How Is Your Credit Score Calculated?

How Is Your Credit Score Calculated?

Several financial factors play a crucial role in the computation of your credit score. There is a slight disparity in the algorithms used by the three prominent agencies (Experian, Equifax and TransUnion) to calculate your credit rating; however the most popular system used for the calculation of your credit rating is the FICO system developed by Fair Isaacs Corporation. The scores computed by FICO fall in the range of 300 to 850, with a higher rating deemed as a good credit score while the opposite holds true for lower figures. The lower your credit score the lesser will be your chances of procuring finance. So here is a breakdown of the various financial factors which are taken into consideration while calculating your credit rating through the FICO system.

History of Repayment: This factor carries the maximum weight and is responsible for 35% of the total figure. When a financial institution considers your application for a loan, the most important constraint from their point of view is of course you repayment history. So factors like regularity of repayment and records of late payment will all create a big impact on your credit score

Existing Loan: This is the second most important factor and it accounts for 30% of the credit rating. The amount of money you currently owe vs. your income often plays a crucial role in the lenders decision. Granting an individual credit for an amount that exceeds his repayment capacity is obviously the recipe for default that all lenders want to avoid.

Credit History: This is responsible for 15% of the credit score. Lenders want to know if you have been using credit for long usually a period two years should suffice and if you have any negative history. This will simply go to prove that you know how to us credit responsibly.

The types of debt: The different types of credit that you are currently using will impact 10% of your credit score. Lenders want to know how much has been borrowed from the different types of credit For instance, credit card debts will rate lower than stable long term accounts like mortgages.

Recent loans: The lender will also want to know about the different types of loans that you have applied for in the last six months. If you apply for a lot of loans with in a short period of time it will be seen in a poor light because if you have been granted most of the loans you may find it difficult to repay all of them. This factor accounts for 10% of your credit rating.

So as you can see your credit score is based on very simple common sense factors that can be manipulated to increase your credit rating.

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