You've probably heard the term credit scoring. You may have some idea that your credit score can have an effect on your life. For example, you may understand that when you apply for a mortgage, the mortgage company will check out your credit score.

But did you know that the interest rate you can get on your mortgage and on credit cards will depend heavily on your credit score? Did you know that more and more employers will check your credit score when you apply for a job, and that insurance companies may raise your premiums or even cancel your insurance based on your credit score?

So, what is a credit score and how is it calculated?

Your credit score (in some cases, it is called your risk score) is a rating of your credit worthiness or how likely you are to repay a loan and how likely you are to repay it in a timely fashion. And it can have a dramatic effect on your life.

There are three companies that gather information on how you handle credit. They are Equifax, TransUnion and Experian. They each determine your credit score based on a formula developed by the Fair Isaac Corporation but each calls its credit score something different. Trans Union calls its credit score Empiraca. Experian calls its score FICO, and Equifax will tell you its credit score is Beacon.

Credit scores range from 400 to 900 with the average score somewhere around 700. This is one case where higher is not better as the higher the score the greater the risk you are thought to be.

What are the factors that make up your credit score?

There are five factors that determine your credit score. The first of these is payment history. About 35% of your credit score may be based on how late you have been paying your bills (30, 60 or 90 days). The later you have been, the more negative effect this will have on your score. So will matters that are in the public record, such as bankruptcies and accounts that have gone to collection.

About 30% of your credit score will be based on the amounts you owe. If you have, for example, a credit card that is close to its limit, this can impact your score negatively. This means it may be better for you to have a lower balance on several different cards than a large balance on one card.

The third factor in your credit score is the length of your credit history. If you have an account that has been open for a long time, this can have a positive effect on your credit score. About 15% of your score will be based on the length of your credit history.

About 10% of your credit score will be based on how much new debt you have requested. So, if you recently applied for a number of new credit accounts, your score may be negatively impacted,

Your credit score will also depend (about 10%) on the types of credit you already have. For example, if you have loans from finance companies, this can negatively affect your score.

Like it or not, your credit score will also reflect your level of education. For example, a college-educated person will be given more points than a high school graduate. How long you have lived in a single location will also affect your credit score for good or for bad. So will the number of years you've worked for the same employer. The companies that score your credit just plain like stable people. And finally, if you are a homeowner, you get additional points.

Is credit scoring fair? It is fair in that it does not take into account personal factors such as your race, gender, color, religion, national origin or marital status. It also does not factor in interest rates you are paying on your credit cards, nor does it include factors such as child or family support obligations or rental agreements. It also does not take into account inquiries about your credit score by employers or lenders that were made without your knowledge, or any information that could be thought of as predicting your future credit performance.

What can you do to improve your credit score?

Experts in this area suggest that you make sure you pay all your bills on time, that if you miss a payment to a creditor, you get it current and keep it current, and that if you are having trouble paying your bills or cannot pay your bills, you contact your creditors or see a legitimate credit-counseling firm.

In addition, you should keep the balance on your credit cards and other lines of credit as low as possible. And if you can, pay off your debt, and not just move it around from credit card to credit card.

Do not try to increase your credit availability by opening a number of new credit card accounts. Try to pay off the balance owed on your credit cards every month.

The credit information providers (Trans Union, Experian and Equifax) are not required to provide you with your credit score. However, they are required by law to provide you with a free credit report once a year. Moreover, the law requires that you be able to access these reports online. The web site for these reports can be found at annualcreditreport.com. Once you log onto this site, you will be asked to provide several pieces of personal information, including your full name, social security number, birth date, and current and previous addresses ... to make sure you are who you say you are.