Most people realize that a good credit score is crucial for financial success, but not everyone understands what it actually is and do not make any attempt to improve credit score.

A credit score

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is a three digit number calculated from your credit report and helps lenders determine your approval and interest rate for mortgages, loans, or credit cards.

A FICO credit score, the kind most often used by lenders, ranges from 300 to 850. You’ll need 760 or more for the best mortgage rates and 720 to get best deal on auto loans.

But how do you get to the score you want? Or for those with bad credit,  how do you improve credit score?

First, you have to understand your credit score. Although lenders can customize what goes into a FICO score, they are typically determined as follows:

• Payment History (35%):

  Have you paid past credit accounts on time?

• Amounts Owed (30%):

  How much do you owe on your accounts?

• Length of Credit History (15%):

  How long have you had your credit accounts? How often do you use them?

• Types of Credit in Use (10%):

  What is your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans?

• New Credit (10%):

  Have you opened several credit accounts in a short period of time?

By understanding what goes into your credit score, you will know best how to improve your credit score.

Getting Started

The first step is to check your credit / payment history, found in your credit report. You can’t do much about missed payments, but you can try to find errors. You’re entitled to a free credit report once a year from each of the major three credit bureaus: Equifax, TransUnion, and Experian. Other sites, like Credit Karma or Free Credit Report, may offer free basic reports but require subscriptions or memberships for more detailed or more frequent information. Check for incorrectly recorded late payments or incorrect amounts. You can dispute these with the credit bureau to remove them from your credit report. You can even negotiate with creditors to remove missed payments. Try writing them a letter emphasizing your good history with the creditor or offering to pay off the remaining balance in exchange for a “paid as agreed” report.

The Magic Number is 30%

Next, tackle the 30%. How much do you owe and how can you get rid of that amount? It may help to set up reminders on your phone or through your bank. Automatic payments are often available, but be careful― these may help you keep up with payments, but don’t build money management skills. Part of this factor is how much revolving credit you have versus the amount of credit you’re using. Experts recommend keeping your credit utilization ratio to 30% or less.

Reduce Your Debt

The third and most satisfying option is simply to reduce debt. Stop using credit cards and formulate a plan. What cards have the highest interest rates? Which ones have the greatest amounts of debt? Come up with a payment plan that focuses on removing those debts first, while maintaining minimum payments on your other accounts. If you can, try to eliminate nuisance balances at the same time. FICO scores include not only how much you owe, but how many cards have balances. By getting rid of small “nuisance balances” on a number of cards, you can improve your credit score. Choosing one or two go-to cards can have the same effect― rather than building up small amounts on numerous cards, you can consolidate your debt and improve your credit score.

Bad Debt vs Good Debt

Well-handled debt can raise your score, too. Don’t worry if debt shows on your accounts, as long as you’ve kept up with payments. Because FICO scores account for the length of your credit history, a long record of on-time payments shows reliability and therefore boosts your score. Likewise, a variety of debt types and strategic planning may help. FICO scores look into what types of debt you have― are they all mortgage loans? All credit cards? By varying the types of debt you have, you show that you are responsible and mature enough to make steady payments over an extended period of time.

Maintenance

Getting and keeping the score you want isn’t easy. It takes financial planning, discipline, and responsibility that can be difficult to maintain. It may even take months for you to begin seeing results. But with consistency and a positive mindset, you’re sure to see your score rise to the top.