What Your Credit Score Means and How to Improve It

Whether you’re looking to buy a home or car, take out a loan, open a credit card account, or even purchase a new auto insurance policy, your credit score will likely come into play. This three-digit number is calculated based on a variety of financial factors, and can influence whether a lender or creditor is willing to work with you.

But what does your credit score really measure? And if your score isn’t high enough to get the products, services, or rates you need, what are some ways you can boost it (and fast)? Here are some helpful tips and things to know about credit scores, and how you can improve them.

What Your Credit Score Means

Your credit score is a number typically ranging from about 300 to 850. The higher your score, the more creditworthy you are viewed to be by potential lenders, creditors, and other financial services providers. Creditworthiness is a gauge of how reliable you will likely be when it comes to paying your bills on time and satisfying your debts as agreed.

Though it’s often referred to in a singular way (i.e. “your credit score”), you can actually have tens or even hundreds of different scores, depending on which credit scoring model is used. The most popular credit scoring model is the FICO 8, provided by the Fair Isaac Corporation. Other models include the VantageScore as well as proprietary calculations created by individual credit card issuers, lenders, and other companies.

Why Credit Matters

There are a few key factors that go into calculating one’s credit score. These include your:

• Payment history — if you have made payments on-time and as agreed in the past

• How much of your credit you utilize — whether your credit cards are maxed out or not

• The different types of credit you’ve held — revolving credit accounts, personal loans, open-ended lines of credit (like HELOCs), and more

• How many times you’ve applied for new credit recently — the number of hard inquiries reported to the credit bureaus in the last two years

• How old your existing accounts are — whether or not you’ve been managing credit-based accounts for years or if you’re brand new to it

Using this data, scoring models can generate a credit score that gives lenders a rough idea of how well you’ve handled your credit accounts in the past, and whether you’re likely to handle them responsibly moving forward. If you haven’t had credit accounts for very long, mismanaged your accounts previously, or have been taking out a lot of credit in recent months, a lender may be hesitant to lend you more money or give you access to a new line of credit.

How to Improve Your Credit

If you have a low credit score or limited credit history, there are a few ways you can work to build and boost your score moving forward. Here are some of the top methods to consider.

Look for errors

Perhaps the easiest way to improve your credit score is to remove any erroneous information that might be bringing your score down. Since your payment history accounts for about 35% of your credit score calculation, a single incorrect late payment could bring down your score by tens or even hundreds of points!

Every American consumer is offered at least one free credit report from each of the three reporting agencies (Experian, Equifax, and TransUnion) each year. You can request these through AnnualCreditReport.com; just be careful about lookalike websites, as this is the only one that’s official and government-approved.

Then, look over your credit reports with a fine-toothed comb. Look for things like:

• Reported late payments that were actually made on time

• Accounts that you don’t recognize

• Incorrect balances

• Errors on names, addresses, birthdates, and more

• Hard inquiries that you didn’t approve

• Closed accounts that are reported as open

If you find any errors, you can contact the creditor directly to request a correction. You can also dispute these inaccuracies through the reporting bureau’s website directly. After an investigation is completed (or the creditor removes the report), your score will change to reflect the correction.

Pay off existing balances

Your credit utilization is the percentage of your credit limit that you’re taking up with an existing balance. If you have a credit card with a $10,000 limit, for example, and are carrying a $6,500 balance, your credit utilization is 65%.

Credit utilization accounts for about 30% of your credit score calculation. If your balances are too high and dragging down your credit score, one quick way to make an improvement (if you can afford it) is to pay off some debt. By lowering your balances, you’ll lower your utilization and raise your credit score.

Piggyback on someone else’s good credit 

If you have a spouse, parent, sibling, or other trusted and creditworthy individual in your life, you could also consider boosting your score with a simple piggyback. By having them add you to one of their accounts as an authorized user, you can often reap the benefits of their account and payment history without having to open an account on your own. You don’t even need to spend on the account to get it reported to your credit.

It’s important to note that while another person’s positive payment history will go on your credit, so will any negative history — so be sure that it’s someone who manages their account responsibly.

Avoid taking on new credit

There’s nothing wrong with using your credit responsibly, but if you’re trying to improve your credit score in the short term, limit the hard inquiries you allow and the new accounts you open.

A new credit-based account can affect your credit score in multiple ways. First, it will usually require a new hard inquiry and a new account being noted on your report. Both of these will factor into about 10% or so of your FICO score. Your average age of accounts is also important, and makes up another 15% or so of your credit. 

Play the long game

Building and maintaining good credit is a gradual and often years-long process. If you need to boost your credit in the short-term, there are a few steps you can take today that may have an impact. But you’ll also want to make sure you’re also building a positive long-term history along the way by making payments on time, maintaining reasonable balances, and varying the types of accounts you own.

This will ensure that when the time comes to really pull from your credit — whether to buy a home, consolidate your student loans, or use a home equity line of credit to tackle a renovation project — your credit score will be exactly where you need it.

Bottom Line

Your credit score may not mean much to you today, but it will mean something to a lender or creditor the next time you need to borrow money. But by building and maintaining a healthy credit score, you can open the door to the right products, repayment terms, and interest rates, saving you money and headache along your financial journey.