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Credit reports and scores - barometers of your credit worthiness

There is no number more near and dear to the heart of the American consumer than the credit score. For most of us, these three numbers dictate much of how our lives are lived. They help shape decisions such as how big your house will be, what kind of car you'll drive, and where you might vacation this summer. But for all their importance, most consumers are unaware of how their credit score is tabulated, who keeps track of it, and perhaps most importantly, how it can be manipulated to your advantage.

Let's first start by defining the credit score, as well as the credit report that drives it. In a nutshell, the credit score is a numeric rating of your ability to pay bills, the amount of debt you currently have, and the types of credit you use. The credit report, which is compiled through a series of vast, nationwide databases, is the record of your credit history.

Before we break down the components of a credit score, let's touch on how all of your credit information is tabulated. The system begins with all the vendors, lenders and landlords with which you perform some sort of financial transactions. These parties report on your payment history - good and bad - to a series of nationwide organizations called credit-reporting agencies. Keep in mind that only financial information is compiled by the credit reporting agencies - they do not record information regarding your race, religion, age, salary, occupation, sex, martial status or other personal data.

The compiled agency information is then forwarded to one of three national credit bureaus. The three bureaus - Equifax, TransUnion and Experian - in turn furnish credit reports (with accompanying credit scores) for the same vendors, lenders and landlords that generate much of the core data. It's like a financial ecosystem; with parties all connected through a labyrinth of databases and networked communication systems.

That's where the reports come from. Now let's consider how the score is generated. To output the final number, such things as payment history, the amount you debt you currently have, the length of your credit history, your most recent types of credit activity, and the various types of credit you've used, are all considered. Greatest emphasis is placed on payment history and the amount of money you owe.

How is the score used? "Generally, the higher the score, the better rate and term you'll get on loans," says Ravi Shahani, a credit counselor with American Consumer Credit Counseling. "The higher score tells lenders you are very reliable with credit."

It's important to realize that lenders and vendors approach your credit reports in different ways. Many mortgage lenders, for example, may be willing to overlook a slightly lower credit score if they can see from a credit report that your recent activity has been excellent. This indicates to them that you may have had some tough financial times in the past, but that you've since righted the ship. Then again, another potential lender may scrutinize how much debt you're currently carrying, and in turn balk at issuing you credit if they feel that your debt ratio is growing too large.

Now that we've defined a credit score and the accompanying report, the big question is how to make them work in your favor. Let's make it clear from the get-go that there are no smoke-and-mirrors tricks to building a good score. Considering the multiple variables that affect a score, it's nearly impossible to artificially inflate your score. "Mainly it's a matter of time," Shahani cautions. "There are no shortcuts."

If you want to build a higher credit score, here are five overall guidelines to follow:

Pay those bills on time. If you've fallen behind, get yourself up to speed and stay there

Try and keep your balances as low as possible. Moving debt around won't help your score

Opening new cards and closing old ones won't boost your score - in fact, it may hurt it. Simply take care of the accounts you currently have and manage them wisely

Don't allow lenders and vendors to pull your credit on an ongoing basis. Try and open any kind of new loans or credit within a short period of time

Use a credit counselor or work with a vendor if you feel like you're falling behind on your debts. It's better to work out a compromise before the information makes its way to the credit bureaus

Finally, understand that the credit score is a barometer of your financial behavior. Imprudent financial behavior, such as taking on too much debt or missing payments, can severely hamper your ability to borrow money down the road. Unless you have a large amount of money in reserve, your credit score is a key component of your financial future. Manage it with care.