How credit score calculated

 

Credit scores are calculated using various factors and algorithms that evaluate an individual's creditworthiness. While the specific formulas used by credit bureaus may vary, the following factors generally play a significant role in calculating credit scores:

1. Payment History (35%): This is the most crucial factor. It considers whether you have made your credit payments on time, including credit cards, loans, and other forms of credit. Late payments, defaults, or accounts in collections can negatively impact your score.

2. Credit Utilization (30%): This factor measures how much of your available credit you are using. It is calculated by dividing your total credit card balances by your total credit card limits. Keeping your credit utilization ratio below 30% is generally recommended for a positive impact on your score.

3. Credit History Length (15%): The length of your credit history matters. A longer credit history can be advantageous, demonstrating a track record of responsible credit usage. This factor considers the age of your oldest account, the average age of all your accounts, and the age of your newest account.

4. Credit Mix (10%): Having a diverse mix of credit accounts, such as credit cards, loans, mortgages, or retail accounts, can be beneficial. It indicates that you can handle different types of credit responsibly. However, it is not necessary to have every type of account to have a good credit score.

5. New Credit Applications (10%): Whenever you apply for new credit, such as a loan or a credit card, it generates a "hard inquiry" on your credit report. Multiple hard inquiries within a short period may suggest higher credit risk. It is generally advised to minimize the number of new credit applications.

Additionally, negative information like bankruptcies, foreclosures, or liens can significantly impact your credit score. These factors can stay on your credit report for several years.

It's important to note that different credit scoring models may prioritize these factors differently, and individual credit bureaus may use their own proprietary algorithms. The most commonly used credit scoring models in the United States are FICO® Score and VantageScore®, both of which consider similar factors when calculating credit scores.

In India, credit scores are calculated by credit bureaus based on the credit information they receive from banks, financial institutions, and other lenders. The primary credit bureau in India is the Credit Information Bureau (India) Limited, commonly known as CIBIL. Other credit bureaus like Experian, Equifax, and CRIF High Mark also operate in the country.

The calculation of credit scores in India follows a similar framework to that of other countries but may have some variations in terms of weightage assigned to different factors. The factors considered for calculating credit scores in India typically include:

1. Payment History: This is a significant factor, similar to other credit scoring models. It evaluates whether you have made your credit payments on time and if you have any late payments, defaults, or accounts in collections.

2. Credit Utilization: The ratio of your credit card balances to your credit limits is considered. Keeping your credit utilization below a certain threshold is advisable for a positive impact on your score.

3. Credit History Length: The length of your credit history is considered to assess your creditworthiness. A longer credit history is generally beneficial.

4. Credit Mix: Having a diverse mix of credit accounts, such as loans, credit cards, and retail accounts, is considered advantageous.

5. New Credit Applications: The number of recent credit applications and inquiries on your credit report are taken into account. Multiple applications within a short period can potentially impact your credit score.

It's important to note that the specific algorithms and weightage assigned to each factor may differ among the different credit bureaus operating in India. Each credit bureau has its own credit scoring model and methodology.

To maintain a good credit score in India, it is essential to make timely payments, keep credit utilization low, maintain a healthy credit mix, avoid excessive new credit applications, and manage credit responsibly. Regularly checking your credit report from the credit bureaus and correcting any errors or inaccuracies is also recommended.