One of the prime indicators of your creditworthiness is your credit score. You can improve your credit score by understanding what factors influence it.
Your credit score depends on the following five factors:
- Your payment history
- How much you owe
- The length of your credit history
- The types of accounts you have
- Your recent credit activity
How is Credit Score Calculated?
If you are wondering how a credit score is calculated, you must know that the available credit bureaus are responsible for calculating your credit score. Lenders like banks and non-banking finance companies (NBFCs) consider 750 a good score.
You must also know that each credit bureau has an algorithm for credit score calculation. The factors they consider before calculation are:
Payment History
If you have consistently paid your bills/loan EMIs, it suggests you are a responsible borrower. Responsible credit behaviour will qualify you for faster approval of your loan applications. On the other hand, making late payments will lower your score.
Credit Utilisation
Credit utilisation is the second most crucial factor affecting your credit score. A credit utilisation ratio is the total amount of credit used as a percentage of your total credit limit.
You can divide your total outstanding balance by your total credit limit. Experts advise consumers to use 30-40% of their credit limit to maintain a high credit score.
Credit Age
To better assess your creditworthiness, you can consider your history with credit when computing your score, which has a medium impact. Assume you have previously handled your credit responsibly and have made on-time payments on your active credit lines. In that case, it will improve your credit score.
A long credit history assists lenders in making an informed decision about extending credit to you. As a result, keep credit cards with a long history open longer than newly acquired cards.
Total Accounts
Your total accounts reflect your experience with total edits. Borrowing in large amounts can harm your credit score. However, total accounts have a minor influence. A credit card is a kind of unsecured credit, whereas a car loan or home loan is an example of secured credit.
In effect, a mix of credit and credit inquiries (hard inquiries) helps to improve your credit score. Although it has a lower impact than other factors, it is still vital.
Therefore if you are ever planning to take credit from any organisation or are already borrowing loans, don’t forget to calculate your credit score.
FAQs on how credit score calculation
How credit score is calculated?
Credit scoring algorithms frequently consider your payment history, the amount owed, and how recently and often you missed payments. Your credit history will also show how many of your credit accounts are past due compared to the total number of accounts on file. You can calculate your credit score in this manner.
Will salary affect a good credit score?
Your income and wages will not affect the calculation of your credit score. On the other hand, an income loss may impact you because late and missed payments reported to credit bureaus will lower your credit score.
What is a good credit score for borrowing a home loan?
A good credit score you need to get a home loan is 740 or above.
What do the bureaus consider a bad credit score?
A credit score of less than 580 is a bad credit score.