Think of all the numbers in your life. Your PIN number, your passwords, your address, your phone numbers - modern life is a series of numbers. And perhaps the most significant number to the way Americans live is your credit score. That number determines what kind of vacation you take, the type of car you drive, and how big your house is.

And yet most people have no idea how credit scores actually work. They don’t know who calculates them, or how they can be changed for the better. They just go on applying for credit cards, unaware of how the whole system works.

First let’s talk about credit scores and credit reports, and what they are. Your credit score is essentially an overview of your credit habits: whether you pay your bills on time, how much debt you owe, and so forth, all wrapped up in a simple three-digit figure. Your credit report, on the other hand, is more detailed and complex. It has all your specific credit-related actions on there: late payments, on-time payments, who your creditors are, how much you owe them, etc.

You may wonder how all this information is collected. When you fill out a credit card application, how is your future creditor learning about you? Well, all the people who extend credit to you report your payment history, good and bad, to various credit-reporting agencies. Then the three major credit bureaus — TransUnion, Equifax, and Experian — collect all the data in their huge databases and create credit reports. That information is then made available to creditors who need to look into your credit worthiness — when you apply for credit cards, or seek a bank loan, for example.

It’s a huge network of credit information, with thousands and thousands of creditors supplying information on their customers.

That’s the credit reports. What about the credit scores? How can your whole credit history be boiled down to a simple number? The credit bureaus use complicated algorithms and formulas to devise the numbers, and they’re secretive about the specifics. They each have their own system, which is why you usually have three different credit scores (though they’re typically fairly similar to one another).

They factor in the amount of debt you have, how long the accounts have been open, whether you pay your bills on time each month, and information like that. The two biggest things, though, are how much debt you have and how reliable you are about making payments.

A higher score can make all the difference when you’re trying to get new credit. With a high score, you’ll get the lowest interest credit cards and excellent credit card rewards programs. With online credit card applications, you might even get instant approval, thanks to your high credit score.

Of course, your credit score and credit report can be interpreted in different ways, and some elements are more important to some vendors than to others. An example: With mortgage lenders, the credit score isn’t all that important; they want to see that your most recent behavior has been positive, i.e., paying your bills on time and so forth. They don’t mind a little trouble in your past, as long as you’re on-track now. Meanwhile, a different potential creditors may not like how much debt you’ve racked up, regardless of your spotless monthly payment history, and might turn you down for the best credit cards.

Knowing now how your credit score and credit report affect your life, you might wonder what you can do to make them better. There is no overnight way of boosting a low credit score; it takes time, discipline, and patience. But it can be done, and millions of people are doing it right now. Here are a few guidelines for improving your credit score:

• Pay on time! One of the surest ways to sink a credit score is to have a lot of late payments on your credit cards. Your credit card applications are likely to be rejected if they can see you’re often late paying the money back.

• Lower your balances. Try not to max out your credit cards. If they’re maxed out now, work on reducing that debt - not just taking balance transfer credit card offers, but actually paying off the debt.

• Avoid new accounts. Handle the accounts you have now as wisely as possible, and don’t fill out new credit card applications unless you really need them.

• Every time you apply for a credit card, an inquiry is made into your credit report. And every inquiry lowers your score a little bit, because it looks like you’re desperately seeking new credit. So avoid unnecessary inquiries.

No matter what we think about it, the credit score is a major element in how we live our daily lives. It measures your spending habits and indicates to creditors how responsible you are. It’s a very vital figure, so do what you can to keep it high and healthy.

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