The FICO scoring system was created in the 1960s by the Fair Issac Corporation and is used by lenders, employers, landlords, and utility companies to weigh the risk of lending, renting or employing you. It is a scoring system that ranks you as a consumer; using a numeric scoring system that ranges from 350 - 850. Those who represent the least risk can secure credit at lower interest rates (typically scores of 720 and above). Scores less than 680 represent higher risk to lenders or creditors, which in turn means consumers with a lower score will end up having to pay higher interest on loans and debt.

Check out the example below. Using the myFICO.com loan savings calculator, here’s how much you’d pay today rates for some credit score ranges. Examples are based on national averages for a 30-year fixed loan of $200,000.

So, how does the FICO score system work? It’s made up of 5 factors, and each one has its own weighting.

Here are a few tips from myfico.com on managing credit responsibly:

If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. Rapid account buildup can look risky if you are a new credit user.
Request and check your credit report. Every year go to www.annualcreditreport.com and request your free credit reports from all 3 major credit reporting agencies: TransUnion, Experian and Equifax.

Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix—it probably won't raise your credit score.
Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and making your payments on time) will build your credit scores. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.

For more information, helpful videos and financial calculators visit www.myfico.com.

FICO – Why You Should Understand and Manage Your Credit Score