What Does A Credit Score Mean, And What Factors Influence It?

How to Calculate Credit Score

How to Calculate Credit Score

Introduction

A credit score is simply a metric based on the numeric representation of your current credit rating as a virtue of your past credit history and transactional behaviours you have made so far.

Any individual who owns a credit card or has taken out a loan holds a credit score.

Once you understand the importance of having a credit score, the next thing you need to do is what factors are involved in determining its value and its evaluation from where it comes. For that, a credit report which can be generated digitally represents the tabulation of your credit score.

In standard terms, if your credit score ranges anywhere from 300 to 500, then it will be considered as a poor or bad credit score as it is too down the scale, and if it lies somewhere between 600 to 700, then it is deemed as fair or reasonable score but if it comes between 700 to 900 that means you have an extraordinary credit score and you can take advantage of the loan negotiation perks.

It is essential to learn the foundation of what builds your credit score and what practices harm it. Because knowing the fundamentals of it can make your vision clear towards understanding the credit score efficiently. Let’s dig deeper and learn more about what influences our credit score.

How To Calculate The Credit Score?

Calculate credit score

In general, credit scores are calculated with the help of the CIBIL score. Following are some notable elements that can increase your credit score if you preach well. For a user-friendly experience, it has been depicted below in the simplest form of the factors that influence your credit score calculations the most.

Length of credit history: 15% of your credit score is determined by the size of your credit history. When it comes to credit history, most credit scoring models consider the average age of your credit. This is why keeping your accounts open and active is a good idea. It may seem prudent to avoid applying for credit and accumulating debt, but if lenders have no reviewing credit history, this can hurt your score. In the end, the longer you have made on-time payments, the higher your credit score will be.

Types of credit: Your account types contribute 10% of your overall score. It might include having a diverse set of accounts, such as instalment loans, house loans, and retail and credit cards, which can raise your credit score. However, it will not help you achieve a good credit score if you use one credit responsibly. For example, you may need a mixture of secured and unsecured loans. It means you’ll need a variety of credit, such as a mortgage, a personal loan, a car loan, a credit card, and so on. Instead of having just one sort of credit, or credit line, having the correct mix will improve your credit score.

Payment history: Your payment history consumes the highest weight age of the total amount i.e., 35% of your total score. It shows whether you pay your bills on time, how often you skip payments, or how recently you have missed payments.

Also Read : What Is A Credit Score And What Is It Used For?

Usually, late payments of more than 30 days will be reported to your lender, lowering your credit score. The amount of money you owe on a bill, the number of accounts with late payments, and whether you’ve brought the accounts current are all variables. Your score will be greater only if you have a larger percentage of on-time payments because when you skip a cost, it negatively influences your credit score.

If you’re looking for ways to calculate what makes your credit score then Buddy Score can be a great help with assisting you to know your credit value in no time.

Amounts owed: As shown in the pie chart, you can see that the parts you owe cover the second most place in the overall score. Your credit score is also based on how much money you owe on loans and credit cards. It is determined by the total amount you owe, the number and types of accounts you have, and the ratio of money due to the available credit. High amounts and maxed-out credit cards hurt your credit score, but smaller balances can help you improve it if you pay on time. New loans with minimal payment history may temporarily lower your score, but debts closer to being paid off can raise it due to successful payment history.

New credit: The final 10% is made up of recent credit activity. If you’ve lately created a lot of accounts or applied for them, it could either indicate that you are suffering through financial problems or dismiss your loan request. One thing to pay attention to is that every time you ask for new credit, the lender will conduct a credit check on you, and if you have too many queries, it will negatively affect your credit score. Hence, you always suggest that you take out new credits wisely only when required.

Also Read : A Comprehensive Guide to Credit Score, How It Works And The Factors That Affect It!!

Wrapping up

It is undeniably true that your credit score is one of the most important reflections of your creditworthiness, and the higher your credit score, the lower you risk yourself to lenders. And to make an informed and wise decision, you may need guidance from experts and financial advisors to approach a fruitful outcome with no scope of loss and fraud. Buddy Loan is a good platform for such instances and will help you thoroughly prioritise customer satisfaction.

You May Ask

  1. What can happen if you do not make timely payments?

You should pay off your bills and other obligations duly in a consistent manner to avoid any hindrance to your credit score. If you don’t pay them promptly, it might become a problem, and you may find yourself in a difficult spot while applying for any loan in the future.

  1. What help does credit score do in the loan approval process?

Your credit score has a lot to do with your loan request chances. Having good credit can lead you to get a low-interest rate loan disbursal. You must manage your credit responsibly.

  1. How can you avoid a bad or poor credit score?

To avoid having a poor credit score, you need to follow these practices:

  • Punctually paying off your debts, bills, and other transactions without any delay
  • Do Not max out credit card utilisation and focus on using within certain limits.
  • Ignore making too many inquiries to lenders all at one time.
  1. Are credit scores and CIBIL scores the same?

Frequently people get confused between a credit score and a CIBIL score. To get a clear idea, CIBIL is one of India’s four primary credit bureaus authorised and licensed by the Reserve Bank of India (RBI). The main distinction between CIBIL and credit scores is that credit scores can be obtained from India’s four credit bureaus.