You are here: Home / Money Saving Tips / How credit scores are calculated

How credit scores are calculated

People, who have some idea about loans and interests, also understand how crucial credit scores are. No matter what kind of loan you plan to avail, be it a personal loan, a car loan, an educational loan or a home finance, your credit score or credit rating plays a vital role during loan approval and repayment period.

Knowing the fact that credit scores play an important in our money matters, it’s important that we also know how credit scores are arrived at. Sadly enough, though you may or may not evince in interest in knowing credit scores calculation, there are some evaluating companies that keep their calculation secrets close to their heart.

Do We Know How Credit Score Works?

Though most companies keep their formula a closely guarded secret, some of them reveal the general guiding principles that alter credit scores.

Fair Isaacs Corporation, more popular as FICO; aver that following aspects play a crucial role in the assessment credit scores:

  • Payment History
  • Current Debt
  • Length of Credit History
  • Recent Lines of Credit
  • Types of Credit Used

As per FICO, the payment history forms 35% of a person’s total credit score. Anyone who has been regular in his or her past repayments and has not been a defaulter at any time will earn a good rank in payment history and will in all probability merit a good credit score.

According to FICO, current debt comprises 30% of one’s credit score. In case a borrower has huge unpaid debt, the credit score will decline because the higher the unpaid credit, the higher is the risk factor involved.

FICO allots 15% a person’ credit score to his or her length of credit history. The longer the length of your credit history, the more transparent it gets and consequently your ranking improves too. For instance, if a borrower is very young and is a green horn in matters of finance, FICO is unsure of their credibility and allots them a lower rank.

Lastly, the remaining 20% account equally for new lines of credit – like new credit cards acquired – and various kinds of credit availed by the borrower. Borrowers possessing older lines of credit earn better ranking according to FICO owing to their better length of credit history, as opposed to the recent ones, that have not been tested yet, as per FICO’s rating policy.

Also, the types of credit availed play an important role in one’s credit score. According to FICO’s yardstick, people with mortgages and long term personal loans merit better ranking as against those who have too many credit card payments and short term loans in their name.

In Case My Credit Score Is Unimpressive

After going through the credit score assessment procedure mentioned herein, you discover that your ranking isn’t impressive in any of the categories; you do not need to worry and fret. Credit scores fluctuate easily and good news is that you have a chance to improve your score.

As a borrower, you have a right to ask for your credit report and go through your past financial performance and mark the ones that are denting your credit score. If you detect any anomaly in the report, you may contact the concerned credit rating agency to remedy the situation. Once the correction is carried out, your credit score will automatically improve.

If your report presents correct picture, then the best cure lies in your hands. You will need to be careful in your financial dealings in the days to come and your credit score will correct itself. A word of advice is called for here. Take a loan by all means but remember to adhere to the loan agreement.

About John Evans

Comments are closed.

Scroll To Top