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Your credit score can make a huge difference in your financial life. A good score gets you access to better credit cards, lower interest rates and can even help you rent your next apartment.

However, not everyone understands what goes into a credit score—or how to improve it. Let’s take a deeper look at what a credit score is, how it’s calculated and what you can do to make your credit score better.

What your credit score is and what it says to lenders

What is a credit score?

Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk—specifically, the likelihood that you will become delinquent on your credit obligations in the next 24 months.

There are many credit-scoring models in existence, but only one that dominates the market: the FICO credit score. According to myFICO.com, over 90 percent of top lenders use the FICO score to help them make eligibility decisions. This means your FICO score might determine whether you receive your next credit card, mortgage or car loan.

A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. FICO scores range from 300 to 850. Higher scores indicate lower risk.

If your credit score is 700, for example, you’re considered to have “good credit.” This means you’re unlikely to fall behind on your credit card payments or take out a loan you can’t repay. If your credit score is 400, you’re considered to have “poor credit.” Based on the way you’ve used credit in the past, you’re score says you might be at risk of missing payments or becoming delinquent on your debts.

Two new credit scoring models, UltraFICO and Experian Boost, were developed to help people improve their credit. By monitoring activity that isn’t typically part of your credit score, such as paying your phone bill on time or maintaining a positive checking account balance, these services help prove to lenders that you are ready to manage credit responsibly.

How your credit score is measured

Your FICO score is based on the following five categories as they appear on your credit report:

  • Payment history: 35 percent of your credit score is measured by whether you make regular on-time payments on your debt. This includes credit card debt as well as mortgage debt, car loans, student loans and so on. Late payments and delinquencies lower your credit score.
  • Credit utilization: 30 percent of your credit score is measured by how much of your available credit is currently being used. If you have a credit card with a $10,000 credit limit, having a $9,000 balance is worse for your credit score than having a $1,000 balance. Improving your credit utilization by paying off your balance is one of the quickest ways to boost your credit score.
  • Length of credit history: 15 percent of your credit score is measured by how long your credit accounts have been open, and how long it’s been since you’ve been active on those accounts. This is why you should think twice before closing an old credit card. Keeping those old cards active can increase your length of credit history and raise your credit score.
  • Types of credit used: 10 percent of your credit score is measured by the mix of accounts you have, such as revolving (like credit cards) and installment (like a mortgage or loan). Having multiple types of credit accounts shows that you can be responsible with multiple types of credit. However, you shouldn’t worry too much if you only have one type of credit account. You don’t need both a mortgage and a credit card to have an excellent credit score.
  • New credit: The last 10 percent of your credit score is measured by whether you’ve recently requested or received new credit. If you request new credit too often—or if you apply for new credit and are turned down—your score can drop.

Personal or demographic information such as age, race, address, marital status, income and employment don’t affect your credit score.

The importance of your credit score

Your credit score can mean the difference between getting approved or denied for credit, as well as your interest rate level. People with excellent credit scores have access to the best credit cards. If your credit score isn’t so great, don’t worry, there are plenty of resources to help you rebuild your credit – such as secured credit cards.

How to access your credit score

It’s important to check your credit report regularly, and make sure that the information is updated and accurate. Millions of Americans have errors in their credit reports, and those errors can hurt your credit score. So be sure that you’re well aware of what’s in your report in case you need to dispute any incorrect information.

Federal law allows you access to one free credit report per year from bureaus like Equifax, Experian and TransUnion. You can also sign up with Bankrate to get a free copy of your credit report, along with expert advice to help you improve your credit score.

Bottom line

Knowing how your credit score works, accessing it and monitoring it consistently is just as important as the score itself. The more you know about your credit score, the better equipped you’ll be to improve it and reap all of the associated benefits.