The credit score of a person or a firm reflects their credit worthiness and it clearly reflects whether the person is financially stable or not. It is like a number which shows the probability of you paying your bills in the specified period.
Your credit score is calculated by analyzing and interpreting the credit report that is prepared. It follows a simple procedure and determines the likelihood of your credit approval.
The exact formula for the calculation of the credit score, or FICO score as it is popularly called in the United States, is propriety for each of the concerned credit bureaus and is not revealed by them. Despite that, a basic break-up of the score and the factors it is based upon are listed below.
§ The Payment History: 35% of the score is based on your payment history. If you have been regularly paying your bills on time then your credit score will benefit from it and if you delay your payments your score will fall.
§ Debt: 30% of the credit score is calculated by computing the total debt you are under. This will be affected by your outstanding unbilled amounts and your credit card bills. The higher your debt, the lower is your score.
§ Time Factor: The amount of time that your credit history is analyzed for accounts for 15% of your credit score. The accuracy of the calculations is directly affected by the number of observations and the longer you have spent in the credit field, the better your credit score will be.
§ Credit Types: This accounts for 10% of your total score. In the past if you have dealt with different types of credit then your credit score will be affected positively. It shows that you are experienced and will benefit.
§ Inquiries: 10% of the total score is calculated by monitoring your inquiries. This shows that you are searching for new credit and brings down your credit score depending on the number of inquiries made.
The final credit score calculated is a three-digit number and its minimum value is 300 and the maximum is 850.
The three major credit bureaus which exist today are Experian, TransUnion and Equifax. These are the companies which prepare the credit reports that are used by the Fair Isaac Corporation (FICO) to calculate the credit score. All the three companies deal directly with the consumers. They have a good reputation and their reports are considered valid by all the major lenders and evaluators in the United States of America. Equifax also finds a place in the New York Stock Exchange (NYSE).
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