Kickoff Your Credit Goals: Understanding Your Credit Score

65% percent of Americans were thinking about having a financial resolution this year according to Fidelity’s 2025 New Year’s Financial Resolutions Study. Although saving more money seemed to be the most popular financial resolution, we here at American Consumer Credit Counseling can’t stress enough how important it is to fully understand your credit score.

By taking the time to understand and improve your credit score, you can set a solid foundation for achieving all your financial goals, including saving more effectively. Your credit score is a crucial aspect of your financial health, influencing everything from loan approvals to interest rates and even potential employment opportunities.

Now, as the new year begins, it’s the perfect time to dive into the components of your credit score and make informed decisions that can lead to a brighter financial future. Consider setting specific, actionable credit goals for this year, such as increasing your score by a certain number of points or reducing your credit utilization. By focusing on these goals, you can enhance your creditworthiness and open doors to better financial opportunities.

A credit score is a numerical representation of your creditworthiness, used by lenders to assess the risk of lending to you. Scores typically range from 300 to 850, with higher scores indicating lower risk. The key components influencing your credit score include payment history, credit utilization, length of credit history, new credit inquiries, and credit mix.

So what even is the purpose of a credit score? Essentially, it’s a numerical summary of how well you manage debt and repay loans, which can significantly influence your ability to obtain credit, such as mortgages, car loans, and credit cards, and can affect the interest rates you’re offered. A high credit score can lead to better financial opportunities and lower costs, while a low score might limit your options and result in higher interest rates. Therefore, understanding and maintaining a good score is crucial for financial health and achieving your financial goals.

Next, let’s go over length  of credit history. A longer credit history is advantageous because it provides lenders with a more comprehensive view of your financial behavior over time. It accounts for about 15% of your credit score. Lenders prefer borrowers who have a long track record of managing credit responsibly, as it indicates stability and reliability. Even if you no longer use a particular credit account, keeping it open can contribute positively to the overall age of your credit history, boosting your score.

Your credit utilization ratio is the percentage of your available credit that you are currently using. It’s a crucial factor in your credit score, making up about 30%. Ideally, you should aim to keep this ratio below 30%. Higher utilization can signal to lenders that you may be overextended financially. To manage your credit utilization effectively, consider actions like paying down existing balances to keep individual balances low.

Credit inquiries occur when a lender checks your credit report, and they can be categorized as either soft or hard inquiries. Soft inquiries, such as those made by you when checking your own credit, do not affect your credit score. Hard inquiries, on the other hand, occur when a lender reviews your credit for a loan or credit card application and can slightly lower your score, typically for up to two years. It’s important to limit the number of hard inquiries to maintain a healthy credit score.

Lastly, having a diverse range of credit types, such as installment loans, credit cards, and mortgages, can positively impact your credit score. This factor accounts for about 10% of your score. A varied credit mix demonstrates your ability to manage different types of credit responsibly. That can be beneficial in the eyes of lenders. However, it’s important to manage all accounts wisely and avoid taking on unnecessary debt just for the sake of diversification.

Your credit score is a vital component of your financial health, impacting loan approvals, interest rates, and more. A higher credit score can lead to better loan terms and lower interest rates, potentially saving you a substantial amount of money over time. Beyond loans, credit scores can affect your ability to rent a home, determine your insurance premiums, and even influence employment opportunities. Some employers check credit as part of their hiring process.

With the new year comes the chance to establish clear credit goals. Consider aiming to improve your credit score by a certain number of points, reduce your credit utilization, or diversify your credit mix. Setting these goals provides direction and motivation, helping you stay focused on enhancing your creditworthiness.

Understanding and improving your credit score is an essential step towards financial wellness. By taking proactive measures and setting clear goals, you can enhance your credit profile, opening doors to better financial opportunities. As you embark on this journey, remember that consistent effort and informed decisions are key to achieving your credit goals.

We invite you to share your credit score goals for the year! Follow us on social media (facebook, Twitter, etc.) and tell us about it. Don’t forget to tag ACCC! We’d also like to encourage you to seek support or advice if needed. Whether it’s through online communities, professional guidance, or educational resources provided by non- profits like ACCC, there are ample opportunities to gain the knowledge and assistance necessary to succeed in your credit improvement efforts. Let this January be the start of a financially healthy and prosperous year!