Your credit score measures your history and capacity to handle debt. It’s a three-digit number lenders use to paint a picture of your creditworthiness when you apply for loans, credit cards or even mortgages. Knowing how your credit score is calculated and improved can save you money in the long term by unlocking better interest rates and financial opportunities. You can also track your credit score through various applications, which notify users about when and why their scores change.

Still, the credit score has remained an enigma for most people. I hope I can make your credit score a little clearer for you.

The key components of a credit score:

1. Payment history (35%)

The most significant factor in your credit score is your payment history. Lenders want to know if you can be trusted to make timely payments. This includes payments on credit cards, mortgages, auto loans and any other form of debt. Even a single late or missed payment can significantly affect your score.

As the largest contributor to your credit score, it is extremely important to make your payments on time. Automatic payments or reminders can ensure you don’t miss due dates, but remember — if you change banks or card providers, you need to be diligent and make sure your automatic payments are switched over as well.

2. Credit utilization (30%)

Credit utilization refers to how much of your available credit you’re using and is the second largest contributor to your score. If you have a credit card with a $10,000 limit, and you’re using $3,000, your utilization ratio is 30%.

Lenders prefer to see a lower utilization rate — ideally below 30% — because it suggests you’re managing your credit responsibly, without relying too heavily on it. Maxing out multiple cards has a significant negative impact on this part of your score. Ideally, pay off your balances in full every month.

You can also ask for a credit limit increase, which automatically lowers your utilization ratio.

3. Length of credit history (15%)

The longer your credit history, the better. This component of your credit score considers the age of your oldest account, the age of your newest account and the average age of all your accounts. Unfortunately, if you are young and only starting to build your score, this takes time. As you build credit, it may be tempting to close credit accounts you’re not using. But keeping them open helps your credit score by maintaining your credit limit and extending your credit history … as long as you don’t continue to use them.

4. Credit mix (10%)

Having a variety of credit types (e.g., credit cards, installment loans, mortgages) can positively impact your score. Lenders like to see that you can manage different kinds of debt effectively. While a variety of debt can help, don’t take on unnecessary debt just to improve your score, as this is one of the smallest components. Taking on debt without a good reason is never recommended.

5. New credit inquiries (10%)

Each time you apply for credit, a “hard inquiry” is made on your report, which can slightly lower your score. Multiple hard inquiries in a short time indicate financial stress, which makes lenders cautious. Limit how often you apply for new credit, especially within a short period.

If you’re shopping around for a loan, do it within a focused time frame, as some credit scoring models will group inquiries together as one. Also, if you are taking on a new loan, like a mortgage, it is best to avoid opening other lines of credit during that process.

While rare, errors on your credit report can damage your score, but they are often fixable. You’re entitled to a free credit report once a year from each of the three major credit bureaus (Equifax, Experian and TransUnion) and these are great services to track your score over time. If you see a sudden, unexpected drop in your credit score, look for things such as payments marked late when they were on time. Dispute any inaccuracies you find on your credit report.

Building and maintaining your credit score doesn’t happen overnight — but with consistent effort, you can gradually build a solid credit profile. Focus on paying your bills on time, managing your debt responsibly and monitoring your credit regularly. With patience and persistence, these actions lead to a healthier credit score and greater financial opportunities in the future.

Zach Harney is a wealth advisor at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to Zach Harney, 2340 Garden Road Suite 202, Monterey, CA 93940 or email zach@montereypw.com.