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Computing Credit Scores

By Ruth Racey
Published: Sunday, November 29th, 2009

Credit has undoubtedly changed the American way of living in so many ways. Because of the sheer number of consumers making use of plastic, there arose a need for a comprehensive and centralized information collection system to manage credit records. Consumers usually own more than one credit card. To keep track of the cardholders’ credit histories, the federal government authorizes three credit bureaus, namely Experian, TransUnion, and Equifax. Only these three agencies can collect, collate, and update the records of cardholders, commonly known as credit reports.

These reports also determine a consumer’s credit score. A credit score is essentially a numerical rating of how well a cardholder is performing financially and credit-wise. Credit scores allow lenders and creditors to determine whether a particular individual deserves to receive better credit limits. Most financial institutions rely on these scores to immediately see if they can trust borrowers and cardholders.

Of course, it is equally important for cardholders to know how the credit agencies come up with credit scores. The bureaus actually use a specific formula to determine a credit score. Scores range from a low of 350 to a maximum of 850. Experts contend that a score of less than 700 requires urgent attention from the consumer to avoid having their records tainted.

A cardholder’s credit history accounts for 35 percent of the total score. Payments more than 30 days late mean corresponding point deductions. Even bankruptcies can cost precious points for consumers struggling to maintain good credit standing. The credit bureaus also pay close attention to more recent late payments, which means that cardholders always have to update their payments to avoid poor ratings.

Thirty percent of the credit score is also based on how a consumer manages his or her loans. The credit bureaus usually consider the ratio of the outstanding debt to the approved credit limits. A lower ration means a higher score.

Credit history also plays an important role in computing for credit scores. In fact, the age of a cardholder’s credit amounts to 15 percent of the total score amount. A longer credit history would mean higher scores.

Frequent inquiries for loans can also lower credit scores. Asking lenders for new loans can mean fewer points whereas obtaining new loans can mean more points, eventually improving a cardholder’s credit record. A total of 10 percent of the credit score amount comes from these particular factors.

The last 10 percent typically takes into consideration the mix of different loans and balances a consumer currently has.

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