Your credit score serves as an indicator of your financial history, wellness and responsibility. Continue reading to learn how your credit score is calculated, why it matters and steps you can take to improve your score.

How is your credit score calculated?

There are three major credit bureaus in the U.S.: Experian, TransUnion and Equifax. Each one collects and shares information about your credit usage with potential lenders and financial institutions. Most lenders use this information along with the FICO scoring model to calculate your credit worthiness. The scoring model looks at the following factors when calculating your score:

The age of your credit. How long have you had your oldest credit card? When was your first loan? An older credit history generally boosts your score.

Used credit vs. available credit. How much of your available credit are you using? Lenders like to see that you are responsible with your credit, and able to pay it off regularly. If you have numerous accounts that are at their limit, this will affect your score.

The diversity of your credit. Lenders want to see that you have and have had several kinds of open credit. For example, you may be paying down an auto loan, a student loan and using three credit cards.

The trajectory of your debt. Are you accumulating new debt each month, or slowly working toward paying down every dollar you owe?

Your credit card usage. Financial experts recommend having several open credit cards to help boost your credit score, but this only works if you actually use the cards and pay off your bills each month. It doesn’t help much to have the cards sitting in your wallet.

How does your credit score affect your life? 

Your credit score serves as a gauge for your financial wellness to anybody who is looking to get a better idea of how responsible you are with your financial commitments. Here are just some ways your credit score can affect your day-to-day life:

Loan eligibility. This is easily the most common use for your credit score. Lenders check your score to determine whether you will be eligible for a loan.

The larger the loan, the stricter the requirements. A poor credit score can hold you back from buying a house, a car, or getting a personal loan.

Interest rates on loans. Here too, your credit score plays a large role in your financial reality. A higher score can get you a lower interest rate on your loan, and a poor score can mean paying more in interest over the life of the loan.

Employment. A study by the Society for Human Resources Management found that 47 percent of employers look at the credit scores of potential employees as part of the hiring process.

Renting. Many property owners run credit checks on new tenants before signing a lease agreement. A poor credit score can prevent you from landing that dream apartment or it can prompt the property owner to demand you make a higher deposit before moving in.

Insurance coverage. Most insurers will check your credit before agreeing to provide you with coverage. Consumer Reports writes that a lower score can mean paying hundreds of dollars more for auto coverage each year.

How to improve your credit score:

If you’re planning on taking out a large loan in the near future, applying for a new job, renting a new unit or you just want to improve your score, follow these steps:

Pay your bills on time. If you have the income to cover it but find getting things paid on time to be a challenge, consider setting up automatic payments.

Pay more than the minimum payment on your credit cards. Your credit score takes the trajectory of your debt into account. By paying more than just the minimum payment on your credit cards, you can show you’re working on paying down your debt and help improve your score.

Pay your credit card bills before they’re due. If you can, it’s best to pay your credit card bills early. This way, more of your money will go toward paying down your outstanding balance instead of interest.

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