Understanding how credit works has become even more important over the last several months. Not only is it becoming more difficult to borrow money, the formula used to decide who is worthy of credit is changing as well. Everywhere you turn lenders are adjusting their criteria and requirements for individuals to qualify for credit and knowing how your credit score is determined can go a long way toward helping you meet these new requirements. Let’s take a look at the recent changes and how they affect your credit score, which in turn determines your credit worthiness.

Recent changes that affect your FICO credit score:

• Carrying high balances on your credit cards will have an increasingly negative impact.

• Applying for new credit may hurt less than before.

• It is more important to actively use the cards you currently have (this does not mean you should incur more debt, simply using the cards for small purchases which you can pay off in full each month to keep the cards “active”).

• Having revolving and installment accounts can help your score as the new formula considers your ability to handle different types of credit.

There are other changes beyond how you use your credit cards that will affect several people’s credit score. Recently attention has been paid to the act of “piggybacking” which is when a person with no credit history or perhaps bad credit history is added as an authorized user on another persons credit card account (generally a person with good credit). By piggybacking on another persons account some individuals were able to boost their credit score by up to 100 points.

Fair Isaac the company that created the FICO credit score says the new formula will also better predict who is a good risk and who is a bad risk. While changes are being made in how your score is determined there are also changes occurring with creditors themselves and how they view your activities in regard to your creditworthiness.

One of the biggest issues people are currently facing and justifiable upset about is the “guilt by association” that credit card companies have been instituting. For example, some card holders for American Express have had their credit limits cut; these individuals pay their balance in full each month and never pay late yet are being penalized for where they shop. The reason, other customers who shop at the same establishment have a poor repayment history with the card issuer.

It would appear that it is becoming increasingly difficult to predict how your actions will be perceived by lenders so it is imperative to stay on top of the subject and try to conduct yourself in a way that ensures your credit doesn’t suffer unnecessarily.