Question: I was recently turned down for credit because my credit score is 650. A lender told me that I'm in a high risk category. I didn't even know that I had a credit score. What makes up my credit score and what can I do to improve it?

Answer: A credit score is a three-digit number based on your credit history. It is a snapshot of credit risk at a particular point in time. Lenders use this score to help determine the risk associated with lending to a potential borrower. The most commonly used score is called FICO (Fair Isaac Company). FICO scores typically range from 300 to 850 and are derived from information in your credit report. Your score will change as positive and negative information is added to your credit file.

Most lenders view a score of 700 or better as a sign that the borrower handles credit well. Generally, once your score goes below 670, you are considered a high credit risk and you may be charged higher interest rates or unable to easily obtain credit.

It is important to know how your credit score is determined in order to be proactive about improving it. Credit scores take the following factors into account. Payment history is 35 percent of your score. Do you pay on time or are you consistently late? By late, I mean more than 30 days late. You might be surprised to know that missing one payment (30 days or more late) can knock 50 to 100 points off your score.

The amount owed to creditors is 30 percent of your score. What are your balances on loans and credit cards? Are you overextended? Are you close to the limits on your credit cards?

The length of your credit history is 15 percent of your credit score. How long have you been using credit? Do you have established credit accounts? You don't really have any control over this one. You either have an established credit history or you don't.

New credit accounts account for 10 percent of your score. Have you obtained a lot of recent credit? Are you a fan of obtaining retail credit cards to get 10 percent off your purchase? This habit can knock 20 points off your score every time you apply.

The types of credit you have account for 10 percent of your credit score. Creditors want to see a healthy mix of credit. This includes retail cards, bank credit cards, installment loans, etc.

Now that you know what factors are used to determine your credit score, you can use this information to improve your credit score. Just because you have a low credit score today doesn't mean it will stay that way. If you take steps to improve your credit score, you can expect to see an increase in it down the road.

Most importantly, pay your bills on time. This is one of the fastest ways to increase your score. Delinquent payments can devastate your score. Another quick way to increase your score is to pay down your balances and charge less. Lenders like to see a lot of breathing room between the amount of debt and total credit limits. Credit scores don't distinguish between people who carry a balance and those who pay in full every month. Charging less also can improve your score, even if you pay off your balance every month. If you plan to apply for a mortgage or loan in the next year, start paying down loans now.

Be sure to keep any paid-off accounts open because closing them can hurt your credit score. Closing credit accounts lowers the total credit available to you and makes any balances you have larger in credit score calculations. Also, closing your oldest accounts can actually shorten the length of your reported credit history and make you seem less creditworthy.

Last, but not least, stay out of bankruptcy if possible. The impact to your credit score depends upon how many black marks you have on your credit report prior to filing bankruptcy. Bankruptcy can easily knock 200 points, or more, off your score if you had good credit prior to filing.

Following these steps can help you get on your way to improving your credit score.