All three of the major credit reporting agencies use the same range of scores to evaluate an individual’s creditworthiness. These scores range from 300 to 850, with the average score being 710. The agencies use specific criteria to determine your credit rating, also known as a FICO score.

While the three agencies — Equifax, Experian and TransUnion — all offer one free report per person per year, only about 5 percent of consumers actually order these reports. What’s more is that most people don’t have a complete understanding of the criteria used to determine their FICO score.

Regardless of where you sit on the credit spectrum, it’s vital to stay informed. Your credit rating has a major impact on your ability to secure loans, open credit accounts and get approval for mortgages. If your rating is lower than you’d like it to be, it’s especially important to know how these scores are calculated so you can take proactive steps to improve your personal financial situation.

How Credit Ratings Are Calculated

FICO scores are determined by proportional calculations that use several key factors that measure your financial health. They break down as follows:

  • Payment history. Your payment history is the single most important factor in determining your credit score, and accounts for 35 percent of the calculation. To maintain a positive payment history, don’t miss payments and avoid late payments to the greatest possible degree. However, if you’ve been working to establish better payment habits, there’s some good news: all three agencies look more closely at your recent history than they do at more distant events.
  • Debt to credit ratio. A debt to credit ratio is a representation of how much money you currently owe, compared to your total available credit. For a simple example, if you have a credit card with a $1,000 limit and you’re carrying a $750 balance, your debt to credit ratio is 75 percent — a high figure. Generally speaking, lenders see borrowers with high debt to credit ratios as posing a greater risk of defaulting, since saturation with debt makes it difficult for the average person to meet their financial obligations. Your debt to credit ratio accounts for 30 percent of your FICO score.
  • Length of credit history. The longer your credit history, the better — this gives lenders a clearer and more comprehensive picture of your spending and payment behavior. The length of your credit history accounts for 15 percent of your credit rating score.
  • Type(s) of credit. When it comes to types of credit, more is better; it signals that multiple lenders find you creditworthy. The different types of credit accounts you have comprises 10 percent of your credit score. Examples of types of credit include bank loans, small business loans, credit card accounts, merchant and retailer accounts, and mortgages.
  • Recent credit applications. If you apply for multiple types of credit over a relatively compact period of time, lenders will raise a suspicious eye — particularly if your applications have been denied. Credit searches account for 10 percent of your FICO score, but if you’ve been inquiring about rates with various lenders for a particular type of credit, don’t worry — this has very little effect on your overall score.

Thus, if you’re looking to improve your credit rating, the best thing to do is build up a positive recent payment history and work to reduce your debt to credit ratio, as these factors combine to determine 65 percent of your score. Supplement these strategies by avoiding credit applications until your score rises, and working to maintain a good track record over an extended period of time.

If your credit score is low, remember that there is no quick fix. Most credit events will remain part of your permanent record for five to seven years, so bear this in mind before making a major decision such as declaring bankruptcy or settling debts for less than the full amount you owe.