When you apply for credit, the lender will review your credit report to determine your eligibility based on this information. The report includes this three-digit number called your credit score. This magic number tells lenders your potential credit risk and your ability to repay loans. Credit scores take into account various factors, such as payment history and the length of credit history of your current and past credit accounts.

There are two main credit scoring systems: FICO and VantageScore. FICO scores are more valuable because lenders derive your FICO score from over 90% of loan decisions in the United States.

A FICO score can fall within the following ranges: Very low: 300 to 579; fair: 580 to 669; good: 670 to 739; very good: 740 to 799; and excellent: 800 to 850.

Credit scores are calculated differently depending on the credit scoring model. Here are the main factors used by FICO:

• Payment history (35%), if you paid old credit accounts on time;
• The amounts owed (30%), the total amount of credit and loans you are using, compared to your total credit limit, also known as the utilization rate;
• The length of your credit history (15%), the length of time you have had credit;
• New credit (10%), how often do you apply for and open new accounts;
• Credit mix (10%), variety of credit products you have available including credit cards, installment loans, finance company accounts, mortgages, etc.

Only about 1.6% of Americans have a perfect 850, according to the most recent statistics from FICO. While it may be exciting for some to aim to join the 850 club, there is no additional benefit that you probably won’t get with a score of 760 already. The best published interest rates for car loans are 720 plus and 760 plus for mortgages.

Last year, the median credit score of successful mortgage applicants was 759, or “very good” on the FICO scale. According to the Federal Reserve, only 10% of mortgage borrowers had credit scores below 647.

While this is not the norm, borrowers with scores as low as 620 are approved for new mortgages, even amid the current economic downturn. Yet a good credit rating is still important when applying for a mortgage, as banks tighten their lending standards. Applying for a home loan with a lower credit score may not prevent you from getting a loan, but it could put you at higher interest rates.

In my research, I found some important steps to take before applying for a home loan. Start by visiting AnnualCreditReport.com for your free weekly credit report from each of the three major credit bureaus: Experian, Equifax, and TransUnion.

Once you know where your credit is and have checked your credit score, follow these steps to improve your credit score: Pay all your regular bills on time; pay off as much debt as possible; and keep your credit card balances low. Do not apply for new credit, because a serious application will temporarily reduce your credit rating by a few points. Do not close any currently open credit lines.

I grew up in a house where borrowing money was frowned upon. All loans must be repaid as soon as possible. I also grew up in a time when there was no credit score.

Today, managing your credit score is an important part of good financial planning.

Bob Hollick is a Washington-based State Farm Insurance agent. His column will now appear every other Thursday in the Observer-Reporter.