Your credit score is a three-digit number that banks, landlords, insurance companies, credit card issuers, employers, and others use to determine whether you are a good risk or not. The typical scale ranges from 300 — 850, with 850 being perfect credit. Why does this score matter? The higher the number, the better a risk you are. The better a risk you are, the better chance you have of obtaining an auto loan, a mortgage, getting approved for an apartment, landing a job, or being approved for a credit card.

The better a risk you are, the better chance you have of getting a lower interest rate, acquiring a better cell phone deal, paying smaller utility deposits, and paying less for insurance. People with perfect credit often qualify for 0% auto loans and 0% introductory interest rates on credit cards. People with lower credit pay more to borrow money, often need a co-signer, need larger security deposits, and pay more for insurance.

To start, ask yourself: "Where do I stand?" Request your score for free at (877)322-8228 or at www.annualcreditreport.com.

The most well-known credit scoring system was developed by Fair Isaac Corporation and is called the "FICO" score. There are three major credit rating bureaus — Equifax, TransUnion, and Experian. All three use the FICO scoring system. Each of the three uses a slightly different statistical model. That's why your credit score is slightly different on each credit bureau.

So, how do the bureaus determine your credit score? Fair Isaac has developed a scoring system taking into account five components as follows:

• Payment history — 35% (detail of your track record of paying back debts on time)
• How much you owe — 30% (reveals how deeply in debt you are)
• Length of credit history — 15% (refers to how long you have been using credit)
• Type of credit — 10% (concerns the mix of credit, i.e., credit cards, retail credit, installment loans, etc.)
• New credit inquiries — 10% (suggests that you are about to borrow more money)

How can I build or improve my credit score if I have no credit history or a low credit score?

The model above shows that the two most significant factors are paying bills on time and not using too much of your credit limits. Knowing this, you can utilize the following strategies to build or improve your credit:

• Pay all bills, not just credit cards, timely. Late payments and accounts sent to collection bureaus will lower your score. Late payments can stay on your credit report for up to seven years.
• Don't apply for too many credit accounts at once. New accounts lower your average account age, and each application causes a small dip in your score.
• Don't max out credit cards. Try to use no more than 30% on any one card, and the highest scores go to those using 10% or less of their limits.
• Keep accounts active. This will give you a longer payment history.
• Dispute errors on your credit account. Check your credit regularly with each credit agency and dispute any errors.

Practice good credit management to lower your borrowing costs and put this money in your pocket to save and invest.