Everyone should take time to educate themselves about their credit score. Your credit report and credit score may not seem significant on a day-to-day basis, but together, they’re one of the most influential parts of your financial life, determining what you pay when you borrow money and if you’re able to borrow at all.

If you plan to buy a car with a loan or a home with a mortgage, for example, your credit report and credit score are critical. Here’s a look at how they work and what you can do to .

What’s a Credit Report?

Your credit report is like your high school transcript, but instead of tracking your grades from class, it tracks all of your borrowing and credit activity. Three big companies, Experian, TransUnion, and Equifax, are responsible for collecting all that data and compiling a credit report for nearly every adult in the United States.

When you apply for new credit, open a loan or credit account, or make a payment, it’s all tracked on your credit report. On-time payments reflect positively, while late and missed payments make you a less desirable borrower.

Banks, credit card companies, and other lenders use your credit report when deciding whether or not to approve your application. You can get a copy of your credit report for free by law at AnnualCreditReport.com. Some other sites and apps offer free versions of your credit report as well.

Your credit score is also a major factor in loan and credit card approvals. Once approved, your credit score may also be used to determine your interest rate. Those with lower scores tend to pay higher rates, while those with top credit scores pay the lowest rates.

A Brief History of Credit Scores

Credit reports and credit scores as we know them today have their roots way back in history. Hundreds of years ago, merchants and lenders would collect information about potential customers as a means to determine how likely it would be that they would pay their loans back in full and on time.

The year 1841 saw the establishment of the first formal credit reporting agency, the Mercantile Agency. Much like today’s credit rating agencies, it systematically gathered data about people’s marital status, ethnic background, credit history, and age to calculate rudimentary credit scores. This information was captured in a manual ledger in New York City.

It’s important to note that back then, credit reporting employed highly subjective methods of evaluation. People were evaluated on the basis of their race, gender, and marital status.

Consumer credit reporting only really became mainstream in the late 19th century, when high street department stores and discount retailers gained popularity.

Each entity followed its own procedures and credit scoring mechanisms. It was only in the 1960s that the industry began to see some consolidation, going from over 2,000 credit bureaus in the U.S. to just three: Equifax, Experian, and TransUnion.  In 1989, a universal credit scoring model that could be used to evaluate all consumers was finally born – it became known as the FICO score.

Today, FICO scores are the most widely used type of credit score – the company claims that 90% of top lenders use its scores.

Credit scores themselves have also evolved – today, scores range from 300 to 850, with higher scores suggesting a greater likelihood that a borrower will pay back their loans in full and on time.

Importantly, today, every effort is made to ensure that bias is eliminated from the scoring calculation. Factors such as race, age, gender, and marital status are no longer considered.

The Main Components of a Credit Score

Under the FICO credit scoring system, five main components make up your credit score:

• Payment history – 35%: Your payment history is the most significant factor in your credit score. Late and missed payments stay on your credit report for seven years, dragging down your score. On-time payments help your score over time.
• Credit balances – 30%: Keeping credit card balances low helps your credit score. You don’t have to carry a balance to build credit. It’s best for your finances to pay off any credit cards in full every month by the due date.
• Length of credit history –  15%: A  long history shows you’re experienced and responsible with credit, while a shorter history indicates a higher risk of making credit-related mistakes.
• Credit mix – 10%: Having multiple types of credit can help your credit score. For example, adding a mortgage loan may improve your credit. However, you shouldn’t borrow solely for the sake of improving your credit in most cases.
• New credit – 10%: When you apply for new credit or open a new credit account, it temporarily lowers your score. Over time, these penalties fade away. If you really need or want a specific new credit account, this component of your credit score shouldn’t scare you away from applying in most situations.

How to Improve Your Credit Score

If you have no credit or bad credit, you may want to establish a good credit score to access the best borrowing products and rates in the future. That’s a great goal. Here are some steps to follow to build your credit.

1. Always pay on time: The first rule in building good credit is to always pay on time. Never, ever miss a due date from this date forward. Automatic payments and payment reminders can help you avoid forgetting to pay.
2. Always pay at least the minimum: You can usually pay more than the minimum payment amount with credit cards and other loans. However, paying less will harm your credit.
3. Keep credit card balances low: High credit card balances can quickly tank your credit score. Paying off high balances is one of the fastest ways to turn a bad credit score around if that applies to you and you’re able. It’s best to pay off balances in full every month to avoid interest charges and build your credit.
4. Only borrow what you need: Opening new accounts too frequently or racking up big balances both hurt your credit. Only apply for credit when you need it, and always keep those balances under control.

Why Do Credit Scores Matter?

There are several compelling reasons for caring about your credit record and striving to build a strong one:

• Your credit score determines which loans you can secure, their value, and the interest rates you’ll pay.
• Many insurers refer to people’s credit scores when setting premiums for auto and homeowners’ coverage.
• Most landlords will refer to them to decide who they should rent their properties to.
• Cell phone operators typically use credit scores in determining who to offer the best cell phone plans to.
• Utility companies use credit scores to determine the size of required deposits.

