Editor’s Note: This is the final in a three-part series.

Credit reports and credit scores are the primary way lenders determine whether they should extend a loan to you and at what interest rate. It’s important to teach young people the basics about credit reports because mistakes can cost a lot in the long run.

There are three different credit reporting agencies for individuals. Each agency has different ways of calculating your credit score and each agency uses a different numeric scale to determine your score. For all three agencies, however, there are factors in common that will affect your credit score. Payment history, amounts owed, length of credit history, new credit, and types of credit used are all ways to measure “credit-worthiness.”

So, what makes for a good credit score? A very important factor is history of credit. Lenders want to see that borrowers have used financing in the past and have accounts with long and positive payment history. It goes without saying that paying bills on time has a big impact on your credit score. But factors that may not be as obvious: the types of credit accounts open and the ratio between credit limit and balance. Lenders want to see stability in finances. That means that having positive payment history on a mortgage will increase your credit score more than positive payment history on a credit card. Having 10 credit card accounts with positive payment history may give you a lower credit score than three credit card accounts with positive payment history. Lenders want to see that a borrower isn’t juggling too many balls. Having a credit card balance of $5,000 on an account with a $5,500 limit is not going to give you as high a credit score as an account balance of $1,000 on an account with a $7,500 limit.

In a perfect world, we would be rewarded for paying bills on time and in full, and given some leeway when mistakes were made. Unfortunately we don’t live in a perfect world, and when we’re talking about credit reports, it gets even worse than imperfect. It seems that no matter how diligent you may be, the credit report can be unforgiving when it comes to mistakes. Pay a bill 30 days late, a negative mark will be on your credit report for seven years and will bring your credit score down significantly.

The long tail of the credit report is the reason it is critical that we teach our children that managing finances will have an impact on their buying power. It’s important to note that simply making payments on time doesn’t always result in a great credit score, especially if all open accounts are credit card accounts. In my mind, it means more to teach children that financing all of their material desires is not a good idea and that saving for something in order to pay cash for it can be the smartest move they can make.

Attorney Denise K. Aguilar is an Ahwatukee Foothills resident whose bankruptcy practice is located in Ahwatukee. Reach her at (480) 455-1881 or visit www.aguilarlawonline.com.