How A Credit Score Is Calculated

Having a good credit score is vital for every person who wants to make a transaction with banks for business or housing loan. But how do we determine if we have a decent score? How is it even calculated? Today, we are going to discuss about it and give you more information on how the credit scores is calculated.

To begin with, a credit score is a value given to a person that represents his or her creditworthiness. In other words, the score given that was given shows a person’s ability to accomplish all the financial responsibilities a person has in the past and future transactions as well.

Factors That Affect Your Credit Score

Usually, the credit score is between 300 to 850. If the person has a score 600 points and above, it means that the person has good impressions to potential lenders. But if it is 400 and below, it is highly unlikely for a person to have good rates to the lenders.

So, how does these lenders calculate your credit scores? Here are three major factors that can affect on how they calculate your credit scores.

Payment History

Payment history is one of the major contributors to how your credit scores are calculated. If the lenders see that you are paying all your obligations on time and never skipped payments, most probably you will have a higher score.

Duration of Credit History

The next biggest contributor to your credit score is the length or duration of your credit history. This is history of all your credits of your bank transactions. It will also show on how many accounts you owned and if you are good standing account holder.

Types of Account You Have

The last but not the least contributor to your credit score is the number of accounts that you have and how many types of account you have. If the lenders can see that you have several account types and maintaining them in good standing, you will most probably have a higher credit score.

Conclusion

There is not really a given formula on how creditors calculate your credit scores. Even if there is a formula, they will not share it to the public. What we can only do is to be aware of the major contributors that we have discussed. By knowing them, we can somehow estimate our scores and hope to have good rates for our future transactions.