If you’ve ever applied for a loan and wondered how they decided how much to lend or why you got the interest rate you did, this is the article for you. Learning what decides your loan terms is one of the most important things anyone can learn before applying for a loan. It’s important to get a credit report and more important to get an explanation of your credit score. Knowing your credit score will ultimately lead you to the best interest rates for your loan.

The credit score is made up of a number of different things. It’s a compilation of the length of your credit history, how much new credit you have, how much you owe and your payment history, as well as the types of credit you have accumulated.

Starting with the most important factors:

Most of your credit score is based on your payment history. This is any types of revolving credit as well as standard loan repayments and includes mortgages, car loans, any credit cards and any other types of loans you may have taken out in the past. This also includes any judgments, bankruptcies, or past due accounts/payments. It takes in consideration how old the past due payment was, how long it was past due, the amount and how many accounts were past due. These totals are then offset by the positive payment history; ie if 95% of your accounts are paid on time you may see a smaller ding on your credit score than if you’ve got 60% of your accounts paid on time.

The next most important factor is the total amounts of all monies owed on open accounts. This includes the proportion of your accounts that actually has a balance versus the available balance. What that means is it counts up the balances you have on your cards and how much balance is available. A higher score is when you have low balances but high limits.

Although not worth as much as the credit history and balances, the length of your credit history plays a part in your credit score. This is how long you’ve had credit accounts. The longer history you have the higher your credit score will be. This is only about 15% of the total score.

Divided equally, approximately 20% of the total credit score is any recent credit you’ve applied for and the types of credit you have had. The more accounts you’ve opened recently, the less positive points on your credit score. Additionally, some credit is worth more than others. A mortgage has more strength than a car loan and a car loan has more strength than a credit card.

These are the items that make up your entire credit score. Understanding how they work will help you raise your credit score accordingly. When your credit score is high enough, you can ask for the lowest possible interest rates on any loan.

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