Your three-digit FICO credit score enables financial institutions to gauge the likelihood that you will pay back borrowed amounts, based strictly on how you handle debt. Higher scores empower you to negotiate lower interest rates on mortgages and personal loans, such as credit cards.

According to a Financial Consumer Agency of Canada (FCAC) report, the average FICO score for Canadians is around 760, a rating that most lenders view as good.  

Borrowers can improve their personal credit scores by avoiding the following mistakes.

Mistake No. 1: Failing to check your credit report for errors.
Mistakes on consumer credit reports are more common than you think and can unfairly damage your credit score. 

For example, credit bureaus sometimes mistakenly categorize home equity lines of credit and mortgage accounts as revolving credit on consumers' credit reports. This can unfairly handicap a score because home equity lines of credit and mortgages are treated more favourably than revolving credit, such as credit cards.

Tip: Review your credit file at least annually, and ask the appropriate credit bureau to correct all errors.

Mistake No. 2: Charging close to your credit limit.
Using more than 50 per cent of your available credit limit dings your credit score. One way to combat this is to ask your financial institution for a credit limit increase, which will reduce your percentage of used-to-available credit. However, this approach can be dangerous since the higher credit limit could encourage you to borrow more than you can afford.   

Tip: Pay down account balances to 30 per cent or less of your existing credit limit.

Mistake No. 3: Closing older credit card accounts.
Some consumers don't realize that their credit scores go down after they cancel existing cards. The problem is that closing older accounts shortens the length of your credit history and your responsible payment record. Personal finance guru Gail Vaz-Oxlade estimates that credit history-related factors drive 40 per cent of a credit score, so the hit to your credit rating from cancelling older cards can be significant.

Tip: Rather than cancelling and replacing cards, try to negotiate lower rates and fees on cards that you have responsibly used for a long period of time.

Mistake No. 4: Frequently taking out new credit cards.
Registering for several new credit cards over a short period can depress your credit score. As the FCAC report explains, "Consumers who frequently open new accounts have greater repayment risk than those who do not."

Tip: Selectively apply for only the best new cards available and space out your applications.

Mistake No. 5: Missing monthly payments.
Your credit score can drop by up to 125 points if you miss a credit bill deadline by 30 days, according to MSN columnist Liz Pulliam Weston. After 60 days, card companies often raise the APR charged -- even if you have a reasonable explanation for payment default, such as an unexpected medical problem or family emergency.

Tip: Well before the payment deadline, work with your financial institution to find an alternative arrangement if you can't pay your bill.

Mistake No. 6: Over-shopping for mortgage, auto or student loan rates.
Comparing the lowest competitive rates for auto loans and mortgages makes sense. But what surprises many applicants are the credit checks that rate shopping at different financial institutions generates when lenders at these financial institutions pull your credit report.

FICO ignores mortgage, auto and student loan inquiries for the first 30 days. However, if you continue to shop around for longer than 30 days, your credit score can be lowered by up to five points per credit check.

Tip: Mortgage brokers require only one credit check, even if they approach many lenders on your behalf.

See related: Q&A: How to thrive after a financial crisis; 7 credit score ringtone songs for your mobile phone.