For many of us, credit scores feel like one of those complex financial concepts that exist just out of reach. You might know that credit scores affect things like loans and credit cards, but what exactly goes into that three-digit number? And if your score isn't where you want it to be, what steps can you take to make it better?

A credit score is essentially a snapshot of your creditworthiness, based on your financial history. It's what lenders, landlords, and even some employers use to gauge how reliable you are with money. While it might seem complicated, understanding the basics of credit scores and knowing what actions can improve them can help you take control of your financial future.

Let's demystify credit scores, look at what affects them, and go over some easy steps you can take to build a healthier credit profile.

What Is a Credit Score, Really?

A credit score is a three-digit number, usually between 300 and 850, that reflects your credit risk-essentially, how likely you are to repay borrowed money. The higher your score, the better your credit looks to lenders. Scores above 700 are generally considered good, while those over 800 are excellent. On the other hand, scores below 600 often indicate that there's room for improvement.

Credit scores are calculated by companies like FICO and VantageScore, which look at your credit history and apply a formula to come up with your score. Your score is then used by lenders to determine things like interest rates, credit limits, and whether or not to approve a loan or credit application in the first place.

While there are multiple credit scoring models, they all focus on similar financial behaviors-paying bills on time, keeping balances low, and avoiding too many hard inquiries (we'll get into these in a bit).

Factors That Influence Your Credit Score

Credit scores aren't random; they're based on specific aspects of your financial behavior. Here's a closer look at the main factors that influence your score:

New Credit Inquiries (10\%)
Each time you apply for credit, it generates a "hard inquiry" on your credit report. A few inquiries won't make a big impact, but too many in a short period can lower your score, as it might signal to lenders that you're desperate for credit.

Types of Credit (10\%)
Having a mix of credit types-like credit cards, a car loan, or a mortgage-can positively impact your score. Lenders see a diverse credit mix as a sign that you can manage different types of credit responsibly.

Length of Credit History (15\%)
The longer you've been using credit, the better it is for your score. This factor considers the age of your oldest account, the average age of all your accounts, and the age of individual accounts. That's why closing old accounts can sometimes hurt your score.

Credit Utilization (30\%)
This is the percentage of your available credit that you're using. If you have a credit card with a $1,000 limit and a $300 balance, your utilization is 30\%. Keeping utilization low-ideally under 30\% of your total available credit-shows that you're managing your credit responsibly.

Payment History (35\%)
Payment history is the most significant factor in your credit score. Late payments, missed payments, or accounts that go to collections can harm your score. Simply put, lenders want to see that you can pay your bills on time.

Checking Your Credit Report: A Must-Do for Everyone

One of the best steps you can take toward better credit is regularly checking your credit report. Your report gives you a detailed look at your credit history, including accounts, balances, and payment history. It's also where you'll catch any errors or potential signs of identity theft, like unfamiliar accounts.

The good news is that you're entitled to one free credit report each year from each of the three major credit bureaus: Experian, Equifax, and TransUnion. You can request these reports at AnnualCreditReport.com, which is the only federally authorized site for free credit reports.

Reviewing your report might feel tedious, but it's essential. Mistakes do happen, and if you find an error (like a payment marked late that you know was on time), you can dispute it with the credit bureau to have it corrected. An accurate report is crucial because it directly impacts your credit score.

Strategies for Improving Your Credit Score Over Time

Building better credit isn't about quick fixes-it's about consistent, healthy financial habits. Here are some actionable steps to help improve your credit over time:

Check Your Report for Errors
Regularly reviewing your credit report can help you spot and address any inaccuracies. If you find errors, such as a payment marked late that wasn't, submit a dispute with the credit bureau to have it corrected. Even minor mistakes can affect your score, so it's worth double-checking.

Consider Keeping Older Accounts Open
Length of credit history is a factor, so if you have older credit cards in good standing, it's often best to keep them open, even if you're not actively using them. Just remember to check in on them occasionally to avoid account inactivity fees.

Limit New Credit Applications
Each hard inquiry can slightly lower your score, so avoid applying for multiple credit accounts within a short time. If you're shopping for a specific loan, like a mortgage or car loan, multiple inquiries within a short period (usually 30 days) may count as one inquiry for scoring purposes, which can help minimize the impact on your score.

Keep Credit Utilization Low
Try to keep your credit card balances under 30\% of their limit. If possible, pay off your balance in full each month. If paying off completely isn't feasible, aim to keep balances as low as you can. If you have multiple cards, distributing the balance across them can help keep utilization rates lower.

Pay Bills on Time, Every Time
Since payment history is the largest factor in your credit score, paying bills on time is essential. If you're prone to forgetting, consider setting up automatic payments or reminders. Even a single late payment can stay on your report for up to seven years, so timely payments are one of the best ways to protect your score.

Avoiding Common Credit Pitfalls

Credit is a powerful tool, but it's easy to fall into habits that can hurt your score. One common pitfall is relying too much on credit cards. If you're carrying a balance month after month, it's easy for interest charges to spiral, making it harder to pay down debt. Over time, this can lead to high credit utilization rates, which will drag down your score.

Another pitfall? Co-signing loans. When you co-sign for someone else, that debt shows up on your credit report, too, and if they miss a payment, it can impact your score just as much as theirs. Co-signing is a generous gesture but one that should be approached with caution.

Finally, closing old accounts might seem like a good idea for simplifying your finances, but it can actually hurt your score by reducing your available credit and shortening your credit history. If you want to tidy up, focus on paying down balances rather than closing accounts.

Building good credit is like planting a garden-it requires attention, patience, and small, consistent actions. By understanding the basics of credit scoring, checking your credit report, and adopting healthy financial habits, you can steadily improve your score over time. With a little effort, that once-mysterious credit score becomes a powerful tool for achieving financial goals and a solid foundation for your future.

References

• American Bankers Association. (2021). Credit Score Basics. Retrieved from https://www.aba.com
• Consumer Financial Protection Bureau. (2022). Understanding Credit Scores and Reports. Retrieved from https://www.consumerfinance.gov
• Federal Trade Commission. (2022). Free Credit Reports. Retrieved from https://www.ftc.gov