Credit Score Breakdown
Credit scores are important. They help to determine the financial situation and the credibility of a borrower. Due to this, knowledge about the calculation of credit scores and sound information about various criteria that are considered while rating is very important. The credit scores are calculated in a manner similar to grades in school. Creditors including banks, lenders and other financial institutions send credit reports of an individual to credit bureaus and agencies. The scores are calculated based on the information provided by these credit reports.
The exact formula for calculating credit scores through FICO method is not revealed by credit agencies since it is the proprietary right owned by Fair Isaac. However, depending on the credit scores of individuals with similar profile and credit histories, one can approximately estimate the weightage of different criteria while calculating these scores. Credit scores usually range between 300 and 900.
Payment history of the individual usually accounts for the largest percentage of the score. Around 35 percent of score depends on this. Timely payment of bills has a positive impact in determining the scores. This criterion is important since every lender requires an assurance about the repayment capacity of the borrower. 30 percent of the score depends on outstanding debts on credit cards, home loans or car loans. It is always advisable to keep the outstanding balance on credit cards below 25 percent. Another 15 percent of the score depends on the period of the credit. Longer the time period, better would be the credit score. A 10 percent weightage is given for the number of enquiries made regarding the credit history of a person. These enquiries are made whenever any individual applies for a loan or a credit card. An increased number of enquiries can create a negative effect on the scores. The basic rule is to apply for a credit only when it is absolutely required. The final 10 percent is given based on the number of loans and operating accounts that an individual has.
Credit Score Breakdown
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