Lenders are interested in how well you are able to manage borrowed money in order to determine how much of a liability lending you additional funds will be. Lenders will access your credit history to determine the terms of the loan that you are requesting. A credit score becomes very valuable especially on large purchases because it is the only variable used to choose the annual percentage rate of the loan. The lower your credit score the higher your interest rate will be and visa versa. Having a poor credit history and consequentially obtaining a high interest rate can cost you tens and even hundreds of thousands of dollars more over the length of a traditional 30 year home loan.

Having a good credit score means that you save a lot of money in interest. But how are credit scores calculated? Below is the breakdown of the components that make up the total credit score:

1. Punctuality of past payments (35%) - The largest factor in determining your credit rating is your payment record. A poor record where there is a history of bills being overdue or not paid at all will lower the credit rating. Continually making payments on time (and obviously avoiding things like bankruptcy and calls by collections agencies) will increase your credit score.
2. Ratio of current to available debt (30%) - How you control your debt is of great interest to lenders. Lenders want to know not only that you re-pay your debt, but that you can use credit responsibly. Lenders expect to see that no more than 15% of an individuals after tax income be spent on credit. As you use your credit card you begin to get closer and closer to your credit limit. Having more current debt than available debt sends a red flag to lenders that you do not know how to live within your means.
3. Length of credit history (15%) - Lenders want to see that you are stable in your job and in your residence for at least two years. You also need to build up a reputation of longevity and a history of good decision making.
4. Type of credit used (10%) - Some types of credit are more respectable than other types of credit. Installment credit where a set amount of money is paid by a set date (such as for a car payment) is the best type of credit to use. Credit such as is obtained through payday loan companies is frowned upon and is not the type of credit you should be using if you want to raise your credit score.
5. Resent credit search (10%) - Anytime you allow someone to pull your credit report your score temporarily drops 5-7 points. From the lender's point of view, a creditor who is constantly having his credit pulled looks like someone who is frequently looking for loans. This type of frequent borrowing (whether perceived or real) gives the lender the perception that you are a poor credit risk.