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Understanding the Credit Score

By Janet Lacey
Published: Sunday, September 20th, 2009

Before we get into understanding the credit score, first let’s try and understand what it basically is. A credit score is like an SAT score or any other competitive exam score which actually gives a snapshot of your abilities to pay your dues. And it also gives an idea as to how much you owe.

So that was about the basic layman’s understanding of the score. Let’s get into how it’s actually calculated. Generally, the credit score has the following parameters.

35% of the score is constituted by your payment history. It depends on whether you have paid your bills on time. If not how late you were, or how often you were late and when it happened. So make sure you pay your dues on time. Even if you are late, call up your lender and let them know and renegotiate the terms. Usually, the lender will not file a report for a few days after the due date and some of them will file a report only on the second or third default on the due date. So if you are a good negotiator, use those skills in convincing those people.

30% of the score is the amount owed on each account. It also shows how much credit limit you have used. So not using beyond 10% of your credit limit for 3 months before your loan filing is a very good idea.

10% is based on what sort of debt you have. Like the interest rate on each debt, the amount that will potentially be accumulated in the debt, etc.

10% is based on how many new accounts you have or how many queries you have had. This is actually a very bad parameter. Because an innocent request for your credit history will actually land your score in the soup. For example, if you go out to buy a new car and even if you have not enquired about a loan and the buyer wants to sell real bad, he might go and request for a credit report from the bureau and this will send your score southbound.

15% is your credit history or how long you have had each account. The older your accounts the better. So obviously, a youngster will have a lesser score than an old-timer. All you young hot shots better lie low till you get some age on that account. It’s really not wise to start of work with an EMI to pay up every month.

This is a general vague understanding of what the score actually constitutes. There are a lot more parameters that might actually go into it when the bureau is calculating it. And those scores are not accessible to the general public.

There are a number of organizations out there that actually give out the credit score for a fee. It’s a good idea to try them out; at least you will get a vague feel of your financial stability. And then you can work on improving your score.

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