Now that you know about some different types of credit, let's talk about what you can do to improve your chances of qualifying for credit.

In this post you'll find out what lenders consider when they decide whether or not to give you a loan. And we'll give you some tips on how you can monitor and improve your own financial health.

What does a lender look at to determine if you should be approved for a loan? They base their decisions on something we call the five Cs of credit. The five Cs are:

Capacity -- your ability to repay the loan.

Capital -- what you have in assets.

Conditions -- the state of the national economy.

Collateral -- assets you have pledged as security for the loan.

Character -- your personal trustworthiness.

In considering your Capacity and Capital, lenders use something called financial ratios as indicators of your overall financial health. The slide here lists five of the more common financial ratios that lenders consider. Let's walk through each one. In addition to helping you understand how lenders make their decisions, understanding and monitoring your financial ratios can help you spot some warning signs of debt before you get in over your head.

The basic liquidity ratio determines the number of months that you could meet your monthly living expenses if all your income stopped tomorrow. In other words, how long could you survive on your savings before you had to start selling things? For example, if you have $4000 in cash in savings and your monthly expenses are $2,000 then your liquidity ratio would be 2 months. Most financial experts recommend that people have an emergency fund with money to last at least 3 months.

The assets-to-debt ratio measures your financial solvency. An asset-to-debt ratio less than 1.0 means that you owe more than you own. For example if your total assets equal $40,000 and your total debts equal $80,000, your asset-to-debt ratio would be .5, indicating that you owe twice as much as you own. Technically, you'd be considered financially insolvent, even if your income is enough to pay your current debts on time. Young adults and families often have asset-to-debt ratios under 2.0. As people get older, this ratio usually improves.

The Debt Payments to Take-Home Pay ratio measures whether your monthly debt payments (not including your mortgage) are too high. Mortgage debt is NOT included because buying a home is also an investment. This ratio is a key factor that lenders consider in determining whether to approve your loan. To calculate this ratio, add up all your monthly non-mortgage debt payments, then divide that number by your monthly NET take home pay--what's left after taxes are deducted from your gross pay. For example, if your monthly take-home pay is $2000 and you have non-mortgage debt of $500 per month, the ratio is .25 or 25%. This means that 25% of your take-home pay goes toward debt other than mortgage. A figure over 20% means that too much of your income is going for car loans, credit card debt, furniture, and other personal debts.

Want to calculate your own Debt to Income ratio? Download our helpful form using the link below, and use it to calculate your ratio.

The debt service-to-gross income ratio compares the money you spend on monthly debt payments, including mortgage, to your gross monthly income. This ratio tells you if your monthly payments for debt, including mortgage, are too high. To calculate this ratio, divide the total of your monthly debt payments, including your mortgage, by your monthly gross pay--before taxes are deducted. For example, if your monthly gross pay is $3,000 and you have total debt of $1000 per month, your debt service-to-gross income ratio would be .33 or 33%. This means that 33% of your gross income is needed to pay your debts each month. A figure over 36% means that your income is inadequate to repay your debt, including housing costs. If your mortgage payment exceeds 30% of your income, you may have difficulty getting other types of loans.

The only way to build up your assets is to spend less than you earn. You must save money. But how do you know if you're saving enough? The Savings Ratio compares your dollars saved to your take-home pay. To calculate this ratio, divide your take-home pay by the amount you're saving each month. For example, if your monthly take home pay is $2,500, and you are saving $250 per month, your savings ratio is .10, or 10%. Financial experts recommend you save 15 to 20% of your income. This would include contributions to retirement accounts.

If you find that some or all of your ratios are not where they should be, there are some things you can do to improve them.

So let's review the key points to remember in monitoring your financial health. Lenders use certain criteria in determining whether to approve your loan. These criteria fall into 5 categories known as the 5 Cs of Credit. Lenders also look at your financial ratios to get an idea of your spending habits and debt load. You can use these financial ratios to monitor your own financial health. If your ratios do not fall within the recommend range, there are some things you can do to improve them, such as cutting spending, focusing on debt reduction, and increasing savings.