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The ABC of Credit Score

By Sally Maison
Published: Monday, June 14th, 2010

The credit score is basically a three digit number. It is these three digits which will decide how much loan one can apply for and at what rate of interest.

Nowadays, most of us depend on credit to go about all our purchases. This is in fact a very disturbing trend because you are consuming something without actually having the money to pay for it. And you are relying on your future capacity to pay it back. But it’s almost impossible to go about ones daily life without borrowing from creditors. Hence it becomes important to understand and try to make your credit score better.

The credit score was developed by the fair Isaac and company, an organization which records and collates all the credit information of people who are active in credit circles. The credit score was previously not available to the general public, but after a lot of lobbying by the congress it was finally decided that the score would be made available to all on request. This makes it possible for one to check up on the credit score and decide on future plan of action.

You can request for your score by asking for a credit report from any one of the credit reporting agencies. Place a request for it through the centralized agency which is responsible for disseminating this information, this way you don’t need to pay for it.

So now let us see how the score is exactly calculated. The credit score is based on your credit report. The credit report is not a number, but a load of information about your credit activities. The credit score is calculated based on this information. But how exactly it is calculated or what formula it is based on is something that is not openly disclosed since it is proprietary information belonging to fair Isaac and company.

Broadly speaking, we can categorize the importance of each segment of one’s report on percentage basis.

Almost 35% of your score is based on your credit history. That is how you have gone about repaying your loans. Things like extending the deadline of repayment will adversely affect your score. Things like late payment, filing for bankruptcy or the bank sending people for loan retrieval would be very bad for your score.

Then you have the outstanding debt. It accounts for 30% of your credit score. This is in short the loans that you currently hold. Like a loan on your car or education which is still current and not completely paid off. It also includes stuff like how many credit cards you hold that are at their credit limits. Having a lot of cards at their limit will be a bad idea. Make sure each of your card is at lower than 25% of its limit.

15% of the score is based on the time you have had credit. So obviously, it will be more for an older person who has been earning for a long time.

10% is based on new credit. Like getting new credit cards is always a bad idea. It will temporarily get your score down.

And then lastly, 10% of the score depends upon the mix of credit accounts that you hold, like revolving credit accounts and investment loans.

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