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How is Your Credit Score Calculated? Understanding Credit Report Score


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A large number of individuals are oblivious of their credit scores and how they are calculated. These are now increasingly used by employers, lenders, landlords and car loan vendors. Unfortunately most consumers are not aware of it and how it is calculated.

Its calculation is based on a credit report. A special type of software from Fair Issac Corporation Company or FICO is used for this. That is why it is also called a FICO score.

A credit report is a detailed account of an individual's credit history, debts, loans, repayments and credit inquiries. It shows if a person has been paying his monthly bills in time and whether there have been any defaults. If also indicates if a person has fulfilled the terms of contract with lenders, the types of credit he is having and his complete credit history.

The three main credit bureaus which maintain an individual's credit record are Equifax, TransUnion and Experian. Banks, utility companies and other lenders have direct links with these companies. All financial details with individuals tend to be reported to them after every loan and every repayment. Any non-fulfillment of credit obligations gets immediately reported and included in a credit report.

The first step in improving credit rating is to understand a credit report. It is composed of the following components:

Payment History

This accounts for 35% of the rating. It indicates if monthly bills have been paid in time and if there are have been any overdue amounts.

Extent of Indebtedness

Many individuals may are ignorant that their volume of credit constitutes about 30 percent of their score. Thus if a person has been maximizing his credit limits, that will affect it negatively. Therefore, it is prudent to keep utilization of credit below your borrowings limits, preferably below 40%.

Length of Credit History

The longer a person has been having credit, the better it is. The length of time over which a person has been having credit weighs about 15% of the total.

Types of credit

Composition of one's credit accounts for 10%. It could be a mix of loans, credit lines, student lines, credit cards, car loans, student loans, retails credit etc. Some of these like student loans are on softer terms while as some like credit card debts carry very high rates of interest. While the former may not be viewed as negatively, the latter is quite repugnant.

New Credit

It may be surprising to know that even credit inquiries on one's file makes up about 10%. So try to limit the number of credit inquiries.

A credit score varies between 350 and 850. The average is about 650 to 700. Any number above 680 is considered to be good for any type of credit and below 560 poor. While 850 indicates an excellent score, 350 is a very bad.

Credit history of up to 7 years is used in its calculation. In order to fix it, it is important that credit card debt is completely eliminated, all monthly bills are paid in time and credit is used judiciously. If one credit has gone bad due to some reason, one should rebuild it as fast as possible. How to raise your rating starts undoubtedly first with understanding.

The author has background in business, economics and finance. He is presently researching in finding ways to make money and working on the following website and blogs:


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