How Is Your Credit Score Calculated?

A credit score is a 3-digit number on which banks rely to determine whether an applicant is eligible for a loan and credit card or not. Your credit scores are calculated by the credit bureaus by using the credit history listed in your credit report. Each credit bureau has its own credit scoring model which they use to compute your credit score. Your credit score may be different, but the factors that each bureau takes into consideration are same which are as follows-

  • Payment History: 35%
  • Credit Utilization: 30%
  • Credit History Length: 15%
  • Credit Mix: 10%
  • New Credit: 10%

Let’s look at all these factors in detail with the level of impact they have on your credit history and score.

  1. Payment History- 35%

    Payment history is one of the most important factors that affect your credit score. If you have been consistent in paying your credit card bills and loan EMIs, it shows that you are a responsible borrower and are at a lower risk of default. A responsible credit behaviour will also make you eligible for lower rates on loans and credit. Making late or skipping your payments on time will lower your score by several points.

  2. Credit Utilization Ratio- 30%

    Credit usage is the second biggest factor that affects your credit score. A credit utilisation ratio refers to the total amount of credit you have used in proportion to the cumulative total credit limit available to you. The credit utilization ratio is calculated by dividing your overall outstanding balance by your total credit limit. Ideally, you should use only 30% of the credit limit to maintain a high score.

  3. Credit History Length- 15%

    The average length of your credit history is also considered while computing your credit score to evaluate your creditworthiness. If you have responsibly handled your credit during the past and continue to service payments on time on your active loan and credit card accounts, it will positively affect your credit score. A long credit history helps lenders take a sound decision on whether to offer you credit or not. Therefore, it is advised to leave the accounts open that you've had for a long time.

  4. Credit Mix- 10%

    It is important to maintain a good balance of secured loans as well as unsecured loans. Having a diversified portfolio of credit accounts helps to boost your credit score. Although it has a lower impact on your score as compared to the other factors, you should not ignore it. Your credit mix reflects the experience you have with handling both types of credit. Along with the type of accounts, your credit inquiries (hard inquiries) are also taken into consideration while calculating your score. A hard inquiry is made by a prospective creditor with whom you have applied for credit. A single enquiry won’t impact your scores by far but too many credit requests can seriously affect your credit health.

  5. New Credit-10%

    Credit score calculations also consider how many new credit accounts you have opened recently. New accounts may impact the length of your credit history. Too many accounts or inquiries indicates increased risk and it can hurt your credit score. So, you should avoid applying for multiple credit products at the same time to safeguard your credit score from getting hampered. Maintaining these factors is very important as they have a direct impact on your credit score which further affects your ability to get approved for loans or credit cards by the lenders.