Diana Billstrom wanted to rebuild her credit score, but she wasn’t sure where to start.

Though she knew the basics, Billstrom wanted to learn more.

“I think we all need financial education, no matter our age or neighborhood,” she said.

When she heard that Walnut Way Conservation Corp. was offering a webinar in February on credit scores called “Keeping Score: Everything You Never Knew About Credit,” she signed up.

Jackie Carter, the director of economic empowerment at YWCA Southeast Wisconsin, led the workshop, which was made possible through a grant from the Zilber Family Foundation.

The need for financial management is great, Carter said. Past generations didn’t have the knowledge to pass it on or it wasn’t something they discussed, she said.

Billstrom, who is a program manager at COA Youth & Family Centers, isn’t just using the information for herself; she’s sharing her newfound knowledge with her family and clients.

Below, Carter breaks down everything you need to know about credit.

1. What is a credit score?

A FICO credit score is a number that ranges from 300 to 850. The score determines a person’s creditworthiness — that is, how suitable a person is to receive a financial credit or loan, based on their past experiences.

Carter explained that 300 to 579 is considered poor, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good and 800 to 850 is exceptional.

“We’re walking, talking credit scores,” Carter often tells clients. “When applying for a loan or credit, that creditor or lender may not know you personally, so they look at your credit score and what’s on your credit report the same way they would consider your character. They look at how you manage certain things financially.”

2. Why is credit important?

“Credit is our ability to borrow money, to receive goods or services now and pay for it later,” Carter said. “It impacts so many areas. It’s important because of the fact that it gives you access to things that you would not have access to if you didn’t have it.”

Good credit can get you the best interest rate or no interest rate. Most people will have to get credit at some point for such things as renting an apartment or buying a car.

Some people are “credit invisible,” which means they don’t have any credit history with the three major credit bureaus: TransUnion, Experian and Equifax. This can create obstacles for them if they need to borrow money, Carter said.

3. How your score is determined

FICO is the most commonly used scoring system among lenders. A person’s FICO credit score report comprises five components: payment history, credit debt owed, length of credit history, new credit and type of credit.

Payment history is worth 35% of a credit score, amount owed is 30%, length of credit history is 15%, new credit is 10% and types of credit is 10%.

“I always stress that your credit score is only what it is at the time you pull it,” Carter said. “It is not set in stone.”

4. Understanding the five components

“A big part of being able to get that credit score up is really understanding what influences it and how to work within those different areas to get that credit score to whatever the goal is,” Carter said.

Payment history

Payment history, the biggest influence on the credit report, is exactly that – the history of your payments. It shows how often you paid on time and how often you were late. The important thing to note is when the payment is late and when it hits the credit report.

Payments are due on a certain day each month. If they are not paid, they are considered late, and when a late payment hits the 30 day mark it goes on the credit report, Carter said. Partial payments are considered late payments.

“If you have to be late, try not to be 30 days late, and if it has to be 30 days, try not to let it get to 60 days and on and on,” Carter said. “The later it gets, the more it hurts the credit score.”

Amount owed

The second largest part of the credit score is the amount of credit owed or a person’s debt.

Length of credit history

This part of the score looks at how many months you’ve had an account open. Once an account hits the 12-month mark it is considered a seasoned or established account, Carter said.

While you want to be careful not to open a lot of different accounts, it is important to have open credit accounts that show your history.

“Once you close the account, it will drop the credit score because you no longer have that history,” she said. “If you need to close an account, don’t close more than one a year.”

Carter said some clients consider closing their credit card accounts because they aren’t managing their credit well. Instead, Carter offers an alternative solution: Cut the card up but keep the account open. The credit history is still available.

New credit

New credit is all the times you have applied for credit in the last 12 months. Carter said it is important to limit the number of accounts you apply for and open.

There are two types of accounts: traditional and nontraditional.

Traditional accounts report a person’s payment history and include installment loans, mortgage, personal loans, vehicle payments and credit cards. Nontraditional accounts include rent, the phone bill, insurance and so on.

Types of credit

There are two types of credit accounts: installments and revolving. Installments raise the score and revolving lowers it.

“With installment accounts, those are accounts that every payment that you make reduces the amount you owe, whereas revolving such as with a credit card you have that ongoing ability to increase your debt,” Carter said.

For example, if a person has a credit card with a $300 limit and spends $150, he or she can make the minimum payments and still have access to charge more.

5. Get to know your credit report

The first step toward building good credit is looking at the credit report and knowing your current credit score. Then, scan it thoroughly to make sure all the information is correct. Individuals should confirm that their name is spelled correctly, that the current and former addresses are accurate, that the Social Security number is right and so on.

They should double-check that the amount borrowed is correct and that all the accounts listed on the report belong to them.

Once the information is deemed correct, a person can begin working on their credit score. When working with clients, Carter will help them look at the full report, and then she helps them tackle it piece by piece. It can take a while, but it can change.

“Never let what appears on your credit report define who you are, because it does not define who you are,” Carter said. “We’ve all made mistakes at some point and things happen. It’s OK to feel bad when you see your credit score, but don’t stay in that space where you feel bad.”

6. How to use a credit card to build credit

“Credit cards are very effective in building a credit score,” Carter said, if a person is strategic.

She generally recommends that clients don’t use more than 30% of their available credit limit. If a person spends more than 30% of their credit limit, it can lower a credit score.

“I encourage the individuals I work with to use the credit card for something you have to pay cash for,” Carter said. “Something you could pay in full – if you can – when that payment is due.”

For example, when you go to buy gas, use a credit card.

Sometimes, people have no choice, and they have to use more than 30% of their credit limit. In that case, Carter said, individuals should reach out to their credit card company and ask when it reports payment history to the credit reporting agencies. Even if you can’t pay it off in full, you can pay enough to get below the 30% mark.

7. How to protect your score

Carter suggests using a platform such as Credit Karma to monitor your score. Identity theft and fraud are huge issues that have been exacerbated by the coronavirus pandemic, she said. Being informed about your credit score allows you to know if there’s a problem and attempt to fix it right away.

Another suggestion: Be careful who you share vital information with. People can use your information to apply for credit in your name.

Check your credit score at least once every four months. People used to check it once every year, but Carter suggests doing it more often.

“In the world we live in right now, a lot can happen in a year,” Carter said. “It’s important to check your credit score more often and make sure everything is accurate so they can address any issues right away.”

To check your credit score, visit Annual Credit Report. Right now, Equifax, Experian and TransUnion are offering free weekly credit reports.

8. Common misconceptions and misunderstandings

There are three major misconceptions that Carter has heard from clients over the years.

The first is that if you don’t get approved for a credit card, it doesn’t hurt your credit score. This is false. Whether you’re approved or not, your credit score focuses on the fact that you applied. Applying for one credit card isn’t going to cause a drastic hit but applying for one after another will lower your score.

People often believe that their job or background plays a role in their credit report. Again, this is false. A credit report does not factor in a person’s age, salary, job or other information aside from the five components listed earlier.

The third misconception is that anyone can check another person’s credit score. This is definitely not true. A person has to have a purpose and your permission to legally look at your credit score.