If you’ve ever applied for credit (aka asked to borrow money, like with a credit card or loan), then you’ve probably had your credit score checked. You might have also heard that you should try to make your credit score better. But people rarely slow down to explain what, exactly, all that means — or how to do it.

But your credit score is a big part of your overall financial picture, and one of my favorite parts of being a CFP® Pro at Ellevest is helping my clients understand how their credit score is calculated and then make a plan to improve it.

What even is a credit score?

Your credit score is a number between 300 and 850. It helps potential creditors (banks that give loans, credit card providers, etc.) decide whether they should lend you money. The higher your credit score, the more likely they are to see you as responsible and “credit-worthy,” and the more likely they are to lend to you.

But people with higher scores are not only more likely to get approved for credit, they’re also more likely to get better interest rates (which makes borrowing that money less expensive) and higher credit card limits or loan amounts. That’s why people keep track of their credit score and try to keep it as high as possible.

I don’t want to borrow money and get into debt. Do I need access to credit?

Good question. It’s true that high-interest debt — like credit card balances or personal loans — is not your friend. But there are also “good” forms of debt — like a mortgage on a home, for example, or a car loan that allows you to get to work every day, or student loans that can help you to go to school and boost your future earning potential (depending on the interest rate and your chosen career path).

Also, life happens. And while having an emergency fund is the ideal way to prep for financial emergencies, not everyone has been able to build one. So it’s good to know you could apply for a credit card or personal loan if times get tough.

Also also, creditors aren’t the only ones who look at your credit score; your score could get checked when you apply for jobs, apartments, or insurance policies. They use it as a sort of crude approximation of how responsible you might be.

How’s my credit score calculated?

If you’ve never borrowed any money before, then you might not have a credit score at all yet. Otherwise, your score comes from the info from your credit report, which is essentially a report card on your past money-borrowing behavior. The three main credit bureaus in the US — Equifax, Experian, and TransUnion — each give you a credit report. The better your reports are, the better your credit score will be.

The actual credit score you’re “given” might vary a little bit, depending on what company is calculating it for you. The two most commonly used credit score models are FICO and VantageScore. A FICO score of 670–739 is considered “good,” and for VantageScore, it’s 700–749. Scores even higher are considered very good or excellent. If you have a good FICO score, you probably have a good VantageScore, and vice versa — so most people just pick one to track.

What goes into my score, and how can I improve it?

There are five main areas of your credit report that affect your credit score. Improving any one (or all) of them will give your score a boost. But sometimes the things that will help you in one area might count against you in a different area. Luckily, each area carries a different level of importance, so you can prioritize by taking steps to help you with the most impactful areas first.

1. On-time payments (35% of your score)

The most important thing: Have you paid all your bills in the past, and have you made the payments on time?

Even just one missed or late payment can hurt your score by putting what’s called a “derogatory mark” on your credit report. A “major” derogatory mark — like if a bill you owe gets handed over to a bill-collections agency — could potentially ding you by a couple hundred points (!). A missed bill payment (credit card and loan payments, utility bills, cell phone bills, medical expenses, etc.) would typically be listed as a “minor” derogatory mark and affect your score less — although it will get worse the longer you let it go unpaid.

Derogatory marks stay on your credit report for seven to ten years, although they often have less of an effect after three years.

If you have a derogatory mark on your credit report and it’s wrong, you can dispute it to try to get it removed. If it’s legitimate, and you have a good track record with that company otherwise, or you had extenuating circumstances (like you got divorced, lost your job, had a medical emergency, etc) then you might write your creditor a “goodwill” letter asking them to remove it.

If they say no, though, there unfortunately isn’t much you can do other than make future payments on time and keep the other components of your credit score as healthy as possible — that way, once the mark eventually drops off your report, your score can jump up.

2. Credit utilization rate (30% of your score)

Next comes your credit utilization rate, aka how much you’ve spent on your credit cards compared to the max they’ve agreed to let you spend (aka your credit limit). If you have a $1,000 credit limit and an outstanding balance of $150, then your credit utilization rate for that card would be 15%. (If you have multiple credit cards, your total utilization rate would be the sum of all your outstanding balances vs the sum all your credit limits.)

The goal here is to keep your utilization rate as low as possible; this helps to convince creditors that you use the credit you’ve been given responsibly. A utilization rate of less than 10% is ideal, and less than 30% is next best. Using more than 30% of your limit — that goes for each individual card, and for your total utilization rate overall — will hurt your credit score.

