How are credit scored calculated? And what factors reduce or impacts the credit score?

The main motive of credit score is to help financial risk managers and lenders make fair decisions on whether or not to “take a risk” of giving loan to someone. Credit scores is the financial tool that is designed to predict the likelihood that individuals will pay their bills as agreed. Credit scores are only one of the several tools used to determine the reliability and credit standing of a person. Payment history, the amount of credit you’re using, and the length of your credit history are the major factors considered in calculating your credit scores.

The Main Factors Involved In Calculating A Credit Score Are:

    • Payment history – 35%

Your payment history contains the information about how you have repaid credit you already have extended on your credit accounts like credit cards, lines of credit, installment loans, retail department store account, car loans, student loans, finance company accounts, home equity loans and mortgage loans for primary, secondary, vacation and investment properties. Your payment history determines 35% of your credit score. In fact, your timely payment of bills affects your credit scores more than any other factor. Damaged credit scores means the reliability of the person is challenged. Serious payment issues, like charge-offs, collections, bankruptcy, repossession, tax liens, or foreclosure can ruin your credit score, making it almost impossible to get approved for anything (Future loan) that requires good credit standing.

    • Used credit vs. Available credit – 30%

A major part of your credit score assesses how much of the available credit is being used on your credit card and also the other revolving lines of credit. A revolving line of credit is a type of loan that allows you to borrow up to a certain limit, make small payments, pay interest, pay off your debt, and borrow again. You can borrow many times following the same process as long as your line of credit is open and in good standing. The total line of credit or credit limit is also included in this factor. Credit limit is the maximum amount you could charge against a particular credit account, say $2,500 on a credit card.

    • Credit History – 15%

The age of credit contributes 15% to your credit score. This part of your credit file contains the details of how long the credit accounts have been in existence. The credit score calculation usually includes both how long your oldest and most recent accounts have been open. Generally, creditors like to ensure how efficiently you’ve been handling your credit accounts over a period of time.

    • Public records – 10%

This section highlights the prior history of bankruptcy, or collection issues or other derogatory public records that may be considered risky. The presence of these in your credit report negatively impacts on your credit score.

  • Number of inquiries into credit file – 10%Anytime an individual’s credit file is accessed for any kind of inquiry, it may affect the individual’s credit score calculation. It is important to know that Inquiries require the consent of the individual. The only inquiries which may impact an individual’s credit score are those related to active credit applications (such as applying for a new loan or credit card).