Applying for credit, ordering an Uber, selling on Amazon. They all have one thing in common: if you have a bad rating, you’re gonna have a hard time. Credit scores are the number one avenue or impediment to a well-priced loan. 

This economy runs on credit, and responsibly leveraging debt to finance your future is one of the most powerful moves you can make. Whether it’s a mortgage, auto loan, or new credit card you’re after, your score needs to be up to snuff. 

Let’s demystify what’s behind your credit score, and how to make it work for you to achieve your financial goals. 

What’s in a Score? 

Your credit score is a number ranging from 300 to 850, used by lenders of all types to help decide how risky you are to lend to. 

The three big credit bureaus, Equifax, TransUnion and Experian, don’t explain exactly how their score algorithms work. However, through their own clues and plenty of third-party research, we know the basic formula boils down to five main factors: 

As you can see, the lion’s share (65%) of your score comes down to two things: on-time payments and debt utilization. Let’s break down each of the five factors in your score: 

• Paying on Time

• A major factor is the number of late or missed payments on your account. Account delinquencies will factor heavily here, and are a surefire way to tank your score. 

• Debt Utilization

• This is the total percentage of your available credit that you’re using. For example, if you have a $4,500 balance on a credit card with a $5,000 limit, your credit utilization is 90%. Work on paying your debt off, especially credit card debt, to lower this figure.  

• Account Ages

• The longer you’ve had some type of credit, the more of a known quantity you are, and the more it helps your score. 

• New Inquiries

• You’ve probably read that new credit inquiries, such as applying for an auto loan, will ding your score. Unless you’re applying for new credit all the time, this shouldn’t be a huge factor. 

• Account Diversity

• This isn’t a big part of your score either, but credit bureaus want to see you make consistent payments on a diverse array of debt, such as credit cards, student loans, and mortgages.  

Now that you know what makes your score, let’s talk about how to get it up. 

First Things First: Read Your Report 

When tackling a rough credit score, the very first thing you should do is access a free credit report. All three major score companies are required by law to give you a free credit report every year. The Federal Trade Commission has a webpage explaining this right, and how to access your report. 

You can visit each reporting bureau’s website separately, or go to annualcreditreport.com to get all three reports at once. 

When you get your score, carefully read through the key data, such as your open credit accounts and their age, recent inquiries, and personal information. If any of this information is inaccurate, contact the credit bureau! 

Once you’ve confirmed there are no fraud or mistakes on your file, here’s what you can do to improve your score. 

The Biggest Factors: Pay On Time, Don’t Go Overboard 

Remember that a 65% of your score is just making payments on time and lowering your credit utilization. If you missed a payment on a loan or credit card a year or two ago, you can ask your lender to remove the blemish on your report. If they decline, just keep moving forward with on-time payments. 

You can drastically increase your score by lowering your total credit utilization. Focus on paying down your lines of credit, especially credit card debt, to get this number below 50%, ideally closer to 15%. 

Get Some Debt, Diversify 

Take on debt to build credit -- what a counterintuitive suggestion! If you’re a credit newbie, you likely have a low score because you have no history to for bureaus to go on. Opening a small student loan, auto loan, or credit card will help you to start building credit, boosting your score with every on-time payment. 

Taking on a new type of debt, such as a credit card if you only have an auto loan, will also likely help your score. Having a parent or loved one cosign this debt will help to lower your interest and increase the odds of approval (assuming their credit is good!). 

Remember that this advice applies to people with little credit history. If you already have a hefty debt load, it probably won’t help to apply for more! 

Rebuilding Broken Credit 

You might know exactly why your score is in the dumps. Perhaps you missed a few payments, face a hefty load of high-interest debt, or even declared bankruptcy. In these cases, paying down or refinancing your debt are still strong options, but there are other moves you can make to build your score quickly. 

Credit builder loans are specially designed to bring up your score. With these loans, you make payments on a loan before you get the money, and get the full amount you paid at the end. It’s more of a savings plan than a loan, but it shows reporting agencies that you’re taking your credit seriously and can handle monthly payments. 

Additionally, you could consider reaching out to lenders, collection agencies, or anyone else dinging your credit score by reporting a bad item. Often, they’ll issue a courtesy removal of the reported item, such as a late payment or medical bill that went to collections, instantly boosting your score. 

Live and Learn 

Getting your score from 550 to 750 is unlikely to happen in a month, but don’t get discouraged! By reading your credit report and understanding what makes up your score, you’re on the right path. 

To start building your score, make sure there are no errors in the report, including your current address, outstanding loans, or any new credit applications. You can also reach out to lenders and other agencies about removing bad marks. 

Finally, focus on proving that score wrong by making payments on time every month. Paying down your debt, especially high-interest debt or a card with a high credit utilization, will boost your score and put you on the path to a brighter financial future. 

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