It is one of the most important factors in your financial life. The higher your score, the more likely you are to qualify for loans with favorable terms, which in the end can save you thousands of dollars, especially on a mortgage loan.

Credit scores range from 300 to 850. A credit score of less than 580 is poor, 580-699 is a fair score, 670-739 is a good score, 740-799 is a very good score, 800+ is exceptional.

How are credit scores calculated? First, there are three primary credit scoring companies – Experian, Equifax, and Transunion. Your credit score is called a FICO (Fair, Isaac and Company) score, and they look at five main factors.

1. They look at your payment history, which accounts for approximately 35% of your score. It’s your track record of making payments on loans and credit cards.
2. They look at credit utilization, which accounts for approximately 30% of your score. It’s based on how much of the available credit on revolving credit lines and credit cards you are using. Experts say use no more than 30% of your credit at any point during the month. For best scores, 6% should be your target. Calculate your rate by dividing your total outstanding credit card balances by your total credit limits.
3. The length of your credit history accounts for approximately 15% of your credit score. This refers to the amount of time you have had credit accounts open and how recently you have used the accounts. A longer history with an account is a plus.
4. Your credit mix makes up approximately 10% of your credit score. A credit mix is made up of different types of credit accounts, such as credit cards, a car loan, a mortgage, etc.
5. New credit is approximately 10% of your credit score. Lenders typically consider it a red flag if you open several new credit card accounts or take out new loans in a short period of time. It can signal that you may be taking on too much debt and can’t be relied on to repay debts on time.

How do you improve your credit score?

You can improve your credit score by paying bills on time. When bills are paid late, that is the No. 1 reason why your score will drop. To help you pay your bills on time, set up auto bill pay. You can also pay down debt and eliminate delinquencies on bills. Reduce the amount of debt you owe, and keep balances on credit cards and revolving credit low. Don’t open new accounts too rapidly. Credit cards are ok if you are disciplined with use and pay them off each month, or at least pay well over the minimum.

Pull your credit report to ensure that everything is accurate and up to date. You can then determine which areas of your credit history, such as debt balances or length of history, would benefit from some extra attention.

One free resource you can use is Credit Karma. You can access them online (creditkarma.com) or download their app. You can also use annualcreditreport.com, which provides you with a free credit report once a year.

Note: Credit Karma does not always match what the Experian, Equifax, or Transunion scores show, but it does allow you to view your credit report and score at will for free. It is a good tool to use to make sure there are no surprises on your credit report.