Credit score. These are perhaps the two most feared words in the English language, certainly in the world of home buying. As you well know, a strong credit (a.k.a. FICO) score can help you tremendously in securing a mortgage and a less favorable one can cost you.

But what goes into your credit rating? How should you manage your credit cards? Should you cut all that plastic in half and pay cash? These are all tough questions to answer, so I've called on the services of Anne Scheller, director of education and community relations at the Centers for Financial Education (CFE), to help clarify this daunting topic. CFE's mission is to develop and support programs to educate the public on sound personal financial skills and money management principles.

What does that little three-digit number mean, anyway?

You might have received one of those free credit reports in the past and wondered how that score translates into your borrowing power. The following reference numbers should help clarify everything. The perfect credit score is 850. For the record, in my years as a loan originator, the highest score I've ever seen is 810 (and it was an actor!). More realistically, the national average credit score is 677. Anything above 700 is considered great credit, anything above 720 is deemed outstanding credit. On the other side, anything below 660 is considered less-than-great, anything below 620 will make buying a home quite a bit tougher and anything below 580 will make it very difficult.

Buying a Home with Less-Than-Stellar Credit

That being said, there are numerous programs available if you have a below average credit score. Will you have a higher interest rate? More than likely. The lower the rating, the greater the risk you pose to the lender. That being said, a self-employed actor with a score as low as 620 can still secure 100 percent financing (i.e. no down payment) with very reasonable rates. Also, there are Federal Housing Authority (FHA) loan programs that often allow people with average to below average credit to secure a good rate. The bottom line: if you are interested in becoming a homeowner, don't rule out the idea simply because you've had some bad months with your college loans. Meet with a mortgage consultant and put together a game plan.

And now the question we've all been waiting for…

How is my credit score calculated?

Anne summarized it best in our interview: "A credit score is a snapshot of your credit history." That three-digit number is constantly changing based on the various credit transactions you conduct throughout the year, from car loans to gas bills to plastic purchases. To help understand FICO scores, let's look at some information from Anne and CFE. (Note: This is for informational purposes only and should not be construed as credit counseling.)

The rating calculation is based on five categories and their percentages:

1) Thirty-five percent of your score is based on payment history. Do you pay your bills on time or late? If late, how late?

2) Thirty percent of your score is based on how much you owe relative to your credit limit on each of your credit lines. We'll come back to this one in a second.

3) Fifteen percent of your score is based on length of credit history. How long has the account been active? As you might guess, a brand new card will have less impact than one you've been using for the past five years.

4) Ten percent of your score is based on types of credit used (i.e., credit cards, auto loans, etc). Quick vocabulary lesson: Credit cards, whose balances change from month to month, are called revolving lines of credit. Auto or college loans, which have a set payment schedule, are called installment lines of credit. A balance between these two types of credit will help your rating.

5) Ten percent is based on any new credit you may have opened recently. We'll come back to this one in a second, too.

Improving Your Credit Score

So what can we take from this information? Plenty. Here are a few good tips to keep in mind, whether your credit is immaculate or in need of some clean-up.

Keep your balances low. Try to keep your credit balances under 30 percent of each credit limit to improve scores. Timely payments are not the only score driver! This point is often overlooked, and is an integral component of your credit rating.

Open new accounts only as needed. You're at the Bulls game and you really want that free t-shirt. All you have to do is fill out a little application and your wardrobe will be complete. Is it worth it? Anne says probably not. "Opening several accounts (or trying to open several accounts) does not bear well on your credit score. The more accounts you open, the more debt potential you have. It is also more difficult to manage and keep track of several accounts, and it increases the risk of identity theft."

Next, one of the best ways to increase your score is time. Keeping all credit and utility payments "clean" (i.e. on time) for at least 12 months can do a world of good for your rating. Anne added, "The longer a credit delinquency has been in the past, the better off your score. The more recent the negative information, the greater the negative effect on your score. Credit scores decrease the importance of older credit mistakes."

Don't be so quick to close your accounts. When people are trying to get their finances in order, they will often close out as many of their credit lines as possible. However, in terminating these lines of credit, you might be badly hurting your rating. Anne says, "Closing an account may increase one person's score while the same action may negatively affect another person's score. It depends on the number of cards you have, the amount of credit you have available to you and your total balance." In order words, please consult a professional before taking the hedge clippers to all that plastic.

But when it's all said and done, what is the best way to improve your credit score? According to Anne, "The most effective way to improve your credit score is to make all your creditor payments on time. Pay on time, pay as agreed and keep your balances under 30 percent of total amount of credit you have available. There's no quick fix for negative credit, it's a matter of rebuilding and reestablishing credit worthiness. A steady and positive payment history is what gets you there."

Mike McNamara has been a working actor in Chicago for the past seven years, in theatre, commercials, television and film. Mike is also a Mortgage Consultant and Loan Originator with West America Mortgage Company. He can be reached anytime at 773/398-0021 or McNamara310@aol.com. Special thanks to Anne Scheller of the Centers for Financial Education for contributing to this article. Questions for Anne can be directed to Anne.Scheller@moneymanagement.org. You can learn more about the Centers at www.crediteducation.org.