Most of us have a vague idea of what a credit report actually is. But when its time to apply for that loan to purchase your house or pay for a car, your credit report can make or break the decisions of banks and financial institutions. Knowing your credit past and understanding how it works is the key to your present convenience and future financial health.

Instead of charging expenses to their credit cards, some choose to use cash mistakenly thinking that it would be easier to get a bank loan some day- if they don't have any debt. But actually, the opposite is true - it can be beneficial to have some debt as long as you have a good payment history.

Banks usually look at several factors when assessing an application for credit. A good payment history reflected in the applicant's credit report is one important factor when it comes to applying for finances such as home mortgages, personal loans, car loans and credit cards. This means that when the banks are considering your loan, they will take into consideration, and appreciate, your reliability to repay any outstanding debt you may have.

A credit report is a snapshot of your financial health that lenders use to assess the risks involved in granting credit. It contains your personal profile, repayment trend showing the promptness of payments relative to their due dates, and records of credit enquiries and payment defaults. By maintaining a good credit history the chances of having your credit application approved will increase.

Never take your credit worthiness for granted. Just like how you would go for regular health check-ups, it's important to do the same with your financial health.

Checking on your credit report regularly will also alert you of any attempts made by fraudsters to steal your credit identity. For instance, every time a loan enquiry is made, it will be reflected on your credit report.

The discovery of identity theft can take weeks or even months, so the importance of being vigilant cannot be underestimated. Identity theft is growing around the world and the impact on the victims can be great. Often victims of identity theft may suffer from financial loss, bad credit rating and even difficulty in getting a job or mortgage.

"I may have missed a few payments..." or what happens if your credit rating is low

Just as a good credit report gets you the financial thumbs up a bad credit rating may find your credit card applications denied and loan applications rejected. In a worst-case scenario, bankruptcy filings can even deny you access to certain jobs.

In economies where credit bureaus have been around for a long time, risk-based pricing is prevalent. This means that a consumer with a bad credit rating will be able to borrow funds only at a higher interest rate. Nevertheless, your credit rating is not the be-all and end-all of loan applications. Banks do take other factors like your salary and job into consideration. At Citibank for instance, the approval of credit applications are based on several obligations, such as the applicant's credit history, current financial standing, sources of income and total loan obligations.

If your credit report is less than stellar, you can re-establish it. To begin with, strive to pay up on time. Adopting a disciplined payment pattern is a powerful way to gain credit worthiness. Also, the wider the gap between your credit card debt and the credit limit, the better your credit report. So pay off more of your debt and consider charging less to your credit card. Of course, the best way is to pay the full balance on your bill each month

While different credit cards may have different benefits, it's more manageable to keep track of just two credit cards than 10. Just keep the credit cards you had the longest or with a better payment history and cancel the rest of the unused ones. Also, avoid opening new lines of credit right before you commit to a big purchase, like a car loan, as it will bring down your credit worthiness in the short term. Lastly, cancel a credit card only when the balance is fully paid off. Closing your account before that can hurt your credit worthiness.