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You should know your Credit Report and Credit Score better

By Sally Maison
Published: Monday, June 21st, 2010

The time has come when man has to depend on three figures to actually decide what he can or cannot consume. And those three figures represent the credit score. The credit score is calculated by a formula which is based on a number of factors which are represented in the credit report.

The credit report is a consolidated listing of all the credit activities pertaining to a person. It includes information such as credit history, current accounts, public records and enquiries.

Let us see what a credit report is and based on this we shall understand how the credit score is calculated.

A credit report can be divided into four broad categories. The first part is the personal information. This would involve the name of the borrower, the home address and other personal information like social security number, date of birth etc. always make sure that there is nothing wrong with these, because the personal information is very important.

Secondly, there is the credit information or credit history. This will list all the different credit accounts you have held, the amount owed and the age of your accounts. It is always better to have an old credit card for this reason as the age is a great factor in deciding your credit score, however we will come back to that later.

Thirdly, there is the public record information. This would include all court judgments, tax liens and bankruptcies. This is one category which better be blank if you want to even get a loan. Even if you do, the rate of interest will be practically obscene, because the banks will mark you as a risky customer.

Lastly, there is the recent enquiries column. This will have the list of all the agencies or people who have requested for a copy of your credit report over the last year.

Now that we know what exactly constitutes the credit report, we will analyze how the credit score is calculated.

The credit score depends on a number of factors which are weighed out in a formula. However, we do not have access to the formula as it belongs to fair Isaac and company. But we can get a fair idea of what exactly is the prominence of each factor in the credit score.

35% is based upon your credit history, that is how you have behaved with respect to repayment of dues.30% is based on the number of open loans you have. The more the number of loans to be paid, the lesser is your score. 15% is based on the duration for which you have had your accounts. Older accounts have a better credit score.10% is based on new credit, hence always think before you go out and get a new credit card. And then lastly, 10% depends on the mix of accounts that you hold like revolving credit accounts, investment credits and credit cards.

We have broadly gone through both credit scores and credit reports, it is now up to you to go out and make use of your new found knowledge!

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