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What is Credit Composed of?



Credit is one of those concepts that’s often talked about but never explained. As a Real Estate Advisor, one of the most common issues I see is bad credit. In general, I’d argue that having a decent understanding of credit and a great credit score can be extremely advantageous. Believe it or not, having access to credit can save you money or give you access to unique or exclusive offers. But I’ll save those tactics for a different article. In this article, I just want to provide you with the fundamentals. The most important thing you can understand about credit is this…

What exactly is credit made of? I know, it sounds so basic and simple. But, without reading this article, could you tell me what your credit score is made of? Do you know what factors actually impact your credit score? If I asked you how to raise it, could you tell me how without Googling it? If you’re like most people, you probably can’t. But that’s okay. In a few minutes, once you get through this article, you’ll be able to school nearly everyone you know with your vast wealth of credit information.

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Before I get into the fundamentals of credit, I encourage you to read this article that explains exactly what credit is here.

In college, I didn’t really have credit and that’s a regret that I have. If possible, I’d go back and IMMEDIATELY get credit. So, I encourage you to do so right now if you don’t already have at least one credit card.

Now, when it comes to getting your first credit card, I’d encourage you to check out this article for a full run down. However, I’ll give you the cliff notes version right now. Again, it’s extremely important to get credit right away if you don’t already have it.

Summary of How to Get your First Credit Card

  1. Save $250-$750

  2. Go to a local bank

  3. Request a Secured Credit Card

  4. NEVER overspend and use your credit card frequently

  5. ALWAYS pay back what you spend immediately

  6. After a year, request to upgrade your secured credit card to an unsecured credit card

  7. Enjoy being a responsible credit card carrier

  8. BONUS: Inquire to increase your Credit card limit yearly (This can be done usually online but may require a phone call)

Now that that’s out of the way, you’ve opened up a credit card, and you’re ready to learn let’s get into the breakdown of having a credit card.

Payment history (35 percent)

I used to be a Swiper. But what exactly is a Swiper? It’s the kind of person that always swipes their credit card. For everything. Recklessly. Without a care in the world. Now, to be honest, I wasn’t the most reckless Swiper. I’d always have an idea of how much money was in my account. And I’d never spend more than what was in my account (typically, at least). But, for months, I made a mistake. I thought I had my autopayments set up. Turns out, I had it disabled for some odd reason. This meant that those monthly payments to cover my minimum were going unpaid. This was a disaster. As you can guess, this meant that my balance was going up…

And up… And up… Eventually it kept going up and the debt kept piling up. One day the bank called. They were furious. They were pissed! They threatened me and told me that they needed their money. ASAP!

Okay, that’s a bit exaggerated. They did call. But they were informing me that they hadn’t received a payment in a while. We chatted for a bit. And the bank forgave me and lowered my monthly minimum payments from the $300/month that had accumulated to $75/month. I was out of the woods… But I actually wasn’t. Because my payment history was poor. And this was the bulk of my credit score. Understand this… Your Payment History makes up a massive 35% of your credit score. This means that if nothing else, you should be paying your minimum monthly payments on time.

As a side note, missing payments not only destroys your credit score but it leads you to a negative cycle of debt. As you miss payments, the minimum requirement increases.

Overtime, you’ll see your minimum balance go from $50- $300 or more depending on how long you miss you payments.

Again, be sure to pay your minimum on time at the very least. This is the simplest way to protect your credit score.

Credit utilization (30 percent)

Healthy credit is kind of like an empty pot. When the pot is empty, it’s light. It’s easier to carry. It’s not a burden. But as the pot accumulates water, it gets heavier and heavier. Eventually, it’s tough to lift. The same applies to your credit score. Utilization is another major component of your credit. And similar to the pot, as you use too much of your total available credit your credit score is overwhelmed. This will cause it to decrease.

My personal suggestion, use up to 10% of your total available credit.

For example, if you have $1000 in total credit available to you, you should only be using $100 of your credit. This allows you keep it manageable and allows you to maintain a healthy score. I’d say at most, use 30% of your total credit (especially if you’re a beginner with credit).

Does this make sense? As a side note, I also recommend paying off your credit balance in full as often as possible. Depending on your credit card and bank, you might be able to pay off a balance immediately after a purchase. However, other cards and banks might require at least 24 hours before you can pay off a previous transaction. Keep this in mind and stay on top of your credit.

Credit history age/length of credit history (15 percent)

Remember when I told you earlier to get credit as soon as possible? Well, this is a major reason why. The amount of time you’ve had access to credit contributes to your credit score. For example, even if you’ve paid off everything on time and consistently used under 10% of your total credit score for 5 years straight, your credit score won’t be as high as someone who’s been doing this for 10+ years. Now, Credit History/Length doesn’t contribute to much as it’s only 15% of your score. However, it’s a decent chunk that’s easy to earn simply by opening up a single credit card.

Credit mix/variety of accounts (10 percent)

Can you juggle? Can you juggle multiple balls at the same time? How about plates… On sticks…. With blade on the edges?

Could you do it above a pit filled with Lions? I bet you could. BUT if you can’t, that’s okay. Juggling different types of accounts is far easier than that. I may or may not know from personal experience.

The variety of credit you have contributes in a minor way to your credit score. It attributes 10% of your overall credit score. And, luckily, this is probably the easiest part of a credit score to fulfill. In fact, if you’re reading this, you’ve probably already accomplished this. Do you have student loans AND a credit card? Or maybe a car loan AND a student loan? Perhaps you have a Mortgage AND a credit card? These are all forms of accounts that will contribute to the 10% of your credit score.

And the reason why this is important is because it shows lenders that you’re able to juggle multiple types of credit and accounts at the same time.

Again, easier than juggling plates with blades on a stick above a pit of lions…slightly.

New credit/inquiries on your credit report (10 percent)

Have you ever been to a retail store? Have they ever offered you a credit card? Did you know that even attempting to open up one affects your credit score? I used to work at American Eagle and Brooks Brothers several years ago. We were always encouraged to ask customers to open credit cards. We had scripts and everything. True story. And whenever a person would say yes, we’d type in their social security, income, and personal information to run an inquiry. Now, this inquiry--whether they were approved or denied--would stay on their credit report for two years. And this slightly impacted their credit score. In fact, a credit inquiry makes up about 10% of their credit score.

Keep this in mind. If you’re offered multiple credit cards at once, it can hurt you to even run the credit card check. Personally, I think there are strategic ways to open credit cards and you’re able to use websites like Free Credit or Credit Karma to get a general idea of your credit scores if you’re unsure of whether or not you’ll get approved. However, I’d be cautious of opening a ton of cards. Again, it only makes up a small amount and it usually doesn’t crucially impact your score for too long, but it’s still worth noting.

Know what goes into a credit score and then take steps to increase your score.

Again, the most important thing you can do is pay your bills on time. This makes up 35% of your credit score and sometimes includes paying on-time payments for cell phones, cable TV and Internet bills.

Also, make sure that all of your accounts are in good standing.

If you only have a few credit cards, it would be beneficial to open more, especially if they're all from different companies. Having multiple accounts helps increase the variety in how you use them; having multiple lines of credit allows lenders to see how responsible you are at managing money across different types of loans.


Knowing what goes into a credit score is the first step to increasing your score. You can then take steps to improve your score, such as paying all of your bills on time and avoiding new credit inquiries. If you have any questions about this topic or need help improving your credit score, DM or Email me and I’ll try to help. By the way, I highly encourage you to check out my FREE Basic Finance Course where I go over some more tips on credit, how money works, and how you can strategically set yourself up financially.



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