Here's Why It's Wrong to Think Your Credit Score Is Irrelevant

Let's be honest: For the average person, credit scores aren't exactly a compelling topic. It's likely that you don't think about yours too often, unless you happen to be gearing up to borrow money in the form of a loan or a new credit card.

Unfortunately, a recent study by Bread Financial found that 1 in 3 millennials and Gen Zers have been told by someone in their life that their credit score is irrelevant. And this couldn't be further from the truth. Let's take a closer look at how credit scores work and why they matter -- as well as a few ways to boost yours.

How do credit scores work?

When we talk about credit scores, we're usually referring to FICO® Scores -- this is the one used by 90% of lenders. A FICO® Score is based on five factors:

1. Payment history (35%): Your history of paying back borrowed money on-time and in full is the biggest piece of the FICO® Score pie.
2. Amounts owed (30%): This is the amount of borrowed money you owe your creditors (like credit card companies and mortgage lenders).
3. Length of credit history (15%): Having a long credit history is important because it shows lenders that you're a known quantity.
4. Credit mix (10%): Having a mix of credit types (like credit cards, auto loans, and personal loans) is good for your credit score.
5. New credit (10%): If you open new accounts frequently, you could lose credit score points. It's good to maintain old accounts in good standing.

Why do credit scores matter?

Your credit score has a major impact on the interest rates you're charged for borrowing money in any form -- whether it's a personal loan, auto loan, or even a mortgage loan. And having a higher credit score means you're more likely to be approved for the best credit cards available. But your credit score matters in other ways, too.

In some states, employers can check your credit report (not your exact credit score) as part of a general background check to decide whether to hire you. And having a lower credit score can result in a higher cost for auto insurance. If you apply to rent an apartment, your potential landlord might also run a credit check, and if your credit score is low, you might not be approved as a tenant. Your credit score is important for many aspects of your personal finances. It's no wonder that the Financial Feminist herself, Tori Dunlap, called them our "adulting GPA."

How can you improve your credit score?

Thankfully, it's fairly straightforward to improve your credit score, once you know how they work. Here are a few key areas to focus on.

• Make on-time payments: This is the most impactful way to increase your credit score. Payment history makes up the biggest percentage of your FICO® Score, after all. And you can commit to pay on time, every time, right now.
• Pore over your credit report: Another easy way to improve your score is to get a copy of your credit report (go to AnnualCreditReport.com to do this for free) and check it for errors. If you spot one (such as a delinquent account that was never yours), you can dispute it with the credit bureau and have it removed.
• Pay down debt: This may not be possible for you immediately, but if you can work toward a higher income or cut your monthly spending (perhaps by switching auto insurers or cellphone service providers?), this is a worthy goal. I boosted my credit score by 100 points in less than a year by paying off debt. Paying down debt improves your credit utilization ratio, which factors into the "amounts owed" part of your score.

Ultimately, your credit score is more important than you may have realized. Take your newfound knowledge and make the moves necessary to keep your credit score in tip-top shape. Your future self will thank you when they need to borrow money, rent an apartment, or find a new job.