Can Credit Cards Be Used to Build a Strong Credit Score?

In short – yes. But only if they’re used responsibly. Using credit cards can be a double-edged sword. On the upside, credit cards are a convenient way to pay for goods and services that you need on the spot, especially if you’re low on cash in hand. Responsible use of credit cards (i.e., using them sparingly and always paying off the minimum balance) can go a long way to building up a favorable credit score.

But it’s also all too easy to reach for them to pay for that new pair of shoes you spot in the store window, an expensive dinner out, or the latest shiny gadget. If you leave this behavior unchecked, you’ll find yourself fast approaching your credit card limit or, worse still, maxing it out entirely. Then come the painful weeks and months of trying desperately to dig yourself out of the debt trap you’ve fallen into. And in the meantime, your credit record will start to slip.

Why Should I Check My Credit Report Regularly?

Everyone should get into the habit of checking their credit report regularly to ensure that their personal and financial information is accurate. Doing so also provides you with the opportunity to make sure you’ve not fallen victim to identity theft where someone else has opened fraudulent accounts in your name. Should you find errors on your credit report, take immediate steps to have them corrected.

How Do I Check My Credit Report?

Visit AnnualCreditReport.com. This platform gives you a free annual credit report from each of the three credit reporting agencies, Equifax, Experian, and TransUnion.

You can request all three reports at once or one at a time.

To request your free credit report:

Online: Visit AnnualCreditReport.com.

By Phone: Call 1-877-322-8228. For TTY service, call 711 and ask the relay operator for 1-800-821-7232.

By Mail: Complete the Annual Credit Report Request Form (PDF, Download Adobe Reader) and mail it to:

Annual Credit Report Request Service

PO Box 105281

Atlanta, GA 30348-5281

What Happens if My Request for a Free Credit Report Is Denied?

Contact the CRA directly. They’ll tell you the reason they denied your request and explain what to do next. Oftentimes, it’s just a case of information being missing or incorrect on your application for your credit report.

If you can’t resolve your dispute with the CRA, contact the Consumer Financial Protection Bureau (CFPB).

How to Improve a Poor Credit Rating

If you’re worried your credit score might not be high enough, or you’ve already had a loan or credit application rejected, don’t despair. There are ways to improve your credit score.

Some of these tactics will only take effect in the longer term (up to six months). Others will give your credit score an immediate boost.

1. Pay Off Your Outstanding Debts

Each and every outstanding debt you have drags down your credit score. So, start by paying off as much and as many as you can. Go after your accounts that charge the highest rates of interest first.

2. Reduce Your Credit Ratio

Credit scores take into account the variance between the amount you owe and the limit to your credit. This is called your credit utilization ratio. For example, if your available credit is $2,000 and you owe $1,000, your credit utilization ratio will be 50%.

Experts advise that we should keep our credit utilization ratio at 30% or lower to avoid our credit scores being penalized. So, in the example above, paying off a portion of what you owe until the ratio is reduced from 50% to 30% will certainly boost your credit score. Also, paying accounts before the due dates will increase your credit score.

3. Close Accounts

Once you’ve paid off the debt on your accounts, consider closing some of them. Having too many accounts open can damage your credit score, as it’s seen as an indicator of excessive and even irresponsible borrowing.

4. Avoid Using Credit Altogether

Once you’ve paid off your debts, you should obviously avoid the temptation of taking on new debt and opening new accounts. If you do, the cycle is likely to start all over again.

5. Ensure Your Spouse Follows Your Example

What many people don’t know is that their spouse’s credit record will be taken into account if they apply for a joint loan or line of credit. If your spouse takes the same steps as we’ve listed above to improve their own credit record, your chances of “positive” loans such as mortgages being approved will be better.

Make Your Credit a Part of Your Long-Term Financial Plans

Personal finance is a lifetime pursuit. Just as it’s wise to plan for long-term savings, retirement investments, and other major financial goals, it’s essential to track and build your credit. For example, a good credit score can save you tens of thousands of dollars on a mortgage over time or could be what decides if you can buy a home at all.

When you work hard to build your credit, it should help your financial situation in the long run. If you don’t know where you stand, start with your free credit report today.

How Earned Wage Access Can Help You Build a Favorable Credit Score

Earned Wage Access (EWA) is a great solution for people seeking to rebuild a poor credit score. That’s because it allows you to quickly access the money you’ve already earned before payday (as opposed to ringing up significant charges on your credit card or resorting to a predatory payday loan – both of which can damage your credit score.)

EWA can happen in several ways; the funds can be loaded onto a debit or prepaid card, transferred to your bank account, or even picked up as cash at Walmart. Alternatively, Payactiv allows you to use your earned wages to even pay for services like Uber and Amazon and pay your bills directly in the app.

The best on-demand pay service providers give you choices with how you want to access your money and always provide a free option. Look for the instant deposit feature so that you can access your earned wages in real time in case of emergencies. Some providers also include additional perks like discounts and special offers and handy features like budgeting and savings tools and free bill management.

Why not suggest that your employer check out our offering?