Healthy credit is a critical part of financial wellness. Without a positive credit profile, a person is more likely to miss out out on major opportunities, like renting or owning a new home or getting a dream job. That’s because the higher your credit score, the better chance you have of qualifying for the best terms and rates on various credit products, which in turn saves you money on interest. In short, great credit means more financial options and more savings.

But before we get into important insights and reminders to help you nurture your credit and build the life you deserve to have, let’s get back to the most foundational question: What is a credit score, really?

Your credit score is one component of your credit profile, with the other being your credit report. The two are certainly related but also very different. Your credit report (available for free at annaulcreditreport.com) provides a history of all past and present credit accounts. These include student loans, credit cards, mortgages, and other lines of credit, and how well you’ve managed each account over time. If you’ve ever missed a payment, that will likely show up on your credit report.

The information on your credit report is what ultimately gets used to calculate your credit score, which is a three-digit number from 300 to 850 that indicates how reliable or trustworthy a borrower you are from a lender’s point of view. (And for clarification, for the purposes of this article, when we talk about credit scores, we’re talking about the FICO score, which is the most common type of score. It’s used by roughly 90 percent of lenders when reviewing applications for credit.)

Why your credit matters

A strong credit profile matters because, first, it can provide access to a loan or line of credit that can allow you to acquire assets or open you up to opportunities that can level up your quality of life and potentially lead to gaining more wealth. Think: buying a home, starting a business, owning a car, etc.

A strong credit profile matters because it can open you up to opportunities that can level up your quality of life.

Anytime you want to take out a loan, credit card, or line of credit, the financial institution will review your credit score as part of an overall evaluation to figure out whether or not you’re someone who can be trusted to pay back the loan or balance on time. Landlords may also review your credit as part of a lease application, and some employers could even request to review your credit report (not your score) to ensure you’re in good financial standing. (This, though, tends to only be the case at companies where workers have access to cash or valuable goods, like jewelry or gold.)

How to boost your credit score

The first step in raising your credit score is to first understand where you stand. You can check your score in a number of ways, often for free. Start by asking your bank or lender where you can log into your account, and request to see your credit score for no charge. If your score is below 700, it’s worth taking the following three steps over the course of several months, maybe longer, to raise your score.

1. 1.
   Automate your payments so that you never miss a deadline. Payment history—and specifically, paying on time—is the most important factor when it comes to calculating your credit score.
2. 2.
   Prioritize paying down your credit card debt. Revolving credit, like a credit card, is the weightiest of all debt in your credit-score calculation. Your so-called debt-to-credit ratio is a technicality that credit scores look at very closely. It equates to how much you’re borrowing on your credit cards at any given time relative to the total amount of credit you have available to you. For example, if you have two credit cards with a cumulative total credit limit of $10,000 and you have a current balance of $3,000 across both cards, then your debt to credit ratio is 30 percent. Keep in mind that those who have the highest credit scores have debt-to-credit utilizations of less than 10 percent. Knowing this, maxing out your credit cards won’t do your score any favors. For some helpful tools to pay down credit card debt, check out this four-step plan.
3. 3.
   Avoid opening up too many cards in a short period of time. While FICO credit scores consider it a positive to see that you have an array of credit products that you’ve been managing responsibly, such as a student loan, credit card and mortgage, it’s not wise to apply for too many credit cards at once. Each credit card application carries a “hard inquiry” on your credit, and too many hard inquiries in a month can ding your score. Even if you’re just opening up a few cards to bank on the rewards or bonus offers, a credit-scoring calculator may see you as someone who is going on a credit shopping spree and is potentially desperate for money. Your score could lose 10 or more points because you’ll be seen as a high-risk borrower.

So, when nurtured, credit holds the power to make our financial goals closer to reach. And understanding how to boost your score allows you to best nurture it.

Farnoosh Torabi is a financial expert, bestselling author and host of the award-winning podcast So Money.

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