What is Credit Score and How Credit Score is calculated?

A credit score is a 3 digit numerical expression, typically Between 300 to 900 based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, which consists of information typically sourced from credit bureaus. It is predominantly used by lending institutes to evaluate your creditworthiness and predict risk involved in approving your loan application. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques to determine whether you are legible enough to be worked with. Digital finance companies such as online lenders also use alternative data sources to calculate the creditworthiness of borrowers. Let’s see how Individual credit score is calculated based on that parameter. 1 Payment History (35%)
  • Paying debt on time and in complete amounts has the greatest positive impact on your credit score.
  • Late payment, judgments, bankruptcy, collection items and charge–offs all have a negative impact.
  • Delinquencies that have occurred in the last two years carry more weight than the ones that are older.
2 Amount Owed (30%)
  • Lenders and Credit Bureaus look at the amount of debt you owe, relative to the amount of available credit –that is your debt–to–credit ratio.
  • You want that ratio to be as low as possible to benefit your credit score.
  • Creditors also keep their eyes on the portion of each credit line, how you used it and the portion of installment loan amount still owing.
3 Credit History (15%)
  • The date that you opened a credit account has some relevance in calculating your credit score.
  • A lender will be able to see how long you have been using credit lines, when you opened an account, what type of account you opened, and how long it has been since you had any activity on the accounts.
4 Types of Credit (10%)
  • For this percentage, credit bureaus look at how many different types of credit you are currently using and have used in the past, such as credit cards, mortgage, car loan, retail accounts etc.
5 New Credit (10%)
  • This factor entails the number of accounts you have opened recently, what type those accounts fall into, the exact date of opening those accounts,  and the recent number of recent credit inquiries made (by whom and when).
  • In order to keep your credit score from decreasing, try not to open several new lines of credit in a short period of time. Lenders and credit bureaus can view that as a desperate call for money.

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