If you have ever been turned down for a credit card or charged higher interest rates, the reason can be obvious: low credit score. You can't expect to get credit as a matter of course. Just as you would hesitate to lend your money to a stranger, the credit card issuers won't approve your application without knowing that you can make regular on time payments. In order to make a decision they take into consideration your credit score - a special three-digit number that determines your financial responsibility. Having a good credit score can make your financial life a lot easier and save you money on a lower APR.

Credit companies look at your credit score all the time. First of all, it affects whether or not you can get credit and what finance charge you will need to pay. Then, credit score is used to decide whether to change your interest rate or credit limit, or whether to send you an unsolicited credit card offer through the mail.

There are many various types of credit scores developed by independent companies, credit bureaus, and even some lenders. However, the most popular and widely spread credit scoring system is FICO score, developed by Fair Isaac Corporation in 1989. It is used by many credit companies as a fast and objective measure of potential credit risk of applicants.

FICO score ranges from 300 to 850. The more points you have, the better. Credit scores above 660 are a sign of good financial health. It means that you are more likely to get approved for a credit card and pay a low interest rate. FICO scores below 619 indicate that you are high credit risk. It could make lenders turn down your credit application.

FICO score is calculated based on information in your credit report. There are five factors that are taken into consideration:

Payment History - 35%

This factor has the biggest impact on your FICO score. Regular on time monthly payments will raise your rating, while late payments, bankruptcies, and other negative items can significantly lower it.

Amounts Owed - 30%

If you have a large balance, creditors can suggest that you are close to being overextended and more likely to default on payments. If you have a debt, try to keep it less than 30% of your available credit.

Length of Credit History - 15%

The longer your credit history is, the more creditworthy you will be considered. Lenders like to see that you have necessary financial skills to manage your money over time.

New Credit - 10%

Opening a lot of credit accounts in a short period of time will have a negative effect on your FICO score. The creditors can suggest that you are in a serious financial trouble.

Types of Credit - 10%

Having a healthy mix of credit types (credit cards, installment loans and personal lines of credit) on your credit report can add points to your credit score.

FICO score doesn't take into consideration your age, race, color, religion, national origin, sex and marital status, where you live, salary, occupation, any interest rate being charged on a particular credit card or other accounts, any items reported as child or family support obligations or rental agreements.

As you see, your credit score doesn't say everything about you. Many lenders will recognize this and look for other sources of information to make their decisions. For example, while good credit is important for getting an apartment, landlords will also ask about your income and references.