you might be tempted to do is — after you have had accounts for a while, and you have multiple credit cards. Maybe your first credit card wasn’t that great — maybe it just has a super high interest rate or you don’t get points or whatever it is, you might be attempted to close down that account. Do not do that if you can help it at all, because it will drive down the average age of your accounts.

When you close your oldest account, it means that it no longer — it takes a while, but it eventually will no longer contribute to your credit history. And so your average account age goes down; it becomes younger. So if you have like a really old credit card that you never used, I’m going to recommend the same trick that I did before, which is just put a random, tiny bill on it on autopay — just to keep it open. Because the other thing is that sometimes credit card companies will close down credit cards if they haven’t had activity in too long. Just keep it open, you know, just running in the background.

Evelyn: Yeah. That’s a very good point to make.

Gaby: Thank you.

Evelyn: You know, closing down your oldest account is not necessarily something that’s going to help you and could potentially hurt you quite a bit.

Gaby: Yes.

Evelyn: The last factor to talk about is the credit mix and the amounts. Lenders generally like to see that you can manage multiple types of credit. So, ideally you would want to have maybe a credit card, maybe an auto loan, maybe a personal loan just to show that you have experience at managing — and managing well — credit in all of its different permutations.

Gaby: Yes.

Evelyn: And that is something that’s kind of a hard one to control for some people. Because if you are at a point in your life where you don’t have an auto loan, or you don’t have student loans or you don’t have a personal loan — if the only credit that you use is a credit card — then that can be difficult to achieve that mix.

But for most people that mix is going to include a credit card and auto loan, a mortgage if you’re a homeowner. And again, it’s just a mix of all the different types of credit that you could be using.

Gaby: And just to be clear: You shouldn’t go out and get a personal loan just to increase your credit mix.

Evelyn: Oh, no.

Gaby: That’s probably not a great idea. I mean, I don’t know. You know what? You do you. Again, remember the disclaimer at the top of the show? It’s your life. You should decide what’s best for you. But it’s not something I personally would do. What about you, Evelyn?

Evelyn: I would not do it either. But that said, for most people, just living your financial life [means] you’re going to get a mix of credit types. And most people will have an auto loan. It’s very common for people to have credit cards. Student loans are very common. Mortgages are very common. So that credit mix is probably something that’s going to evolve naturally as you just go through your financial life making responsible decisions.

Gaby: Yes, definitely. One thing I wanted to hit on is that if you’re checking your score regularly and you see like random fluctuations but you haven’t actually changed anything, that could be because sometimes the credit bureaus changed their scoring models. Remember we talked about the models earlier?

Evelyn: Right.

Gaby: So that’s also something to watch out for. If you’re looking at something and it just totally doesn’t make sense, that could be one thing to look out for. Or if it suddenly gets hit really hard and your score drops really precipitously. That might be a good sign. Sorry, that might be a bad sign that something hinky is going on with your credit. It could be a sign of credit fraud or something like that, which is why I think personally that you should probably check your credit reports and credit scores pretty frequently.

If you see something on your credit report, like if you see a utility bill that’s not you, that’s something that you can dispute with the credit bureau and get taken off, and that will help your credit score recover. I think it’s important to check your credit scores and reports very regularly so that you can monitor for things like that.

But if you see minor, random fluctuations, I don’t know. I check my credit scores all the time because I work at Credit Karma. It goes up and down — and it’s sometimes by as much as 20 points. So sometimes it happens.

Evelyn: I agree with you. I actually think it’s a very good idea to keep an eye on your credit report and your credit score for a number of reasons, including what you just said. You can recognize fluctuations. You can monitor for fraud — because often if identity theft is going to occur, you’re going to see signs of it in your credit history.

Those things could be like an account that’s newly opened that you don’t recognize, or a bill that’s been reported as late that you don’t recognize. So that’s another reason to monitor.

And even if you’re not worried about fraud and you’re not planning on borrowing any money anytime soon, I still think keeping an eye on your credit report and your credit score makes sense because as we said earlier, knowledge is power. And the more you know about your overall financial picture, the more empowered you can be to make decisions for what you need to do next, what you want to do next.

Also, interacting with this information on a regular basis can increase your comfort with it and help you feel more in control of it. And those are very important things. Not being intimidated by the information, feeling that you’re on top of it and really understanding how decisions that you make, you can control what happens to you financially and really set the groundwork to reach your goals.

So I don’t think there’s a downside to checking your credit and really staying on top of it.

Gaby: No. Y’all, we want you to feel empowered. That’s all we want for you. Here’s some practical advice on how to check your credit scores. There are a lot of ways to check. This is a podcast that is by Credit Karma, so you can, in fact, check your VantageScore 3.0® credit scores on Credit Karma. I think it’s just TransUnion and Equifax. And then there are some other companies too, like Nerdwallet, Credit Sesame. You can check on there. I don’t know what they have. Lots of credit card companies are offering specifically FICO scores these days.

I know that I can check my FICO score through my credit card companies. And then there’s also annualcreditreport.com. And this is specifically for your credit reports, not your credit scores. Remember the difference. The thing about this website is that the last time I looked at it, it legitimately felt like a scam to me because it’s very bare bones.

And I was like, this can’t be real, but it is. It’s from the federal government. It’s safe. Just make sure it’s annualcreditreport.com. Don’t go anywhere else. There are some sites that have similar URLs that are scams. Just be careful. There are a lot of different ways to check what is going on with your credit scores and credit reports.

