Understanding Your Credit Score

By Mike Wayman

Many consumers do not understand the importance of knowing the criteria used to determine their credit score. Knowing these details helps when you apply for a loan, seek to modify an existing loan, apply for a job, or even change auto insurance companies.

The credit score is comprised of five categories: Your payment history, the total amount you owe on all existing loans, the length of your credit history, the amount of new credit you have, and the types of credit you use. Lenders look at how well you make payments on existing loans and how many times any payments have been late. The also look at the total amount you have outstanding on loans, and compare that to your total worth. For example, owing more than the value of the property you own is always viewed negatively.

Also considered is how long you have been using credit. Someone with a history of using credit successfully for twenty years usually fares better than someone who just got his or her first credit card six months ago. Lenders look at how much credit you already have, and determine whether you are overextending yourself by applying for more, and lastly they look at the types of credit you use and whether you typically carry unpaid balances on store charge cards or pay off balances regularly.

Essentially, your credit score affects every aspect of your financial life, so it is important to know where it comes from.