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Unless you are sitting on a large pile of cash, you will probably be in the market for a mortgage when you are ready to purchase your next home. In today's tightening credit markets, this puts even greater importance on your credit score.

Your credit score is simply a mathematical model that takes the information from your credit report and attempts to predict the likelihood that you will pay back your debts through a quantitative score. The higher your credit score, the higher the probability that the lender believes you will be able to pay back the money. This will of course be directly correlated to the interest rate that they will charge for you to borrow the money. Today's lenders rely on a credit score called a FICO score, which is named after the company that creates the score for lenders, Fair Isaac & Co.

Your FICO score is made up of 5 different criteria, with each criteria weighting on your overall score. FICO scores range from a low score of 300 to a high score of 850. Approximately 60% of the U.S adult population has FICO scores between 620 - 780, with remainder split above or below these scores.

Here are the 5 criteria that impact your FICO score in the order of their importance:

Payment history (35% of your score) - your past history of making your scheduled payments on time is the biggest determinant of your future likelihood to payback your loan on time and on schedule. Higher weight is given to your most recent payments, so a late payment in the last 6 months would be hurt you more than a late payment for 3-4 years ago.

Amount you Owe (30% of your score) - the more outstanding debt that you are carrying, the more leveraged you are. This higher outstanding debt makes you more likely to have problems if there is a disruption in your income or unexpected expenses. Your score will be based on your credit utilization, which is the percentage of total available credit that you are using. For example, if you have 2 credit cards with a total outstanding limit of $20,000 and you have an outstanding balance on these cards of $18,000, you are at 90% credit utilization. This would negatively impact your score as it would indicate that you are pretty much tapping out your available credit. If you paid down your credit card balance and reduced your credit utilization, you should see an increase in your FICO score.

Length of Credit History (15% of your score) - the longer your credit history, the better picture that the lender has on your ability to manage your finances and outstanding debt.

New Credit (10% of your score) - If you have opened many new credit accounts recently, this will negatively impact your score. New credit is weighted negatively as it appears that you in need of credit and may be in some tough financial times.

Types of Credit you are Using (10% of your score) -this factor looks at the number and types of accounts that you have open such as credit cad accounts, installment loans, mortgage loans, etc.

Your credit score is ultimately based on the information contained within your personal credit report that is maintained by the three primary credit reporting bureaus in the United States: Experian, TransUnion and Equifax. Each of these credit bureaus maintain detailed reports on each consumer that has taken out credit and their information is based on information that is reported to them by lenders. You will want to make sure that all information in your credit reports is correct and accurate. Any discrepancies in these reports can have a direct impact on your credit score. Sometimes you will find just by making corrections to inaccurate data in your credit report, you can significantly increase your credit score. Each of these credit bureaus provides access to your credit report through their websites.

Once you have ensured that your personal credit information is correct, you can take some of the following steps to try to improve your FICO score in advance of seeking out a new mortgage loan.

• Do everything possible to have a perfect payment history in the 6 months leading up to your mortgage loan application as this activity will carry the highest weight on your FICO score.
  
• Try to limit your credit utilization to 40% of less by paying down outstanding credit balances
  
• Keep open your oldest credit accounts as their length will help your credit score
  
• Do not close any open credit accounts as this will likely hurt your credit utilization
  
• Avoid having new credit inquiries performed and opening new credit accounts as this new activity will hurt your credit score
  

With your FICO score having such a major impact on your borrowing costs and access to credit, it is a worthwhile investment of time and energy to understand and manage your credit score on a regular basis. Start by seeing where you are today and then put together a sound financial plan to get your credit score up to the highest level possible before seeking out your mortgage loan.