How Your Credit Score is Calculated -

Credit scores are becoming increasingly important, with many employers even factoring this into their hiring decisions.  A credit score is based on a credit report, which is a detailed account of one’s credit history, borrowings, repayments, and credit inquiries.  It indicates the financial responsibility of an individual, including on-time monthly payments, types of credit accrued, and complete credit history.

 The three prominent credit bureaus which maintain credit records are TransUnion, Equifax and Experian. Any non-payment is immediately reported to these bureaus and reflected in one’s credit report. A credit score is calculated by a special type of software from Fair Issac Corporation Company, from which the FICO score name stems.

There are several different components, with individual weightings, that comprise your credit score:

1. ·       Payment History – This accounts for 35% of a credit score and indicates timely payment of monthly bills or otherwise.
2. ·       Extent of Indebtedness – How much an individual owes constitutes as high as 30% of the total credit score.  Thus, it is important to keep your borrowings low, preferably below 40% of maximum credit limits.
3. ·       Length of Credit History – How long a person has maintained credit carries a weighting of 15%. The longer the credit history, the better this reflects on your score.
4. ·       Types of Credit – The composition and different types of credit that a person has comprise 10% of the credit score.
5. ·       New Credit – The size of new credit and inquiries has a weighting of the remaining 10% on the credit score.

                                                               

A credit score varies between 350 and 850. While a score of 850 indicates excellent credit, 350 very poorly on the individual’s financial responsibility.  To improve a score, you should reduce credit card debt, pay bills in time, and be careful in the types of credit you utilize.