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Are you planning to borrow money in the near future? Before a lender will loan you a large sum of money, they’ll want to know that you’re going to pay it back. How do they do that? Rather than take your word for it, they review something a little more precise known as your credit score.

Besides your income and how much debt you’re already carrying, your credit score plays a key role in determining whether you’re approved for a loan. When you have a good credit score, not only is your credit application more likely to be approved, it’s most likely to be at a lower interest rate, helping you save money.

What’s a Credit Score?

A credit score is a three-digit number given to you by Equifax and TransUnion. A high credit score indicates you’re a responsible borrower, while a low credit score can make it tough to be approved for a loan. Your credit score can range from 300 to 900. Don’t worry if your credit score isn’t in the high 800’s. As long as it’s above 680, you’re golden in the eyes of most lenders.

Now that you understand credit scores, let’s take it a step further and look at five important factors that make up your credit score.

1. Payment History

Payment history is the most important factor. Lenders prefer borrowers with a stable payment history. What’s a stable payment history? It means paying your bills on time and the full amount. If you run into a bit of a financial bind and you can’t afford to make the full payment, protect your credit score by at least making the minimum payment. It’s better than missing a payment. Do that too much and it can be a real drag on your credit score.

2. How Much Credit You Have at Your Disposal

Next to your payment history, lenders are most concerned about how much credit you have at your disposal (aka your available credit). This is how much money you’re able to borrow if you were to max out all your credit facilities (credit cards, lines of credit, etc.). To calculate your own available credit, add up the credit limits on all your credit facilities, less any balances you’re carrying on them. Lenders are looking for you to use less than 35 percent of your available credit. If you go over that on a regular basis, again it can drag down your score.

why you should care about your credit score

3. How Many Credit Inquiries You Have

Lenders care about how many credit inquiries you have. A credit inquiry is as it sounds. It’s when a lender pulls your credit score and credit report for the purposes of extending you credit. There are two kinds of credit inquiries: soft inquiries and hard inquiries. Soft inquiries, such as checking your own credit report, won’t affect your credit score. Hard inquiries, on the other hand, will impact your credit score. Make too many hard inquiries in a short time span and it can pull down your credit score. To avoid this, it’s best to only apply for credit when you are serious about it.

4. Credit History

Do you have a long history of using credit responsibly? Then lenders will love you. Most lenders are looking for a borrower who has had multiple credit accounts open for at least two years (the longer, the better). If you’re considering cancelling an old credit card because you don’t use it much, you might keep it open, as closing it could actually lower your credit score.

5. Types of Credit

Do you have only one type of credit? (i.e. credit cards) Then it could lower your credit score. Lenders want you to have more than one credit type. So, if you have a mortgage, student loan, line of credit and a credit card, it’s better than if you just have a credit card. Just don’t go crazy. Use any credit you have in a responsible manner.

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About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.