What You Should Know About Credit Score Calculation

Credit Score calculation

Want to avail of a loan? Wondering if you are eligible for the loan? Take a look at your financial report card. Credit scores are an important aspect of personal finance. It is a numerical representation of your creditworthiness, or in other words, your ability to repay debt. It is a crucial factor that is used by lenders, landlords, and other financial institutions to determine your eligibility for credit and the terms of that credit. You must understand the factors that determine your credit score to manage your finances efficiently.

How is your credit score calculated?

A credit score is a three-digit number that represents your creditworthiness. The score is calculated based on your credit history and other financial information, such as payment history, credit utilization, and the length of your credit history. They play a major role in helping lenders assess if the loan applicant is a risky borrower. You won’t most likely be barred from availing a loan if you have low credit scores, but you will be charged much higher interest than those with good credit scores.

Factors Affecting Credit Score Calculation

Here is a list of all the possible factors that determine your credit score calculation.

  • Payment History: This factor carries the most weight in the calculation of your credit score. It refers to how often you make payments on time, and whether you have any missed or late payments. Even one missed payment can have a significant impact on your credit score.
  • Length of Credit History: A long credit history is generally better for your credit score because you have more time to repay the loans. Even if you have a couple of missed payments, you can make those payments and get your score back up.
  • Credit Utilization: It refers to the amount of credit you have available versus the amount you are using. Ideally, you should keep your credit utilization under 30% of your available credit. Low credit utilization shows that you are a responsible borrower, who only takes out loans when they need it.
  • Types of Credit: Having a mix of different lines of credit like credit cards, car loans, and mortgages can be beneficial to your credit score. It shows that you have the income and stability to pay off different types of debt. Lending firms will also be likely to sanction your loan request quickly.
  • New Credit: Applying for too much credit within a short span may lower your credit scores. If you are planning to apply for a home loan or a personal loan, it is best not to purchase any major big-ticket item the week before your loan application. If you have enough income and resources to prove that you can take on the repayment responsibility of your loan on top of your new credit, lenders may sanction it. However, do not push yourself to take on debt beyond your means.

 

What is a Good Credit Score?

Credit scores are divided into ranges. If your score is between 300 and 579, it is comparatively quite low and you may have to pay higher interest charges. A score between 580 and 669 would allow you to obtain credit but you would need a very stable income to convince lenders of your repayment capacity. A score between 670 and 739 is considered to be a solid credit rating and you should be able to obtain loans at reasonable interest rates. An excellent credit rating between 740 and 799 would allow you to get loans at very low-interest rates. A score between 800 and 850 would make you the poster child for every lending firm. You would be able to get loans at extremely low-interest rates.

How to Improve One’s Credit Score?

  • Pay your bills on time: The best way to maintain your CIBIL scores is to pay your dues on time. It indicates that you are a responsible borrower and lenders will be more likely to trust you to repay their loans.
  • Keep your credit utilization low: It is important to keep your credit utilization under 30% of your available credit. If you have a high credit utilization, paying down your balances can help improve your credit score.
  • Monitor your credit report: Make sure to check your credit card report thoroughly before applying for a loan. If you find any discrepancy, talk to your lending firm.
  • Maintain a good mix of credit: It is best to have a mix of loans in your credit history because it shows that you have experience repaying every kind of loan. It also helps to improve your credit scores over time.
  • Limit your new credit applications: Applying for too much credit in a short period of time can lower your credit score, so it is important to limit new credit applications. It is best not to make a big purchase right before applying for a loan.
  • Keep old credit accounts open: Length of credit history is an important factor in determining your credit score. Keeping old credit accounts open can help improve your credit score.
  • Work with a credit counselor: If you are struggling with debt, a credit counselor can help you develop a plan to pay off your debt and improve your credit score. If you want to consult with experienced finance professionals, reach out to Andromeda’s.

 

Payment history and credit utilization are the two most important factors that determine your credit score calculation. This is why it is important to make all your payments on time. Also, try to keep your credit utilization low to maintain high credit scores. The best way to make sure that you pay your monthly dues or credit card balance in full every month is to set up reminders. If you have enough spare money in your account, you can automate these payments to ensure that you never miss payment deadlines.

If you do not have poor credit scores, do not worry. It is never too late to work on them. Maintaining a good mix of credit, monitoring your credit report, and working with a credit counselor can also help improve your credit score over time. By taking these steps, you can improve your credit score and achieve your financial goals. If you want more credit debt management tips and best credit card practices, head to Andromeda’s official website.