Credit

Credit Score

A consumer’s creditworthiness is expressed in figures referred to as credit score. Credit bureaus are responsible for sourcing the credit score. There are different scoring methods but the one that is widely used is the FICO method from Fair Isaac Corporation.

How is your credit score determined?
Credit scores range between 300 and 850. Given below is an overview of how the credit score is determined.

Types of credit-10%
10% of the credit score is calculated depending on the types of credit you have presently. Types of credit may be installment loans as well as credit accounts.

Availing new credit-10%
Availing new credit negatively impacts credit score for a short time span. There are 2 types of inquiries on credit. One is known as the hard inquiry and the other is known as soft inquiry. Hard inquiry refers to the inquiry conducted by the creditors. These creditors have been granted permission by you for conducting inquiries. Soft inquiries on the other hand do not impact score and these are inquiries which you conduct to know the status of the score. Hard inquiries affect credit score negatively.

Duration of credit availed-15%
The duration for which you have had credit makes up 15% of the credit score. The longer the period better it is. The reason being, if a detailed overview of the payment history is obtained, it is easier to predict payments in the future.

Outstanding debt-30%
It is desirable to keep the score high by restricting the card balances of credit cards at 25% of their credit limits. Greater the number of credit cards close to their credit limits, lower is the credit score.

Payment history-35%
Payment history is one of the main factors determining your credit score. A lender tries to find out how regular you have been with your payments over the years. This also implies the payment habit of the consumer.

How to improve your credit score?
There are several ways in which you can improve your credit score. Given below is a list of what you can do to take your credit score higher.

• It is best to be regular with payment of bills.
• If there are old accounts which you are not using, it is better to keep them.
• If you intend to opt for a big loan (like mortgage), it is better not to open a new credit account.
• Do not allow anyone to make inquiries on your credit report without any concrete reason.
• Try to keep your card balances much lower than your permissible credit limits.
• Get your credit report rectified if you find any inaccurate information.

Even though a simple 3 digit number it may appear, a bad credit score can prevent you from getting employed, renting a particular premise, availing a fresh loan etc.