You’ve probably heard a lot about the importance of your credit report and credit score. But what exactly does it all mean? And how can you tell where you stand? We’re here to give you the inside scoop.

Credit Reports 101

Your credit report is kind of like a financial report card. It shows things like how many credit cards and other loans you have, and whether you pay your bills on time. It also shows how much credit you have available (the total limit on all credit cards and loans) and how much of it you’re using (your outstanding balances). The three major credit bureaus — TransUnion, Equifax and Experian — collect this information and make it available to lenders and others you give permission to view your credit to.

Lenders use your credit report to decide whether to give you a loan and, if you’re approved, what interest rate you’ll receive. If your credit report shows that you always pay your bills on time and never take on more debt than you can pay back, lenders will generally feel more confident doing business with you. On the other hand, if your credit report shows that you’re often late in making payments or owe more than you can reasonably repay, lenders may be less likely to trust that you’ll pay them back.

Information in your credit report can also affect what you pay for auto or home insurance, and may even be considered when you try to rent an apartment or apply for a job.

Just as lenders and others can check your credit report, so can you. And it’s a good idea to check regularly to make sure everything listed on it is accurate. Sometimes mistakes do happen, such as a lender reporting a loan as delinquent when you actually received a payment deferral, or a collection account for someone with a similar name being incorrectly added to your report. You can get a free copy of your report from all 3 credit reporting agencies once a year by visiting annualcreditreport.com.

How Your Credit Score Factors In

A credit score is a number calculated based on the information in your credit report. It helps predict how likely you are to repay a loan and make the payments when they’re due. There are lots of different scoring systems, but the most common one used by lenders is the FICO score.

To calculate your credit score, credit scoring companies first pull information from your credit report, like how much money you owe, your payment history, how long you’ve had credit and whether you’ve opened any new loans recently. They then use a statistical program to compare your information to the credit behavior of people with similar profiles. You’re then assigned a score that generally ranges from 300-850 (for FICO scores).

A higher score means that you have “good” credit and are less likely to be a risk, which means you are more likely to get credit or insurance — or pay less for it. A low score means you have “bad” credit and are a higher risk, which means it can be harder to get a loan or insurance — and you’re more likely to pay higher interest or premiums when you do.

Unlike your free annual credit report, there is no free annual credit score. However, some credit cards, banks and credit monitoring services may give you your score for free. You can also sign up for a free service, like CreditKarma.com. You can also buy your credit score, but before you do, consider carefully whether you really need to see it. Since your credit score is based on what’s in your credit report, if you know that’s good, then your credit score will be good (and vice versa).

How to Improve Your Credit Report and Score

The fastest, most effective ways to improve your credit report and credit score are to pay your bills on time and to use credit wisely. In general, this means borrowing only what you need and can easily repay, and never “maxing out” your credit cards. When it comes to credit cards, a good rule of thumb is to use no more than 30% of your limit for any balance you carry over each month. So if you have a card with a limit of $5,000, that means carrying a balance of no more than $1,500 from month to month. If you can pay your card balance in full each month, that’s even better.

If you spot any errors on your credit report (see above), you should also report them right away. In general, you’ll need to report the error to the credit reporting agency in writing. See this tip sheet from the Federal Trade Commission for more information. Once the errors are resolved, any false negative information will be removed from your credit report.

Other strategies for improving your credit include not applying for new credit frequently and instead hanging onto the accounts you currently have for a longer time. For example, sticking with one credit card for several years (and paying it on time) looks better on your credit report than hopping to a new card each year. Also, even if you don’t plan to use a credit card, keeping it open can be a good idea because a card with no balance effectively lowers your overall percentage of credit use.

It may take some time to understand and improve your credit, but your efforts will be worth it!