A credit score (numeric summary derived from one’s repayment history) summarizes the historical credit information on a credit report by assigning a number to it. There are specific components from one’s credit report that shape/ determine their credit score.
You must have often heard about credit score and may need also read somewhere about the way to maintain a good credit score and the way to enhance it. However, have you ever wondered how your credit score is determined? Which are the factors that are taken into consideration by credit information companies like CIBIL, Equifax and Experian while calculating your credit score?
Typically, the subsequent rough weightages are considered in making up credit score:
Payment History (35%): Your payment history alone makes around 35% of the entire credit score. No got to say, it's extremely important to be according to the payment of your bills. Otherwise in addition to paying fine for late payments, you'll also find yourself ruining your credit history.
Total credit (30%): No matter the amount you owe is little or big, you must try to get obviate it because it comprises around 30% of the credit score. Minimization of outstanding debt helps improve one’s credit score.
Length of credit history (15%): The length of your credit history makes up almost 15% of the entire credit score. Also, the amount one has been using one’s credit has a crucial bearing to the score.
New credit (10%): The weightage of 10% is given to any new credit applied for. Therefore, you should to consider before applying for a loan or credit score.
Demographics (10%): Things like your age, location of your residence and therefore the number of IDs (such as PAN card, voter ID, etc) you own also help determine your credit score. This comprises nearly 10% of one’s credit score.
It is, however, important to notice that while a number of these factors could also be weighed more heavily than others, no factor works independently of the others. In India, the credit score typically ranges between 300 and 900. While the Experian credit score itself may differ across the bureaus, typically an honest credit score would be above 700. the particular cut offs for a suitable credit score may vary across banks consistent with their risk appetite. A borrower should understand and evaluate of these factors to be ready to build an honest credit score.
An individual, therefore, must build a credit footprint which will let the banking industry evaluate their creditworthiness.
