Understanding one’s FICO score (credit score) can be confusing to most people. Even for those who have put a great deal of time into studying the subject, there are still a number of gray areas. The reason is that the score is proprietary, and FICO keeps its secrets guarded, for the most part. In reality, you have three scores, one from each of the major credit bureaus. They range from 300 to 850. Fair Isaac, the company who created the score and whom it’s named after, says the median score is 723.

Credit scores under 620 are generally considered a relatively high risk by lenders, while scores over 680 start to qualify for the best rates. This differs with each lender and industry. Some require you to have credit score over 740 to get their best rates. For mortgages, it is nearly impossible to get a conventional loan with a score under 500. It is not uncommon to see scores differ by over 50 points from bureau to bureau, due to the information being different on each, as well as the time of month they receive the information being different. For mortgages, generally the middle score is used. While for other loans, often just one bureau’s score is used.

While much of the complex formula for producing a credit score is mysterious, there are some things that are known. The final score is a composite of individual ratings in five categories: payment history (35% of the rating), debt (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). Income is not a factor.

To see how a change in your credit score would affect how much you pay, please consider the following example. On a $350,000, 30 year fixed mortgage, you’ll pay 6.24% interest, $2,153 a month if your credit score is between 720 and 850. However, if your score were to drop to between 620 and 674, you’re interest rate jumps to 8.05%, and your monthly cost increases to $2,581. You will pay an additional $154,131 over the life of the loan, according to a calculator used on myfico.com.

So by now I am sure some of you are thinking, “Ok, so tell me how I can improve my credit score”. The most important factor is paying all of your bills on time. Some bills such as rent and utilities don’t report to the bureaus, but if they go to collections they surely will! Paying off collections may not be the best move, especially if you are doing so in payments. Closing old accounts may hurt your score as well. It’s generally good to leave your oldest credit card account open, as a longer history of good credit works in your favor. It may be worth it to consult with someone knowledgeable in the field before closing too many old accounts, or negotiating with collectors. Also, sometimes when you are added as an authorized user on an account, you gain the credit history from that as well, depending on if that particular company reports authorized users.

Another huge factor relating to your credit score is the amount of revolving credit you have available to you. The larger the percentage you have available, the higher your score will be. Lenders see consumers with maxed out credit as being a greater risk. Also, keeping credit card applications to a minimum is important. Such inquiries stay on your report for 2 years, and can cost you as much as 5 points each, depending on a variety of other factors (mortgage inquiries, however, are viewed differently and may not effect your score at all, in many cases).

The bottom line is that I have seen many experts in the field argue with one another over numerous things, many of which will never be confirmed by Fair Isaac. But consumers need to remember that timely payments, and keeping percentage of revolving balances used low, are the 2 most important factors you can do to keep your score from dropping. When it comes to getting negative information off your reports, there are a number of books available. There also are a number of companies who will do it for you, for a fee. Some of these companies are wonderful; others are not reputable at all. It pays to check to see if they are members of the Better Business Bureau, and if they have any references.

Do your best to protect and improve your credit score at all costs? It could save your thousands on your mortgage, car payments, insurance, and in some cases be the difference in whether or not you get a job, as many employers now judge your stability based on your credit score. This may not seem fair to most of us, but Fair Isaac would disagree.