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The breakdown of credit scores

By Janet Lacey
Published: Wednesday, March 28th, 2012

Credit scores signify the creditworthiness of the individual who is applying for a loan, or purchasing anything with the help of the credit report. This 3 digit number essentially governs the credit points of the individual in terms of credit and is thus of great significance, both for the lender and the borrower. The borrower and the lender both would like to have a balanced credit score so that the lender feels no hitch in lending money and the borrower gets the money that he asks for. Since the credit is essentially directly managed by the borrower, based on the guidelines of the lender (like interest rate, discounts etc), therefore it is primarily considered the responsibility of the borrower to maintain a credit score which is worth great worth from the perspective of the lender. In other words, depending on the value of the three digit number called the credit score, the lender essentially determines whether to lend money and how much to lend money to the borrower. Based on the assessment of the credit score, the lender can determine whether the borrower would be capable of repaying the loan in time, or, what is the creditworthiness of the borrower.

This important numerical credit report of the credit card, had been designed by Fair Isaac and Company, and was previously hidden from the credit card users so as not to confuse consumers with the meaning of the credit score. However, since 2001, the scenario changed due to pressure from the US congress and industry and consumer groups, so that the consumers could now evaluate the credit score in exchange of a fee from credit monitoring services or credit reporting services.

Understanding how credit scores work is essentially the breakdown of credit scores. Although there are several breakdown methods for credit scores, yet the FICO method from the Fair Isaac Corporation is most commonly utilized while determining the credit score of an individual. The FICO method was developed by the Fair Isaac Corporation in collaboration with the three major credit bureaus at work, namely Experian, Equifax and Trans Union.

The 3 digit number is determined through the grades obtained from various aspects of your credit report. The number ranges from 300 to 850, and the score determines the creditworthiness of the individual. Although the exact formula for determining the credit score is still proprietary to Fair Isaac Corporation, yet here is an attempted breakdown of the calculation of credit score.

For the sake of convenience in calculation, the calculation of the credit score is based on different percentile amounts. For example, 35 percent of the score is based on the payment history of the individual. This is perhaps the most important criteria for calculating your credit scores as this part tells the lender how prompt you have been with repayments and stuff. Whether you have filed for bankruptcy or other factors affecting your payment is also reflected in your credit score. 30% of the score is based on the outstanding debt amount, 155 on credit duration, 10% on new credit, and the last 10% is based on the type of credit that you have.

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