For better or for worse, when it comes to obtaining credit, you are what your credit score says you are. Whether it seems unfair, creditors need a uniform way to judge borrowers before they extend them credit. With that in mind, it is vital for borrowers to understand the basics of their credit score so that they know how this number is reached. Below is some explanation of how the individual elements equal your credit score. 

First, understand that your credit score is an approximation of the risk that you present to lenders. They want an assessment of your past and present credit situation so that they can project your future ability to pay back your debts. With that in mind, the credit score will incorporate various elements of your creditworthiness and aggregate them into one score. If your credit score is low, work with lenders with tools like those offered by August Funding to improve your situation. 

Payment History

This is the most important element of the credit score. Borrowers who have established a track record of paying back their debts have a stronger likelihood of paying their creditors in the future. Those who have at least one instance of either not making good on a promise to pay or doing it late will be viewed with some trepidation by a creditor. Granted, one late payment may have an impact, but will not completely preclude you from getting any sort of loan in the future. Rather, how often you are late and the amount of the debt where you have payment issues will be considered. This counts for over a third of your credit score.

Credit Utilization

Having credit and using it responsibly helps to establish a track record, but you do not want to use too much of it. If you are maxed out on your credit cards or your other revolving accounts, you will be viewed as a risk by lenders. They will hesitate to give you even more credit because the debt that you have is already stretching thin your ability to repay. 

Length of Credit History

This is the track record of how you use your individual credit accounts. If you have certain accounts where you have a long history of using your credit and paying it off, it is looked upon favorably by lenders. For that reason, if you have a main credit card that you have used for many years, it may be a good idea to keep that account open since that is where your credit history is.

New Credit

This factor is a small part of your credit score. New credit can help you or hurt you, depending on the pattern that it reveals. If you are rushing to open up many new accounts all at once, it may be a sign that you are either in financial distress or are simply being irresponsible. Conversely, selectively signing up for and responsibly using new credit may be a sign that you are a creditworthy borrower.

Types of Credit

This final small element of your credit score is almost counterintuitive. While you may think that having no credit cards will show that you are a good risk since you have little debt, creditors actually want to see that you are able to handle different types of debt. For example, if you have a mortgage, auto loan and credit card, you prove that you can handle a diverse debt load.

So What Does This Mean?

If your FICO score ends up above 750, you are thought of as an excellent borrower with little risk. However, even if you have a bad score, it is not the end of the story. Oftentimes, creditors may go behind the numbers to look at the specific factors that are impacting your credit. More recent events may be looked at negatively if they show a trend in your credit. However, if the recent trend is better, you may be viewed more positively than your actual number. There are programs that you can follow to help improve your credit rating. Loan products from August Funding, for example, can help get your debt under control.