You might not know your credit score or credit history, but the people who handle your money sure do.

So what exactly are these things?

Your credit report is a summary of your credit history – any new accounts, closed accounts, unpaid bills, late bills etc. If you have a loan, mortgage or a credit card, it will show up here. Your credit report provides the blueprint for your credit score.

Your credit score (a.k.a. your FICO score) is a three digit number between 300 and 850 calculated using a formula developed by a company called Fair Isaac . Fair Isaac sells the formula to three big credit-reporting agencies (Equifax , Experian and TransUnion ), who each do the math using slightly different personal data of yours. Then, they use the scores to give lenders (people who would give you credit, like a credit card company, a student loan provider or a mortgage broker) an idea of what kind of customer you would be.

Once the lenders have your score, they choose what kind of an interest rate to offer you based on how high (or low) your score is. Generally, the higher your score, the lower your interest rate and the less cash you have to fork over to the lender in the long run.

Cracking the Code: The Basics of the Credit Score Scale

Does this all seem arbitrary? Well, it’s possible to learn a fair bit about how the score is put together. Here’s a breakdown of the method behind the credit score madness:

• 35% of the score is determined by your payment history. Translation: how often you’ve been paying your bills on time, including credit cards, student loans, car payments, the phone company or any other lender or service provider that reports into one of the big three agencies. Getting this right is easy: Don’t blow the due date.
• 30% is amounts owed. In other words, how much do you owe, and if it’s on a credit card or a home equity line of credit, how much does your current balance compare to the limit of what you’re allowed to take out. If you’re maxed out, it can hurt.
• 15% is length of credit history. This just means how many years of records there are on you – and what the average age is on your accounts. Here, the formula discriminates against the young, particularly people applying for private student loans who don’t have a co-signer to improve how credit-worthy the application appears. Nice, no?
• 10% is new credit. How many accounts have you opened recently? And how many lenders have inquired about your credit – say, after you’ve made a loan application with them? The more activity, the more it looks like you’re about to go on a debt binge. This too can hurt.
• 10% is types of credit used, such as auto loans, different credit card accounts or mortgages. Or you could think of it as any account that would be on your credit report.

Scores above 720 will most likely get you the lowest rate. Keep in mind that improving from a 500 to a 700 will make a difference, but don’t sweat moving from a 799 to 800. You’ve already reached the Promised Land of good interest rates.

In case you were wondering, the national average FICO score is 723, and 58 percent of the U.S. population has a score over 700, according to Fair Isaac.

So, want a simple formula to hit the 700’s? Have a few credit cards, pay your bills on time (remember, this includes student loans, library fines, parking tickets, cell phone bills and utility bills), space out when you apply for loans and accounts (to avoid a ton of inquiries in a short amount of time), avoid maxing out your credit cards unless you can pay them off in full every month and keep up all this good behavior for a long time.

“If you use credit in moderation,” Craig Watts, the public affairs manager for Fair Isaac said, “your score will benefit.”

Your Credit Report: What the FICO Score is Based On

By now you’re probably curious about what your magical three digit number is. Much to our dismay, you cannot see your credit score for free unless your bank offers it as a perk or a lender (car salesman, credit card company, etc.) voluntarily decides to share it with you after you’ve applied for a loan with them. Although they aren’t legally required to do this, it never hurts to ask.

You can also pay a fee to get your FICO scores. We’ll get to how you order your credit score in the FAQ.
Keep in mind that your credit score is a snapshot of your credit history – not a movie of how great you are as a consumer. The number that generated can fluctuate a little bit based on minor things. If it’s the end of the month and you haven’t paid off your credit card, expect your score to be a tad lower than it will be right after you pay off a giant balance.

Also know that although your credit score is important, it’s not the sole factor in whether or not you get approved for a loan. Your annual income, employment history and overall scope of your credit history are also taken into consideration by most lenders.

Whether you purchase your credit score or not, you still should take a close look at your credit report. This is the document that FICO scores are based on. Thanks to federal legislation you are entitled to three credit reports (remember, this report is what makes up your credit score) a year, one from each of the big three agencies that compile them. Click here to get yours.

Credit reporting agencies keep tabs on your credit history. They’ll also try to sell you a bunch of hoopla like books and fancy charts with your score, but the actual report, which is all you really need, is free.

Think of it as a once-every-four-month check-up (mark your calendar), and get in the habit of doing it. According to USPIRG, 79 percent of credit reports have some kind of error in them. Even if yours is in the minority, it pays to familiarize yourself with this document so you’ll be more likely to spot irregularities.

When you look at your credit report, look for any errors relating to your name, date of birth, social security number, address, previous addresses, employments, accounts, inquiries and negative items. If you can’t identify where an item came from on your report after perusing your records, call up the agency that sent you your report and let them know about the error. This is also key to preventing identity theft.