Credit Scores – How is it Calculated
Your credit score determines if you will be able to receive your required funds from lenders. Borrowers need to be fully aware of how they manage their debts as it has an effect on them being approved for future debts. Different credit bureaus have different ways of calculating the credit score. However below is the most commonly used way and the values attached to each category.
Credit history (35 %)
Your previous record of how you have managed your debts has an effect on your credit score. Lender will consider if you have missed any payments in the past of if you have been late with your payments. Prompt payments of debts will increase lender confidence and improve your chances of being approved for debt.
Amount owed (30%)
The amount that the borrower currently owes contributes to their credit score. If a borrower owes a lot of money to a lot of lender it increases their chances of missing a payment. The amount owed will also determine the interest that the borrower will be charged. If most of your income is being consumed by debts, then lenders will find your to be a high risk.
Length of credit history (15%)
The longer your credit history the bigger the chances of you getting a good credit score. People with short history are considered to be high risks to borrow money. If your credit account has been in operation for a long time, then it might work to your advantage. Your credit history also determines if you can be trusted with new credit.
New credit (10%)
Customers with new credit are considered to be high risks as well. Old credit provided proof that you have been well therefore can be trusted to pay back new debts.
Type of credit used (10%)
Lender will also look at the type of credit that you require. If you borrow money for your house or bond or education you are likely to be approved than someone who borrow money for the sake of it.