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steps involved in calculating the credit score:
Responded by:Responded on25th May 2015
How the credit score is calculated is a very difficult question to answer as this is computed using a propreitory algorithm and technology, and no one is sure about how it is precisely calculated. But a lot of things go into evaluation of the credit score such as:
35% - Payment History
30% - Amounts Owed on Credit Cards
15% - Length of Credit History
10% - New Credit
10% - Variety of Credit
The percentages provided above are purely indicative, and are based upon experience of reviewing numerous credit reports.
Payment History - basically means whether or not you have made the payments on time in past. One 30-day late payment will drop a borrower’s credit score 20-30 points, and it typically takes 6-9 months of on-time payments after that late payment to make up for what was lost.
Amounts Owed on Credit Cards refers to the current balance reporting on a credit card. If that balance is over 50% of the cards limit, the borrowers score will be lower. The reason for this is that the credit bureaus have determined a greater likelihood of default occurring when balances are over that threshold.
For what duration a borrower has used debt is calculated with Length of Credit History. The longer the duration for which the accounts are open, with on-time payments, and low balances (for credit cards), the better.
New Credit initially lowers the credit score. However, that score decrease should be negated after making the first payment on time.
The Credit Bureaus also like to see a good Variety of Credit on a credit report. A report with only installment loans will show the Bureaus that a borrower can maintain a positive payment history when the payments each month don’t change, but they don’t know how they would be with a credit card, that may change it’s payment from one month to the next.
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