I think the one thing that I want to cover that we haven’t hit yet is we’ve told people how to check their scores. We’ve told people what goes into their scores. What should they do if they log in and they look at their score for the first time — which by the way, congratulations, if this is the first time looking at your scores — and they see that it’s not great?

Let’s try to give people some strategies that they can use to help build themselves up.

Evelyn: Well, fortunately there definitely are things you can do. You are not completely out of control of your credit report and your credit score. There are options.

If you are looking to build your credit, you could — if you are related to someone who has established credit, for example, you are a student or a young professional and your parents have established credit and good credit — you can be an authorized user on a credit card that your parents have. And then the good use of that credit card will be positive for your credit report as well and your credit history as well. So that’s one option.

You can do secured cards, which I’m not as familiar with secured cards. Maybe, Gaby, speak to those.

Gaby: I am, in fact, very familiar with secured cards because before I was a content strategist, I was a credit card editor. Secured cards are a type of card that require a security deposit. That’s why they’re called secured cards. And a lot of times your security deposit is equal to your line of credit. So if you give the credit card company $200, your credit limit is $200.

Not all secured cards work like that, but that’s generally how they work. And the reason that you might think about getting a secured card is that they’re typically a lot easier to qualify for, because what happens is, is that secured card basically guarantees that the credit card company is going to get paid.

So they’re much more willing to extend you the credit. So you give the credit card company your $200, and then you spend money on that credit card [and] pay it off every month. Depending on the card, sometimes you can graduate to an unsecured card and the credit card company will give you back your $200 and just let you spend on credit without having any kind of security deposit at all, as long as you continue to keep paying stuff back.

So the thing with secured credit cards though is that it’s not just about having one. It’s also about using it and trying to make sure that you match up to the parameters of credit scores. So pay that guy on time every time, every single month. Try and stay below that credit utilization ratio. That’s another pothole to potentially watch out for. But remember you don’t want to not use it at all and then have it get closed. But secured cards essentially could be a very good tool to help you build your credit.

Another thing is student loans. Evelyn, you have two children who will soon be going to college. Do you want to talk about student loans?

Evelyn: I do. I am hoping to send them without student loans. We’re saving in 529s, and that’s definitely another podcast that we should do.

Gaby: Yes.

Evelyn: A student loan is something that a lot of people are probably either already doing, or they’re going to be taking out a student loan and paying it off. So if you have a student loan that is in your name, not your parents’ name and you start paying on that student loan — pay it on time, pay it responsibly as agreed — that’s going to help establish your credit history.

Often, student loans are something that people are going to be paying on for a while. But it’s a great way to improve your credit and really establish your credit history by doing something that you have to do anyway. You have to repay that student loan.

The same is true of an auto loan. If you are going to be taking out a loan to buy a car, if you’re able to get that auto loan and qualify for it on your own, that’s great.

If you can’t, one option is to have somebody co-sign the loan for you. And again, a word of caution there. If you go that route, just be aware that your payment activity on that auto loan is going to affect your credit and the co-signer’s credit. So, for example, if it’s your parent that co-signs it for you and you’re paying the loan, that’s going to improve your credit history. But it’s also going to affect theirs. But it can be a very good tool to qualify for that credit —co-signing to qualify for that credit. And then use that to establish a really good payment history, which can help improve your credit score.

Gaby: And the cool thing about having a co-signer, if they already have good credit themselves, it could mean that you end up with a lower interest rate on the loan.

Evelyn: Yes, that is definitely another benefit. It can help you qualify for the loan and may help you secure a better interest rate on that loan.

Gaby: Yes. I think that’s about it, that’s all I wanted to talk about. So I think the main takeaways of this show are that you have a lot of different credit scores, the way that the credit scores are formulated — we generally know some of the factors that go into deciding what your credit scores are. And I think another really big takeaway is that you have the ability to affect your credit scores. Again, this is the whole theme of the episode is we want you to feel super empowered and go out into the world — because knowledge is power.

And now you have so much more knowledge. Evelyn, is there anything you’d like to say?

Evelyn: Yeah, I think that summarizes it really well. Knowledge is power. And the more you know about how credit works, the more able you are to make it work for you.

Gaby: Definitely. All right. Well, thank you for joining us for this episode of “The Buck Starts Here.”

Evelyn: This was a blast. I want to do it again.

Gaby: Of course. All right, listeners. Get on out there and do something good. Bye.

Oh, hey there. Bet you thought it was over. It’s not. Welcome to the outro. In the outro, I tell you things that other people-fact checked in the episode and think that I ought to tell you, just in case.

It’s not anything necessarily wrong, just things that you probably ought to know before you go about your day.

No. 1: Applying for a new credit card can help you improve your credit ratio, but it can also cause your credit scores to dip as a result of the hard inquiry when applying.

Also, please note that requesting an increase in credit limit may result in a hard inquiry regardless of whether or not you actually get that credit limit increase — again potentially dropping your credit scores without any tangible benefit.

I suppose one other thing that you should remember when listening to any podcast about financial advice, but especially this one, according to our lawyers, is that anything that you hear should not be constituted as financial advice that we are telling you to go do directly. You should do your research before you do anything. This podcast doesn’t necessarily count as that.

I know I said that in the disclaimer, but we just really want to drive home the point that, you know,  be careful. We love y’all. Good luck. Enjoy personal financing. And have a great day.


About the author: Gaby Lapera is a researcher and writer at Credit Karma and a personal finance expert. She also spends time working on investing and science communication. Gaby graduated with a master's degree in biological anthropolo… Read more.