Credit scores are based on mathematical formulas. A computer program looks at all of the information in your credit report, categorizes it, and spits out that three-digit number. You don't necessarily need to know the details of how the math works. If you wanted to know, it would be very difficult to find out; the mathematical models are “trade secrets,” or proprietary intellectual property. The Fair Isaac Corporation does not publish its mathematical formula anywhere.

Multivariate analysis is a method that statisticians use to see how numerous inputs affect a single output. In the case of your credit, we can use the FICO credit score as an example. The FICO credit score is designed to predict how likely you are to be more than ninety days late on a payment with any creditor within the next two years. The input data include a variety of different factors, including:

• The number of credit accounts you have open

• The average age of your credit accounts

• The number of late payments in your credit history

• If you're behind on your payments, how much you owe

• If you're behind on your payments, how long you have been behind

• What percentage of your total available credit you are currently using

• Number of revolving accounts (such as credit cards) you have

• Whether you have a mortgage account

In all, your credit score might take twenty to thirty different factors into account. Depending on how you mix and match all of these moving parts, you wind up with a good or bad credit score. To complicate matters, the FICO scoring-model groups consumers into various categories for scorecards while crunching the numbers. If your eyes are beginning to glaze over at this point, remember the three-word secret to improving your score: use debt responsibly.

FICO Score Simulator

You might not be able to see exactly how your credit score is compiled, but there are some useful tools that can help you understand how your behavior will affect your credit score. At www.myfico.com you can use the Fair Isaac Corporation's Personalized FICO Simulator. You have to pay and sign up for this service, but it may be worth the cost if you need to perform major surgery on your credit score.

With the Personalized FICO Simulator, your actual credit history is used to run some what-if scenarios. The Simulator will show your balances, loans, and delinquencies. You can see what would happen if you take a variety of different actions. For example, you can find out what would happen if you were late on one of your bills. At the click of a button you can see what your current score is, and what your score would likely be after this action.