How Credit Score is Calculated?
A specific calculation of credit score has not been revealed by the agencies, however, FICO and VantageScore are two widely used credit models. Credit models use various factors to calculate the credit score by assigning weightage to each such factors as explained below:
1. Payment History (35%): Payment history reflects the record of the repayment of the credit account. This considers on-time payments, late payments, defaults, or bankruptcies. On-time payments increase the credit score while defaults or late payments adversely affect the score.
2. Credit Utilization (30%): Credit utilization shows the ratio of current credit card balances to the credit limits of a person. The lower this ratio is better the score.
3. Length of Credit History (15%): This factor reflects a period for which credit accounts have been active. A longer credit history has a positive impact on the credit score.
4. Types of Credit in Use (10%): Credit Mix is a factor that counts in the variety of credit accounts a person has including credit cards, installment loans, and mortgages. A mixture of various types of credits has a positive impact on credit scores.
5. New Credit (10%): New credit considers recent credit applications. Too many recent applications for loans may harm the credit score as it shows the risky behavior of the borrower.