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Christina Price:

In our video "What Difference Does a Credit Score Make?" we explored how your credit score can help or hurt your finances. In this video, we'll look at the six steps you can take to improve your credit score. The first thing to know is that you have more than one credit score.

There are different agencies, and each has its own score. But the most cited is from FICO, the Fair Isaac Corporation. FICO collects information about your finances from the three major credit bureaus—

Equifax, Experian, and TransUnion. It then assigns you a credit score for each of them. But what is FICO looking for? What makes the difference between a good score and a bad score?

And what can you do about it? Step 1, pay on time. Your credit score has five components, but the most important is your payment history, which accounts for 35% of your score. Do you pay your debts back on time and in full?

Congratulations, it's going to help your score. If your payments are consistently late, that's going to hurt. Step 2, don't max out your credit cards. The second component of your score, how much you owe, represents 30% of your score.

What percentage of your available credit do you use every month? If you have a credit card with a $10,000 limit, are you using $3,000 or $9,000? Lenders like to see that you're using about 30% of your available credit because it indicates that you're not overextending yourself. If you're consistently using 80% or more, think about asking your credit card company to increase your limit.

It's counterintuitive, but it could help your score, as long as you don't eat up the increase with a bunch of new spending. So maybe rethink that new jet ski or the Birkin bag. Step 3, keep those older accounts. The third component of your score is the length of your credit history, and it represents 15% of your score.

If you got a credit card 10 years ago and another one today, your average account length would be 5 years. Lenders like you to have a long credit history because it shows you have experience paying back debt. So be careful about closing older accounts because it can drive your average account length down. The same would also be true if you opened too many accounts over a short period of time.

That brings us to step 4, limit new credit. This one accounts for 10% of your score. Lenders become wary when someone applies for a bunch of new credit in a brief amount of time. And any time you apply for new credit, a potential lender can see all the other lenders who have reviewed your application.

Step 5, have different types of debt. This accounts for 10% of your score. Do you have only one credit card that you're paying off every month or just a personal loan? Lenders prefer diversity.

Just to be clear, I'm not recommending you go on a wild spending spree, rack up a pile of debt, as fun as that might be. But lenders do like to see that you have experience handling different kinds of debt. This could be a credit card, an education or a car loan, or maybe a home equity line of credit. Step 6, know your credit history.

Once a year, you can go to annualcreditreport.com and see the information all those credit bureaus have. So to recap, pay on time. It's the largest component of your score.

Don't max out your lines of credit. Try to limit your debt to about 30% of your available credit. A longer credit history helps, if it's a good history. A track record of late payments won't do you much good.

Limit new credit. Taking on too much too fast makes the credit bureaus wary. Have different types of credit. And finally, you should also know your credit history.

By doing these things, it should put you on track to increase your credit score, lower the amount of interest you pay, and ultimately keep more money in your pocket.

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