Like it or not you are judged by a number and not your situation when it comes to getting a loan. Your credit score can make you or break you. It is no secret that having a good credit score will increase your chances for obtaining a new loan or credit card but many people do not realize this value until it is too late. It is time to learn how credit scores work.

There are quite a number of factors that come into play when figuring out a credit score. The end result is a number that can range between 300 and 850. This is on an increasing scale so the higher the number, the better credit rating you have.

It is possible to have a credit score of 850 but it is not easy. All payments have to be on time, all payments need to be for the full amounts, and how long it takes to pay off certain loans or debts is also considered. However, you do not need an 850 credit score just to have what is considered as "good credit". A credit score of about 650 to 700 and above is usually considered a good credit score. If you want to qualify for things such as prime rates on mortgage loans then you should shoot for about 680 and above.

When determining how credit scores work, we need to look at payment history, outstanding debts, inquiries, and the length of your credit history. The main factors are your outstanding debts and your payment history. These will weight heavily when determining your credit score. Before a lender decides to give you money they want to see if you are typically on time for your payments. The more often you are late, the less they want to lend you money. If you outstanding debts are very high, they might not want to lend you money for fear that you will not be able to pay all your debts back (mainly theirs).

Lenders depend on credit scores every day to decide whether or not a loan applicant should be approved. Using the credit score is an efficient way to make this decision due to the high volume of requests lenders receive each day. A simple query will let them know if you are a potentially good or bad client. While lenders may have other criteria for approving a loan, the credit score is a quick way to weed out those whose credit history is less than desirable.

If you find yourself in the latter category then you should start working on improving your credit score immediately. Since payment history plays a large role in calculating your credit score you should begin paying all current bills on time. The second largest piece are your outstanding debts. Get your own credit report for yourself and see how much money you owe to certain companies. Work on paying these off immediately. Call these companies and see if you can work out a deal where the payments are less per month. Some collectors will settle for a lesser amount if you pay in full. Knowing how credit scores work is the first step to having a more financially stable life.