Wondering how to improve a bad credit score? If so, this article is for you. Credit scores cannot improve even after years of effort if you don’t understand how the credit rating system works and why it is considered a valid indicator of creditworthiness. This article helps you get an apt conceptual understanding of the credit rating system and how it works, so read on to know how to improve a bad credit score.

What is a credit rating?
Credit rating is a tangible evaluation of the creditworthiness of a debtor under the context of a specific financial obligation. It can also be given to a business entity to enable them to acquire loans and to creditors to help them decide whether their potential borrower is reliable. Credit ratings help borrowers understand where they stand financially, while also helping creditors decide whether or not they would like to provide a loan to a potential borrower.

What is the layout of the credit rating system?
Credit bureaus, like TransUnion and Experian, evaluate a person’s credit on a spectrum of three-digit numbers using a technique known as Fair Isaac (FICO) credit scoring. With respect to entities, they usually pay rating agencies to receive a credit rating.

How are credit scores evaluated?
Here’s an understanding of how credit scores are evaluated to help you if you want to know how to improve a bad credit score. A credit score is evaluated on the basis of 5 factors:

• Payment history
  Whether an individual has made timely bill payments and whether the payments made are full or partial is one of the primary criteria in the evaluation of their credit score. On average, it accounts for 35% of a person’s credit score.
• Credit utilization rate
  An individual’s credit utilization rate is a value assigned to the rate at which they can borrow and utilize the withdrawing limit and how much they actually use. The lesser the utilization of one’s credit limit, the higher their credit score is. The general consensus is that a person can have a good credit score if their credit utilization rate is less than 30% of the total limit.
• The age of credit cards
  If certain credit accounts have been in service over a long period, it is best to keep those accounts and not close them, even if the dues have been paid off. This is because it indicates a long payment history and adds to a person’s creditworthiness. If the account has been used for over 10 years, it can be extremely useful in factoring in to build a good credit score. Across all credit scoring platforms, the duration of the payment history accounts for 15% of a person’s credit score on average.

What is a good credit score?
This is subject to a specific creditor in question, but here’s how credit scores are classified with the FICO score range as an objective metric:

• Excellent – 800 to 850
• Very good – 740 to 799
• Good – 670 to 739
• Fair – 580 to 669
• Poor – 300 to 579