When it comes to applying for a mortgage or car loan, lenders want to see whether you've got what it takes. So they look at your credit report. But how do they interpret what they see?

A history of on-time payments and credit card payoffs are diamonds. Lots of late payments and bounced checks are dirt. But there are gray areas where lenders assess other information -- such as how often you've moved -- to decide if they should approve a loan.

Before you even apply for that loan, here's a quick checklist of some basics lenders will evaluate to determine not only whether to say yes, but also to decide the interest rate and other factors associated with the loan.

You pay your bills on time
Creditors in any situation look for indications that the prospective borrower is a good credit risk -- a person who will pay back his or her debts in a timely fashion. Obviously, a history of on-time payments demonstrates that you are just such a person. But that doesn't mean your credit history must be perfect for you to qualify -- few people's are, after all. So-called 'good' credit can include a few minor dings in your report, such as:

Up to two credit card payments 30 days late; or one installment payment, such as an auto or student loan payment, 30 days late.

No payments of any kind should be more than 60 days late, however, and no mortgage or rent payments should be late at all. And there should be no outstanding debts such as judgments or liens.

You keep your debts reasonable
One factor any creditor must assess before offering credit is the total debt of the person applying. If a large portion of your income each month is already committed to paying off other debt, such as credit cards, auto loans, or student loans, the lender will wonder if you may have trouble paying back a new mortgage on top of them.

As a rule of thumb, financial experts say that non-mortgage debt payments should not exceed 10-15 percent of your take home pay each month. If your debts are currently too high, consider ways to pay some down before you apply for your mortgage.

You've avoided unnecessary inquiries
Whenever you authorize a creditor, employer, or other business to check your credit report, an inquiry is added to the report itself -- a note that someone has checked your credit. An inquiry usually stays on your credit report for two years.

Checking your own credit report, however, does not lodge an inquiry.

A lender considering you for a loan will look at the number of inquiries recorded there and when they took place. A large number of inquiries occurring in a short period of time may be interpreted as a sign that you are either applying for lots of credit because of financial difficulty or overextending yourself by taking on more debt than you can actually pay back.

If you're shopping around for mortgages, for example, don't let every lender you consider run a credit check. You might have to settle for slightly more approximate estimates on what the lenders can offer you, since they can't verify your credit history. But that's still better than doing all that shopping around only to find that the lender of your choice now perceives you as a less solid credit risk and wants to charge a higher rate.

You've eliminated excess, unused credit
Just as a lot of inquiries suggest you may be overextending yourself, a lot of available credit means you have the capability to overextend yourself in the future, even if you have not done so in the past.

Although people may think having several credit cards with high limits is a sign that they have good credit, too much of this good thing can make them seem like a poorer credit risk.

The lender needs to be reasonably sure that you will continue to be able to repay your debt in the future. But if you have thousands of dollars of unused credit available, you might spend it all the month after your loan goes through and suddenly have more debt than you can pay off.

To prevent this, close unused credit accounts before applying for a home loan, and/or consider having your credit limits reduced. If you do either of these things, make sure to ask the creditors to record that the account was closed or changed at the consumer's request -- you don't want anyone to get the impression the bank closed the account because of problems with your payment habits.