Many people lack knowledge about their credit scores, arguably the single most influential number in their lives. In fact, forty-nine percent of 1,013 consumers polled do not understand that credit scores measure credit risk, according to a 2005 survey by the Consumer Federation of America and Fair Isaac Corp., the company that created the most widely used credit score formula called FICO.

What is a credit score?
A credit score is a number lenders use to help them decide: "If I give this person a loan or credit card, how likely is it I will get paid back on time?" A score is a snapshot of your credit risk picture at a particular point in time. The higher the score, the lower the risk to lenders. Scores are generated by statistical models using elements from your credit report, and sometimes from other sources, such as your credit application. However, scores are not stored as part of your credit history. Rather, scores are generated at the time a lender requests your credit report and then included with the report. Identity theft can also impact your score.

The five areas considered in the calculation of your credit score listed from most important to least important are:
Payment History
Capacity (Amount You Owe)
Length of Credit History
Types of Credit
New Credit

How scores are calculated
Designers of credit scoring models review a set of consumers - often over a million. The credit profiles of the consumers are examined to identify common variables they exhibited. The designers then build statistical models that assign weights to each variable, and these variables are combined to create a credit score.

Models for specific types of loans, such as auto or mortgage, more closely consider consumer payment statistics related to these loans. Model builders strive to identify the best set of variables from a consumer's past credit history that most effectively predict future credit behavior. About 60 percent of people have credit scores of 700 and above. The best number to have is 720 or above. If your score is 720, there's really no need to try and raise it because lenders lump you in the same category as folks with a score of say 800 or 820. At 720, you are viewed as a safe risk and typically receive a loan without problem and at a low interest rate. However, if your number is below 700, it's definitely worth your time to try and pump it up.

Here is a typical credit score is determined:
• 35 percent Payment History: Details regarding payments made on credit cards, retail charge cards, installment loans and mortgages play a part here. How timely have your payments been? How much do you owe? If you've made late payments, how recently did these payments occur? If you've got few or no late payments, your score will be improved. Also, recent late payments will hurt your score more than those made years in the past. Having a long history making of payments on time and no missed payments on all credit accounts is one of the most important items lenders look for.
• 30 percent Amount Owed: About 30 percent of your score is impacted by the amounts you've got outstanding to creditors. Owing a lot on many accounts won't necessarily hurt your score. If you're at or near your limit on your credit cards and other "revolving credit" accounts, though, your score will be compromised. This measures the amount you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk of late payments in the future and this can lower their credit score.
• 15 percent Length of Credit History: In general, a credit report containing a list of accounts opened for a long time will help your credit score. The score considers your oldest account and the average age of all accounts. If you're just starting to build your credit history, there's not much you can do to improve your standing in this area over the short term.
• 10 percent New Credit: Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. Also, to compensate for rate shopping, the score counts multiple inquiries in any 14-day period as just one inquiry.
• 10 percent Types of Credit in Use: "Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered."