How Is Credit Score Calculated?

HOW IS CREDIT SCORE CALCULATED?

A 3 digit number varying from 300-900 is a credit score. The credit bureaus in the country calculate it. Lenders such as Banks and NBFCs usually consider that a score of 750 or higher is optimal. Every Credit Bureau uses its own credit score algorithm. It can be calculated on the basis of factors such as history of payment, use of credit, credit age and type of credit. Let us look at the degree of effect on your credit history and score , in depth, at all those variables.

Payment History - High Impact:

One of the key factors impacting your ranking is payment history. If you pay your EMIs on time , it means that you are a responsible creditor and that you run a lower risk of default. You also receive preferential loan rates and faster acceptance of your applications with a responsible credit behaviour. Late payments, lack of payments, etc. Lower your credit score by many points.

Credit Utilisation Ratio - High Impact:

The second largest factor influencing your credit score is the use of credit. A credit use ratio relates to the total amount of credit you used in proportion to the total accumulated credit cap or credit limit. The credit use ratio is determined by dividing your balance by the total credit limit . Consumers can preferably use just 30-40 percent of the credit limit to retain a high score, according to experts.

Age of the Credit - Medium Impact:

Your credit history is often taken into consideration when measuring your credit score to measure your creditworthiness. In the past, it would have beneficial impact on your credit value if you have treated your loan professionally and plan to perform on your active credit lines in due course. A long history of credit allows lenders to determine whether or not to give credit. Credit cards with a long history should also be held available in contrast to newly acquired cards.

Total Accounts - Low Impact:

A good balance between secured and unsecured credit is necessary. Personal Loan is a example of unsecured loan while a Home Loan is a secured loan . Right mix of secured and unsecured loan will increase your credit score . While it does have less effect than other variables, it should not be ignored. Your entire accounts reflect your experience with both credit forms. You should avoid large amount of unsecured credit , as it could impair your credit score .

Your credit enquiries (hard requests) will also be weighed when determining your score along with the account form.

Before applying for a loan, it is advisable to review the loan score on your own. You can check your credit score for free on Credit Help India .

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