A credit score is a lender's shorthand for how likely you are to repay. The most widely used, FICO, runs from 300 to 850. Above 740 is generally considered very good and earns the best mortgage and auto rates; 670 to 739 is good; below 620 makes many loans expensive or unavailable. VantageScore is a competing model on the same scale.
Five things go into a FICO score. Payment history is the largest at about 35%: whether you paid on time. Amounts owed, mostly credit utilization, is about 30%. Length of credit history is about 15%. New credit, meaning recent applications, and credit mix, meaning having both cards and installment loans, are about 10% each.
The score is not a measure of wealth or income. A high earner with a late payment and maxed cards can have a worse score than a student with one small card paid on time for three years.
The money at stake is real. On a $400,000 30-year mortgage, the rate difference between a 760 score and a 640 score can be over a full percentage point, which is roughly $250 a month and $90,000 over the life of the loan.
The common mistakes are missing one payment (a single 30-day late can drop a good score by 60 to 100 points and stays on the report for seven years), closing old accounts, and applying for several new cards right before a mortgage. Checking your report at annualcreditreport.com is free and catches errors, which are common.