5 Factors Used To Determine Your Credit Score


FICO score or credit score of an individual is calculated based on a mathematical formula. The formula takes into account various factors like your promptness of making monthly payments, total revolving credit available to you, and other factors. The exact formula for calculating the credit is not publicly available. Weightage of different factors is discussed below. Learn the factors that affect your credit history. It will give you more control over your credit score.5 Factors Used To Determine Your Credit Score

Keep in mind, the formula is there for helping creditors ascertain your credit worthiness. If your credit score is very low, you are a very high-risk customer for the lenders. The logic behind the formula works perfectly. You may not have absolute control over your credit score or credit report. However, knowing how your credit score is calculated can help you plan your strategy to improve your credit score.

Credit score is only a number. The credit reporting agencies ascribe that score to you based on your financial behavior. Your promptness of paying bills and repaying loans, total revolving credit available to you, variety in your credit portfolio, etc are the factors that determine your credit score. In other words, your credit score can give a fair idea of your likeliness of repaying the loans.

Lenders like banks and credit card companies report your payment habits to credit reporting agencies. The three major agencies that track your financial behavior are Experian, Equifax and TransUnion. The lenders will request your credit report while you apply for a loan or a credit card. This explains how the credit reporting agencies get information about your paying habits.

The following five factors determine your credit score. The relative weightage is given in brackets.

Payment history (35%)
Credit utilization (30%)
Types of credit used (10%)
New credit queries (10%)
Length of credit history (15%)

Payment History

If you always pay your bills on time, your credit score will be good. Pay due diligence to paying your utility bills (like electricity, telephone, cable TV, etc). Also, make monthly payments towards any loans you have taken. Paying without defaulting is the most important factor determining your credit score. If you default, even if it is by one day, your credit score suffers. The most important factor determining your credit score is your commitment to make every payment as promised.

Credit Utilization

The ratio of total credit taken versus total credit available to you is another factor determining credit score. If you have $10000 total revolving credit available to you and if you have taken only $1000 in credit, it is very favorable to you. This is reason why they tell you not to close credit cards. If you close credit cards, it will be viewed as less credit available to you. Instead of $10000, your credit report shows you have only $9000 revolving credit. That is a dip of $1000 in total credit available to you. It negatively affects your credit score. You can do one thing. You can ask your credit card companies to increase your credit limit. It will improve your credit score a bit.

The total revolving credit available to you is roughly a measure of trust lenders have in you. When your credit limit increases, it appears as better trust in you by the credit card company. When you reduce credit limit or when you close credit cards, the reverse happens. It appears that your creditors trust you less.

Types of Credit Used

Variety of credit you use also determines your credit score. Credit cards, installment loans, etc add variety to your credit history. The key is to make timely monthly payments on all such accounts. It shows that you are a financially responsible person. The lenders will also think you are mature enough to handle credit. This has a 10% impact on your credit score.

If you have availed mortgage, car loan, personal loan and a credit card, you already have the variety. If you don’t, take a small personal loan solely for improving your credit score. Then, make regular monthly payments. This will boost your credit score. It helps you if you are looking for a mortgage or car loan. With better credit score, you qualify for low interest loans.

New Credit Queries

New credit checks temporarily affects your credit score. Similarly, several credit checks also leave footprints on your credit report. When creditors pull your credit reports, the credit reporting agencies think you have applied for credit. Several such enquiries in a short period mean you are applying for loans at several place. This is not good for your credit score.

If you are looking for a mortgage or car loan in the near future, do not take any personal loans or apply for new credit cards. A new loan and a new credit card will reduce your credit score. You will have a low credit score for a few months. The loans you take during this time will cost you big.

The interest will be higher if you take a loan while your credit score is low. Follow the techniques of improving your credit score at least for six months prior to applying for a mortgage or car loan. It can save you hundreds of dollars every year and thousands of dollars during the lifetime of a mortgage loan. Make these big savings because of your discretion of a few months.

Length of Credit History

Length of credit history has a 15% impact on your credit score. You do not have an absolute control of the length of your credit history. However, you can do one thing. You can keep your credit history clean. If you have a stellar credit history of more than five years, it is a great thing. Creditors usually don’t mind a default you have made three years ago. Then again, it is good to have a credit history, free of any defaults and late payments.

Knowledge is potential power. You now have knowledge of how credit reporting system works. Use this knowledge to your advantage. Plan your own operation improving credit score. Believe in yourself. You now can make your own strategies to improve your credit ratings. It will not only help you improve your credit score, but also put your financial life in place.

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