If you want to borrow money from a lender, you'll quickly learn how important your credit score is. Lending institutions will almost certainly take a look at it, and may well approve or decline your loan based on what they find. A bad credit score can also mean you'll only be offered loans with interest rates significantly higher than standard rates.

Basically, a credit score is a number calculated by analysing the details of your credit history. Whenever you do anything that involves credit, it's recorded. The lender takes all of your credit history, enters it into a computer, and the computer then calculates your credit score. Various credit-ranking agencies use different software, so it's quite possible that you'll get a different credit score with each one. However they'll all still fall within a similar range.

Sometimes, credit scores go by the name of FICO scores. Fair Isaac Corporation (FICO) developed the software most commonly used to determine credit scores, and that's where the name comes from.

Your credit score is compiled from a number of different parts of your credit history, and each one contributes to a different degree. Each factor is assigned a different percentage in the calculation of your credit score. Some of these factors include amounts owed, payment history, and the types of credit you currently have. So let's take a look at the various factors in more depth, and what percentage of your credit score they will generally represent.

Payment History

Payment history includes your history of amounts paid and when, and particularly late payments. Obviously lenders like to see no late payments, as someone with a history of late payments is going to be a much bigger risk for them. Payment history accounts for 35% of your credit score.

Amounts Owing

30% of your score is based on any loans or outstanding debt that you currently have. The lender will look to see how many accounts you owe money to, and the total balance of all your amounts owing. They're also keen to see that you don't have access to much more debt, in terms of lines of credit or credit cards, in case you have the opportunity to overextend yourself.

Length of History

Obviously, if you have a good credit history stretching back for a number of years, that's going to work in your favour. Lenders will look to see how long various accounts have been open, and whether there's been any activity in those accounts. History accounts for 15% of your credit score.

Types of Credit

10% of your FICO score is allocated to analysis of the number and types of accounts you have. Lenders tend to prefer diversity, so they'd rather see a variety of account types, not just credit card accounts.

New Credit

Another 10% of your credit score is based on recent activity in your credit history. Lenders get nervous when they see a lot of recent history, particularly if the credit that was applied for has been knocked back. This tends to send warning signals that you're in trouble, or may have the opportunity of overextending yourself. Never apply for a loan with more than one lender at a time - a batch of 10 applications all hitting your credit report around the same time will make it almost impossible for you to get an approval.

Now that you understand the factors that make up your credit score, you might be wondering what sort of number is considered a good credit score. Mostly, credit scores fall between 350 and 850. The higher your score is, the better your credit. Lenders like to see high scores, because that suggests that you're a low risk borrower. A lender will feel comfortable that they're a lot more likely to get their money back from someone with a high FICO score, because these people have a good, solid history of paying their debts on time and generally demonstrating good money management skills. So a high credit score means you're low risk, and have a much great chance of your loan application being approved.

But if your credit score isn't that high, what can you do to improve it? It doesn't happen overnight, that's for sure, but the sooner you start practising good money management skills, the sooner you will see your credit score rise. Always pay bills on time, and as far as possible keep your credit card balances low. Don't open lots of new accounts in a short space of time just before applying for credit.

It's also worth checking the information on your credit history to make sure it's accurate and up to date. If you find anything that's incorrect, apply to have it altered or removed. Even a few small changes may be enough to get you over the line with your next loan application.

None of this is rocket science - obviously lenders want to limit their risk, and your credit score says a lot about you and your money management skills. Remember, it's not just a question of how much debt you currently have - lenders are looking for longer-term history showing up to date payments and generally good financial management.

So even if you don't have plans to apply for credit in the immediate future, make the effort to keep your credit history as good as you can, because it will pay off in the future.