So, you are ready to make a big purchase. You may be buying a new home, buying a car, or getting a business loan. All of those things are very exciting, and also cause a lot of stress. Before you sit down with a lender to discuss your options, you need to know what your credit looks like. This is easy peasy, right? Wrong. There are several reporting agencies and their scores can be quite different. Let’s get familiar with credit, as well as, the lending process.

Reporting agencies all use different strategies to rate your credit. This is basically how your credit is determined. According to Loans Now, “A credit score is 35% payment history.” That is the biggest factor of your credit score. It is important because it shows how responsible you are about paying your bills. Besides paying your bills, it shows if you pay them on time. If you are 30+ days late, this will negatively impact your score.

The next factor is worth 30% of your score. This is how much you owe on your accounts. It’s great that you’ve paid your bills on time, but they still want to know the probability that you can still pay them. If you are maxed out, you may not be able to afford to pay your loan.

Age matters. Around 15% of your score is based on how long you’ve had credit. The longer the credit history the better. If there is a long track of responsible borrowing and paying your bills the more likely that this trend will continue. If your credit history is one year, there isn’t enough proof of your behavior.

About 10% is the type of accounts you have. Lenders want to know what you are spending your money on. This factor considers if you have credit accounts, installments, or revolving credit.

The final 10% looks at how many inquires you’ve had for credit. Lenders want to know if you are recklessly looking to get credit or a loan from anyone who will give it. If you want to buy a car and send it to 20 lenders and only one approves it, what did the other 19 lenders see? Asking multiple lenders to check your credit can be a red flag.

If you’ve checked your score and it isn’t great, compare these factors to see how you can improve your score. For instance, besides paying your bills, you need to do it on time. Late payments hurt you. If you’ve had lenders pull your score and a lot, stop and wait a year before letting anyone pull your score.

So, now you have a good understanding of what makes up your credit score. It is time to have a discussion with a lender about your options. You will first talk about what you want to spend the money on. The lender will ask you your income and you will both decide if you can really afford that payment. If everything sounds good, it’s time to pull your credit. Once the lender has looked at your credit, they will issue a pre-approval or rejection. If you are pre-approved, that means they will still need to see a few things, like proof of the income that you told them you have. Your lender will tell you what rate you will have based on your credit. The better your credit is, the lower your rate will be. After everything checks out, you will close on your loan.

Hopefully, the lending process is quick and easy. Since you know how your credit stacks up, you should take a look at what your finances look like long term. Are you planning adequately for retirement? Do you have a savings account? Are you using your savings account wisely? Use this opportunity to plan for the future.