Your credit score is one of the most important numbers in your financial life. It affects your ability to get a mortgage, rent an apartment, finance a car, and even qualify for certain jobs. Understanding how it works is the first step to improving it.
What Is a Credit Score?
A credit score is a three-digit number between 300 and 850 that represents your creditworthiness. Lenders use it to determine how likely you are to repay a loan. The most widely used scoring model is FICO, though VantageScore is also common. A score above 700 is considered good, and above 750 is excellent.
The Five Factors That Determine Your Score
Payment history makes up 35 percent of your score and is the most important factor. Credit utilization accounts for 30 percent — this is how much of your available credit you are using. Length of credit history contributes 15 percent. Credit mix (having different types of credit) counts for 10 percent, and new credit inquiries account for the final 10 percent.
How to Improve Your Credit Score
The most impactful thing you can do is pay every bill on time, every month. Set up autopay for at least the minimum payment on all accounts so you never miss a due date. Even a single 30-day late payment can drop your score by 50 to 100 points and stays on your credit report for seven years.
Reduce your credit utilization ratio below 30 percent, and ideally below 10 percent for the best scores. If you have a $5,000 credit limit, try to keep your balance below $500. Paying down balances is the fastest way to see a score improvement.
Do Not Close Old Accounts
The age of your credit accounts matters. Closing an old credit card shortens your average account age and can reduce your score. Unless a card has high fees, keep old accounts open and make small purchases on them occasionally to keep them active.
Check Your Credit Report for Errors
About one in five credit reports contains an error. Visit AnnualCreditReport.com to get your free reports from all three bureaus — Equifax, Experian, and TransUnion. Dispute any inaccurate information in writing. Removing an error from your report can significantly boost your score.
Improving your credit score is a marathon, not a sprint. Focus on consistent, positive habits and your score will gradually climb. A higher credit score translates directly into lower interest rates and thousands of dollars in savings over your lifetime.