Have you ever applied for a credit card, car loan, or mortgage? If so you have probably heard the lender talk about your credit score. But, do you know what your credit score is or more importantly how to improve it?

Credit scores are the centerpiece to any decision to lend a consumer money. However, increasingly that all important number is being used to determine whether you can rent an apartment, get a cell phone, or even have affordable insurance.

If a single number has this much control over your life, you had better learn to get control over it!

What is a FICO score?

A credit score may also be call a risk score or more commonly a “FICO score.” This is because it is used as a gauge of risk (or probablity) that you will repay a loan and the mathematical algorithm used to determine the number was developed by Fair Isaac and Company.

This score is the result of the collaboration of lenders and credit bureaus. Anyone who might lend you money or provides you a service on credit can report your payment history to the credit bureaus. There are three main credit bureaus: Equifax, Experian, and Transunion. These credit bureaus take this repayment reporting and combines it with other historical trends and predicts your credit risk, the probability that you will repay future lenders.

Lenders then routinely pull your credit report to determine not only if they will lend you money, issue insurance, or give you a cell phone; but how much and at what price.

See why it’s so important to control your credit score?

How do I improve my credit score?

Controlling and improving your credit score starts with digging a bit deeper into how the score is determined (this break down is not perfect since the algorithm is proprietary, but it is general accepted as accurate):

• 35% is determined by payment history
• 30% is based on the amounts you owe each of your creditors
• 15% is based on the length of your credit history
• 10% is based on the number of recent account opened versus total open accounts
• 10% is based on the types of credit accounts you have

This simple breakdown can give us pretty good insight into how we can optimize our credit score to keep it in tip-top shape. Here are a few simple steps to improve your credit score:

1. Check for errors. There is a very good possibility that there are inaccuracies on your credit report. Lenders often make errors in reporting or fail to report paid-off or closed accounts. A quick review and a couple of letters requesting corrections can give your credit score a big lift.

2. Pay your bills on time. As you can see by the distribution of factors determining your credit score, paying your bills on time is critical. This is also the quickest way to rebuild your credit score if you have past blemishes.

3. Pay down your credit card balances. High credit card balances, versus your available credit limits on those cards are credit score killers. If you have a few extra bucks during the month pay more than the minimum on your credit card balances.

4. Keep credit cards open, but use them responsibly. If you are financially savvy enough to have paid off one or more credit cards or just have some with really low balances–keep them that way. Having a high percentage of your available credit limit available increases your credit score. This is also why you shouldn’t close credit cards you have paid off (assuming you can resist the urge to charge them back up).

5. Pay off, don’t transfer, balances. With years of cut-throat credit card company competition low interest balance transfers became all the rage. This might seem like a short term fix, but usually hurts you in the end. Continually opening new credit cards and transferring balances is a shell game credit bureaus can easily detect and ding your FICO score. Pay balances down, don’t transfer.

6. Don’t open new credit accounts unnecessarily. Consistent with tip number five, if you don’t need credit don’t get it. Unnecessary credit card, retail cards, and signature loans are a liability and temptation.

7. Contact creditors directly if you’re having financial trouble. If you do ever get in over your head with credit resist the urge to hide from creditors. Contacting them immediately is the best way to find a solution and minimize any impact it might have on your credit score.

Your credit score, especially in economic downturns, will directly effect your financial situation. Therefore, it is in your best interest to closely monitor your credit score and manage to as close to perfection as possible.