Understanding the Information in Your Credit Score

Understanding Your Credit Score

A Credit Score comprises a very useful instrument to a lender that helps him minimizes his risks by getting to know beforehand the extent to which he could rely on a borrower to pay back his money as agreed on the due dates. As such, it is not fair for us to blame him for refusing to lend to a loan applicant with a bad credit score, because lending money for profit is his business.

Credit Institutions and lenders assess loan applications taking the credit score as the index of creditworthiness of any prospective borrower to estimate the risk involved in lending to a borrower. The credit score comprises a statistically calculated value by credit agencies from credit reports furnished by all registered lending / credit institutions containing borrowers’ respective records of past borrowings and repayments and other relevant data that they are obliged to furnish to the Credit Agencies.

It is through this mechanism that all data pertaining to a person’s past borrowings comprising of amounts borrowed with dates, amounts repaid with dates indicating non-payments, delayed payments, prompt payments etc become available to the lending / credit institutions who are then able to act on these credit reports before lending to prospective borrowers.

Calculate Your Credit Score

Computation of the Credit Scores is strictly based on the credit reports furnished by the lending institutions themselves. Despite the differences in the structure of the formulas and methods adopted by the separate credit agencies, they come up with almost identical credit scores in any given situation, which is what really matters.

In order that the credit score remains a meaningful and realistic figure on which alone decisions are taken by lending institutions as to whether to lend or not to a certain individual, credit reporting agencies will only consider the accounts that have run for a period of a minimum six months and updated as at a date not more than six months back as at the date of reckoning. The above will ensure that they base their calculations only on recently updated information on loans with a reasonable long-term continuity.

Thirty five percent out of a credit score gets weighted for your historical records of past performance on repayments including timely payments and also taking missed and delayed payments. Your credit score is also affected by delinquency payments, lawsuits, and bankruptcies etc. that are picked up by credit reports from miscellaneous public records.

Building Your Credit Score

In building up your credit score, another thirty percent is in respect of the credit you have taken in the past. It is not simply the total credit that may be considered, but also the number of accounts from which you have borrowed and how you have maintained their respective balances over time. Maintaining small balances all round on different accounts would have a positive impact in enhancing your credit score.

Another 15% out of a credit score goes for the credit history. The age of one’s earliest account together with the average of the ages of his other remaining accounts would also figure in the determination of a credit score. The length up to which some accounts opened have remained dormant would have an adverse bearing on the credit score. 

Ten percent out of a credit score goes for successes in obtaining new credit in the recent past further subject to how recent the new loan accounts are. Conversely, any requests for credit that have been rejected during the last one year will make the borrower lose points on his credit score. Inquiries received from lenders for credit reports would also have a bearing on the composition of a credit score.

Finally the balance 10% out of a credit score gets allocated for type of credit availed. Into this category will fall any points you are entitled to in respect of your performance pertaining to taking and repaying revolving credit such as credit cards and short term personal loans, mortgages etc.

Credit Score Calculation

In the calculation of a credit score for you, the respective weights given to different categories; or the maximum points you are entitled to score under different categories comprising the total (100%) credit score, such as Historical Records 35%, Credit availed in the history 30%, Age of the Credit History 15%.  New Credit obtained 10% and Type of Credit obtained 10%, remain basically unchanged for all Credit Reporting Agencies while they would slightly differ only in the allocation of points under each head for actual performance. Due to the high extent of uniformity maintained by all Credit Agencies, they arrive at slightly different credit scores that are very close matches for any specific case.