Most of us know about the existence of credit scores and understand that they are important for deciding what sort of access to loans and credit cards you are afforded, but a much smaller number of us have a clear idea of how they are calculated or how much they can affect your plans for life.

Here is a look at what a credit score actually means, and an overview of some of the key factors that influence what lenders will think about you and how willing they might be to agree to lend you money or give you access to credit facilities.

A way of evaluating risk

The fundamental point of a credit score is to give lenders an insight into what level of risk you might pose if they lend you money, in other words, whether you will pay them back and do so in a timely manner.

A group of lenders was the driving force behind the creation of credit scores in the first place and how the system works is to measure a certain number of predetermined credit criteria and use that data to provide a number that represents your credit score.

It is relevant to appreciate that credit bureaus don’t reveal how they actually arrive at your score and how each factor is weighted so it is futile trying to guess and attempt to fool the system into giving you a better score than you should have.

If you are searching for a loan and looking at sites like LoanReviewHQ.com/lender/opploans-review you will find that if and when you apply for finance the lender might access one of several credit reporting bureaus, all of whom might have a slightly different score for you.

Credit scores and reports do not follow a universal standard so it is better to focus on a score range rather than worrying about your individual number.

Your financial history

Your credit report is a detailed listing of your financial accounts and how you have conducted yourself in servicing your financial commitments.

The report will reveal what types of credit you use, such as bank overdrafts and credit cards, how long you have had each account, whether you have kept to your payment schedule or limit, and which address you use when applying for finance.

Although the two tend to go hand in hand, a credit report and a credit score are two different things and your score is purely a numerical interpretation of your track record with your finances.

The information held on you in your credit report will have a direct bearing on what sort of credit score you achieve and any changes in your report, good or bad, will then be reflected in an updated credit score.

Major factors that influence your score

Although the data can be interpreted in slightly different ways by the credit bureau and lender there are a number of major components to your credit report that determines your score.

Your payment history is considered to be one of the most critical elements that influence your overall score and if you make your payments on time every month it should help you to score highly.

Credit utilization

How much you currently owe and what percentage of your available credit you are using are also factors that will have a big say in what sort of credit score number you achieve.

You may see this part of your report referred to as credit utilization or credit-to-debt ratio.

Put simply, what this means is that if you are close to the max on all your credit cards, this will tell lenders that you might already have enough debt and giving you anymore might not be prudent.

If you can keep the amount you owe below at least 40% of the total amount of credit you have at your disposal this is believed to be a positive factor that should give you a higher credit score than if you are fully utilizing your lines of credit.

Not using your credit cards is not necessarily a good thing for your credit score as lenders want to see you demonstrate that you can borrow responsibly and pay back what you owe.

If you don’t use any of your cards they don’t know how you will perform when you do use the credit available to you.

Good track record

Lenders like to see that you have a good length of credit history and your score should improve over time if you keep accounts active and use your credit responsibly over a reasonable period of time.

Being able to demonstrate a good track record of fiscal discipline will help contribute to a more positive credit score.

More than one type of credit

Lenders also like to see that you can handle a decent mix of credit and it is likely that you will enjoy a better credit score if you have more than one type of credit.

What this means is that you might have loans and credit cards rather than just a bank loan, which gives lenders a chance to see how you behave with different types of credit.

Numbering system

As already outlined, it doesn’t pay to get too obsessed with the actual number of your credit score as the range that the number falls into is more relevant.

As each credit reporting system can produce an alternative number it is better to look at interpreting the range to see how you perform.

In general terms, the lower the number the poorer your prospects are of being granted credit.

The range of numbers is used to define whether you are a very poor credit risk or an exceptional borrower who has a close to perfect rating, with plenty of people falling into one of the categories in between.

Keep on top of your finances and your score

It pays to keep a close eye on your credit score and knowing where you stand will help you make more informed decisions about your suitability for applying for finance.

How you behave with your money will clearly determine whether your credit score is good or bad and even if you have had some financial setbacks in the past, there will almost always be the chance to improve your rating over a period of time.