Credit scores play a major role in determining your ability to receive a loan. In addition, your credit will also determine how much your loan is for and at what interest rate. Since every credit based financial transaction that you are involved in is tracked by the three major credit bureaus: Experian, Equifax and TransUnion, checking your credit scores at least once a month will ensure that you have no surprises when it comes time to use credit to your advantage. Knowing the basics is key to success, which is why understanding credit scores is a good start to getting a better interest rate.

Credit Report

Your credit report is essentially a wrap-up of your financial history. It provides a financial snapshot to potential lenders assessing your ability to repay a loan. Contacting each credit reporting agency at www.experian.com, www.transunion.com and www.equifax.com will allow you to view your current situation for a nominal fee. The first item on a credit report will be your personal information such as your name, aliases, address information and social security number. Next, you will see your current and past lines of credit. With this information, creditors are able to view your past payment history and your current debt. Using this information they put together a case to either extend or deny credit. Then, there is the inquiries section. Information contained here alerts potential lenders to your recent activity. This section is why it is important to research the company you want to do business with beforehand because too many inquiries into your credit in a short amount of time looks bad. However, to compensate, the bureaus do allow "rate shopping" inquiries to your credit report. For instance if you are mortgage shopping it is permissible to have numerous inquiries from different lenders over a fourteen day period. Finally, there is the area containing items in collections. If you did not pay a bill at all and it went to collections, creditors will know exactly how much you owe and how late you are.

FICO Scores

FICO is an acronym for the Fair Isaac Corporation that devised the score itself. The FICO score is a culmination of a few different things used in a mathematical formula that provides a rating system ranging from 300 to 850. Your score provides a quick number that lenders can use to discern a go or no-go decision very quickly. For instance, even sub-prime lenders usually will not extend credit to anyone with a FICO score below 500. Conversely, if you have a 700 or better FICO, lenders will usually fight to earn your business. About 70 percent of the score is a result of your payment history and the amounts that you owe.

Credit Scores and Income

Your credit report and FICO score provide a good picture of where you are at financially, however, it does not take into account one important thing. First, it does not include your salary. This important piece of information is able to make or break a deal whether you qualify credit-wise or not. Your debt-to-income ratio will be scrutinized and confirmed by the lender.