What one thing will improve your credit score the most?

Paying bills on time and paying down debt will keep your credit score high. See more debt pictures.
©iStockphoto.com/John Rodriguez

One number could stand between you and your dream house. It may seem unfair for one number to define you, but to many lenders, it does. Not only can that number determine whether you get a loan, it can dictate the exorbitant or reasonable interest rate attached to it. Insurance companies, landlords, employers and even utility companies routinely use the number to learn about you and your financial reliability.

Your credit score can dramatically affect your life, and, luckily, you hold the power to change it. Knowing how to improve your score has become an important skill in today's credit-dependent society. To learn how to improve it, we need to understand what it means and how it's calculated.

Your score is based on your debt history and your existing lines of credit. The companies you do business with report information about your account activity to credit reporting agencies, such as Experian, TransUnion and Equifax. The agencies gather your information and pull it together in a credit report. You are entitled by law to a free credit report once every 12 months. It's a good idea to take advantage of this opportunity, especially if you plan to apply for a mortgage soon. You can see it by going to AnnualCreditReport.com. With that report, the agencies calculate your FICO credit score, a three-digit number between 300 and 850 that is supposed to accurately assess and succinctly sum up your creditworthiness.

In the past, the agencies kept the method for determining credit scores secret, lest people try to manipulate their scores artificially [source: Curry]. Under pressure, however, they released the method they use to establish a credit score. Here's a list of the different factors and their weights, according to myFICO.com:

  • Payment history: 35 percent
  • Debt: 30 percent
  • How long you've had accounts: 15 percent
  • New accounts: 10 percent
  • Types of credit: 10 percent

For a fee, you can find out your credit score from the different reporting agencies. A score less than 620 might land you on a do-not-approve list, but a score greater than 760 could position you nicely for the best interest rates [source: Lankford, Weston,]. If you think your score might need a boost, there is one action you can take that will improve it the most. On the next page, we'll discuss what that is.