The three crediting reporting agencies collect and compile information about your credit history and submit it to formulas — which can vary wildly — that will create your FICO score. In a 2005 survey by the Consumer Federation of America, approximately 49 percent of consumers polled were not aware that FICO, the most widely used credit-score formula, calculates their credit score to measure their credit risk.

In fact, mortgage lenders have used FICO scores for years as a predictor of consumers' future bill-paying performance, which determines whether they grant loans and at what interest rate. Today, insurance companies, cell-phone providers, utilities, landlords, and even prospective employers may use your FICO score as an indicator of your stability, trustworthiness, and ability to pay your bills on time.

FICO collects 22 pieces of data from each of the three credit bureaus to tabulate an individual's score. The final number is a composite of individual ratings in five categories:

1. Payment history (35 percent)

2. Amount of outstanding debt (30 percent)

3. Length of credit history (15 percent)

4. Amount of newly acquired credit (10 percent)

5. Types of credit used (10 percent)

Surprisingly, your annual income doesn't even weigh into the equation. Someone could have a very high income and rarely pay her bills on time; conversely, someone could earn an average income but possess a long, stellar payment record. What they are looking for is a long, stable, responsible, well-managed history with credit.

Since these bureaus collect data at different times of the month, it's not uncommon to have a 30- to 50-point differential between the individual ratings. The higher your FICO score, the lower the risk you appear to a creditor, which translates into lower interest rates for your loan.

Why is this important? If you score in the 740 to 850 range, lenders might offer you a $350,000, 30-year fixed mortgage at 6.24 percent in interest, which would result in a mortgage of $2,153 a month. However, if you score between 620 to 674, the lender would charge closer to 8.05 percent, raising your monthly mortgage to $2,581. You would pay an additional $150,000 over the life of the loan.

Each of the three major agencies computes an individual FICO score for you, and because they don't share information, it's crucial that you obtain and monitor all three scores. Seventy-five percent of mortgage companies will request all three scores when determining your credit worthiness, and each may have their own scoring formulas that they use to determine your credit worthiness.

What's Your Score?

Each of the three reporting agencies is required to give you one free credit report annually, and all three will offer to calculate a credit score for a slight fee. Even though their individual scores will not truly represent your FICO score, they will give you a real idea of how lenders will assess your score.

To obtain the most realistic picture of your FICO standing, go online to myFICO.com and order all three scores. Lenders often create their own formula, but if not, they typically average these three scores or take the middle one.

When you write to request your credit report, make sure you also ask for their FICO or NextGen (a newer formula gaining wide acceptance) score, as follows:

• Equifax calls its FICO score “Beacon.”

• Experian calls its FICO score “Experian or Fair Isaac Model.”

• TransUnion calls its FICO score “Empirica.”

It's a great idea to check your FICO scores once a year; and if you're in the market for a mortgage, order them at least four months ahead so you can clean up any loose ends.

Even though negative history — late payments, delinquencies, liens, and judgments against you — will adversely affect your FICO score for up to seven years, most lenders scrutinize the past two years, minimizing the effect of one 30-day late payment.

Obviously, you want to maximize positive history. If your FICO score is on the low end, you'll want to create a plan to address the problems and reverse the trend. However, it behooves every consumer to do everything possible to boost her FICO score.

FICO scores are used for many purposes, such as these:

• Predicting your credit paying habits

• Predicting the likelihood that you will default on loans

• Predicting which accounts you would be likely to pay first (utility, insurance, home, auto, credit cards)

• Predicting whether you will file insurance claims

• Detecting fraud in insurance or credit applications

• Calculating how much profit a credit company will earn from you

• Noting whether you are likely to respond to credit offers via mail

There is no truly reliable means to assess any of the above, but lenders, insurance companies, and even employers will often acquire and review your FICO score to make judgments about you, your credit worthiness, or your long-term reliability.

What Damages My FICO Score?

Although FICO scores and how creditors evaluate or use them in their full assessment can vary widely, there are definite actions that will negatively affect your FICO score. The following may create red flags or drop your FICO score:

• Moving around a lot (residences and jobs): Creditors like stability, knowing where you are, how long you've been there, and that you have a steady, reliable income.

• Slow payment or missing payments: Creditors don't want people who drag their feet. The two most important factors in your score are whether you pay your bills on time and how much of your available credit you actually use.

• Minimum credit history: Creditors don't know how you'll handle debt. It takes six months to establish a credit report, and activity in the last six months to keep it alive. If you're not carrying any installment debt, it could work against you.

• Too many outstanding balances: They might worry that you're using your cards to fund your daily living expenses, or that you are maxing out.

• Too much available credit: If you have $50,000 available in credit limits or lines of credit and an average or below-average income, they may fear that you'll run up those accounts, which would then end up competing with their company for regular payments.

• Too many inquiries: They might assume you're constantly searching for new credit.

A negative or low FICO score can affect your ability to obtain credit cards, personal loans, lines of credit, cell phone contracts, mortgages, car leases, rental agreements, insurance, or anything that requires a credit check. Some banks will refuse to issue ATM cards to people with perpetually low FICO scores.