Your credit card provider can send your utilization rate to your credit report any time, not just at the end of your billing cycle, once your statement becomes available. So especially if you have a relatively low credit limit, try to keep your outstanding balance down. That might mean making payments more often than once a month, if possible — perhaps weekly, or maybe even as soon as each transaction posts to your account. (Bonus: This technique also keeps you from having to pay one big credit card bill at the end of the month, and it could also help you avoid spending more than you can afford to pay off.)

If your utilization rate is higher than you want it to be, the most straightforward way to lower it is to pay down your outstanding balance as much as you can. But another way is to request a credit line increase from your card provider; that way, your existing balance would be taking up a smaller percentage of your limit. (Although note: Requesting an increase require your card provider to pull your credit history — more on that below.)

3. Age of credit (15% of your score)

Creditors like to see that you have a solid history of managing credit. So your credit report averages together the length of time you’ve had each of your accounts to get your overall average age of credit — so if you had a 2-year-old credit card and a 4-year-old student loan, your average age of credit would be three years. The longer the better.

An average of five years or more is best for your score. Of course, the most straightforward (although v slow) way to extend your average age of credit is to just … let time go by. But to speed up the process, try not to open too many new lines of credit, and try not to close any older credit cards, even if you aren’t using them much. You’ll need to make a purchase on those older cards every so often to keep them active. (I often tell clients to set up one automatic recurring transaction, like a Netflix subscription, on each card — just don’t forget to pay it off!)

4. Credit inquiries (10% of your score)

When you apply for some type of credit, the company processing your application will usually need to access your credit report to decide whether they want to lend you the money. They have to get your permission first, because every request the credit bureaus receive on your behalf stays on your report.

Those requests are known as hard credit inquiries, also sometimes called “hard pulls.” Creditors want to see that you’re making responsible, level-headed decisions about accessing credit, so the fewer hard inquiries you have on your credit report, the better. Typically, three to four hard inquiries a year is considered good, and an inquiry drops off your report after two years.

(Yes, there is also something called a “soft inquiry” or “soft pull.” It’s when someone requests access to your credit report for something other than approving your request to borrow money, like as part of a background check when you apply for a job or if the credit card company wants to “pre-approve” you for a special offer. Soft inquiries don’t affect your credit score.)

So if you’re trying to boost your score, try not to initiate any new hard inquiries for a while. You can also dispute any inquiries that are wrong to get them removed from your report.

Helpful thing to note: If the credit bureaus see that you have multiple hard inquiries within a short period of time for the same type of loan — like if you want to buy a car or get a mortgage — then they’ll just count them all as one. This lets you shop around for good interest rates without hurting your credit score.

5. Types of credit (10% of your score)

The last thing that affects your credit score is whether you have a mix of different types of credit — think credit cards, auto loans, student loans, personal loans, etc. The more variety, the better, because it’s a sign that you can handle having multiple types at once. (Although it’s last on the list for a reason — don’t take out a loan just to add some spice to your credit report.)

How to build a credit score if you don’t have one

I’ve talked a lot about how to boost an existing credit score, but what if you’re brand new to the world of credit and don’t have one yet? How can you get started?

If you decide that you don’t want to get a credit card (because no, you don’t need one to build credit), one of the easier types of loans to get approved for when you’re new is an auto loan. That’s because if you don’t make payments, the bank can repossess your car to recover their money — not so good for you, but it does lower the bank’s risk. You can also ask your utility company, cell phone provider, landlord, and other bill collectors to report your payment history to the credit bureaus, if you have a good track record with them.

But credit cards are a common intro to the world of credit, and so if you do decide to take the credit-card plunge, there are a couple of ways you might do it. Firstly, you can apply for a “regular” credit card in your own name.

But if you’re having trouble getting approved, another potential option is to ask a parent or other close relative to add you as an authorized user on their credit card. You’d get a card, but they’d be legally responsible for your balance. The good: You’d get instant access to their (ideally) good credit history and (ideally) high credit limit. The bad: You’d be tied to this person financially. If something happened and you couldn’t pay for your purchases, it could damage your relationship. And if they fell behind on payments, it would hurt you, too.

Alternatively, you could get what’s called a secured credit card. These are much easier to get approved for, because you have to put down money as a deposit when you open the account. If you can’t pay, the credit card provider just keeps your deposit instead. So there’s less risk for them and less risk for you, but it typically still helps you build credit. Win-win-win.

No matter how you start, though, Future You will be most grateful if you can establish good habits from the very start of your credit journey — by not spending more than you can afford to pay each month and paying close attention to due dates so you don’t miss any.

There are a lot of moving parts when it comes to your credit score and how to make it better. It can be slow and steady work, but worth it in the long run — just think of that dream vacation home you’ll buy someday with your sparkly, shiny, excellent score.

Disclosures