im embarrassed to admit that my knowledge of how credit works is slim. so i have a few questions:
1. why do credit scores only go up a certain amount at a time, but if you don’t make a payment on time, it can plummet 50 points? (just an example)
2. What is a “credit line for cash”, and how does that work?
3. What deeply impacts your credit?
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Credit scores are a proprietary calculation of the credit reporting companies, there is no easy explanation of them. They generally reward behavior that’s statistically associated with paying your debts, like making payments on time, and punish behavior that’s associated with not paying your debts, like paying late.
The scores are not for you, they are for lenders about you. They reflect the lender’s priorities, so paying even once late is a big deal (big change) and paying on time is expected (small change).
Credit scores are a numerical value given to the general concept of “How likely is this person to successfully pay you back if you loan them money?”. As a result, they’re necessarily always an estimate. There is no single Credit Score that you have; anyone could assign a value to that concept. There are three organizations that happen to be very popular and influential in terms of evaluating “how likely are people to pay you back?”, so those three scores are the widely used ones. When people talk about a singular Credit Score, they usually mean the average of those three scores.
The formulas are not public information but the general factors are somewhat known. Basically, if you ever miss any payments, you are much more likely to miss at least one more payment in future. That’s why a single missed payment drops your score. Whereas someone who’s paid on time for 2 years is only slightly more likely to keep paying compared to someone who’s paid on time for 1.9 years; that’s why adding just one more on-time payment doesn’t do much.
Credit for cash *likely* refers to a credit line that allows you to take a cash advance. It’s pretty much a direct loan. Notably this is usually at fairly high interest rates – because cash advances have a relatively high rate of default (people not paying them back).
The things that deeply impact your credit are – roughly in order – completely failing to pay a debt (eg bankruptcy), missing payments on a debt, and having a lot more debt than income.
It uses your past financial transaction responsibility to predict your future financial accountability. While it’s trashed on Reddit a bit, it’s allowed a major proliferation in lending to responsible people, propelling economic growth.
1. There’s a common quote: **”Trust takes years to build, seconds to break and forever to repair.”** Your credit score is a measure of how trustworthy/risky you are as a borrower. A missed payment immediately shows you to be more risky. It takes time to rebuild that trust.
2. Haven’t seen that phrase, but is sounds like the amount available to you for cash advances. Oftentimes, this limit is lower than your limit used for purchases.
3. From [Investopedia](https://www.investopedia.com/terms/c/credit_score.asp#toc-how-your-credit-score-is-calculated):
>While there can be differences in the information collected by the three credit bureaus, five main factors are evaluated when calculating a credit score:
>1. Payment history (35%)
>2. Amounts owed (30%)
>3. Length of credit history (15%)
>4. Types of credit (10%)
>5. New credit (10%)
The exact calculation varies by bureau, and even by the exact *type* of score being calculated, but generally payment history and utilization have the biggest impacts.
1.) if you think of a credit score as a measure of how trustworthy you are to pay it back, it only takes one small thing to really negatively impact trust. My wife could remain faithful for me for 15 years, but if she goes out one night and makes out with another guy, my trust is deeply, deeply damaged and it’s gonna take a long time to rebuild.
2.) I’ve never heard of this and not sure what you are referring to. What you may be referring to is a type of card that you more or less pre-pay. Kinda like a debit card, but it is reported as a credit card. Some people use things like this to build credit when they don’t have it and/or make sure they control their credit card usage as they can only spend the amount on the card.
3.) Lots of things do. Biggest thing is just paying your bills on time as agreed. Missed payments, etc ding your score really bad. If you want to build credit, the best thing you can do to start off is get a cheap, low-limit card, and pay it in full every month.
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