You may find yourself ordering a credit report to determine your credit score, track possible identity theft, or find the lowest mortgage interest rate, but don’t just disregard the results because you are worried that you won’t be able to understand it, or are scared by what it will reveal if you do. Your credit rating is an essential financial tool that you must be aware of.

Here’s an easy overview to help you make sense of credit ratings:

Credit reports vs. credit scores
A credit report lists a complete history of your credit transactions. Your credit score summarizes this information with a three-digit number. There are many mathematical models for determining your credit score. The most popular method is known as FICO (named for its developer Fair Isaac Corporation). But FICO isn’t the only credit scoring system out there. The three most popular companies that run credit reports—Equifax, Experian, and TransUnion—each use their own methods to determine credit scores. As a result, if you request reports from three different credit bureaus, you’ll likely end up with three different credit scores. (As if this matter needed further complication!)

Why your credit report matters
Lenders use credit reports to determine credit-worthiness. If your credit report contains too many negative marks, you may have trouble getting a loan. Lenders also use your credit score to set your interest rate. With a high credit score, you may be able to secure a 30-year fixed rate mortgage on $150,000 at 6.3%. A low credit score will likely get you the same loan for 9.4% interest. That translates to big more than $300 difference in monthly payments. Over the life of the loan, that adds up to $108,000.

Credit reports are an important tool in your anti-identity theft arsenal. Review yours every year to see if anyone has tried to establish credit using your Social Security number. Take steps to repair your credit if anyone has stolen your identity.

Fortunately, your credit report and score are not set in stone—they change as financial picture changes. You can control which direction your credit score moves and the first step is to know where you’re starting from.

How to view your credit report
According to federal law, you are entitled to a yearly free copy of your credit report. Visit annualcreditreport.com to request a copy from each of the three main credit bureaus. Your credit score won’t be included in the free report, you have to pay a few dollars more to receive it.

How your credit score is formulated
FICO, for example, considers five factors, weighted in order of importance, when determining your credit score: your payment history (35 percent); total amounts owed (30 percent); length of your credit history (15 percent); types of credit (10 percent); and how much new credit you’ve established (10 percent).

How to improve your credit score
Based on the above criteria, these are the most effective ways to boost your score.

THE BOTTOM LINE
Reviewing your credit report and knowing credit score will help you save every time you borrow money—and that can add up to big bucks over time.