Components and weightings of credit scores are clearly explained

Lenders and credit providers are required to make reasonable inquiries about your financial situation whenever you apply for a loan package. Your credit score is used to assess your creditworthiness and repayment capacity. You should therefore be aware of the factors that go into calculating your score.

What make up a credit score?

While the scoring formulas are quite complicated and closely guarded, their elements are not. Here is a list of the components and the pertinent percentages assigned to each component to help you understand:

35% for your “Payment history” – Late payments on debts, including mortgages, credit card bills, auto loans, etc. will cause score to drop. Your score will increase if you pay your bills on time.

30% for “Credit utilisation” – Your credit utilisation is determined by the proportion of your total available revolving credit or credit limit to your outstanding revolving debt, such as credit card balances.

15% for Length of your credit history – Your score may be positively impacted by the length of your credit history.

10% for Types of credit used – Having experience handling various forms of credit (such as mortgage loans, instalment loans, revolving credit, personal loans, etc.)

10% for Recent searches for credit – When you apply for a credit card or home loan (whether revolving or not), you will submit hard credit inquiries, which can lower your credit score, particularly if you do so frequently. If you are looking for a mortgage loan or auto loan (“rate shopping”), for instance, a fortnight or 45 days), you will likely not experience a meaningful decrease in your score as a result of the credit enquiries. Since all hard inquiries that take place within 14 or 45 days of one another are treated as one in the scoring models.

What Results from Credit Inquiries?

All inquiries are recorded and visible on your personal credit reports for two years, but after that time they have no impact because the majority of credit scoring systems ignore them.

Some inquiries (known as “soft inquiries”) are not taken into account by credit scoring systems and have no bearing on your score. These “soft inquiries,” which don’t affect your credit score, are listed below:

>> A report obtained by you for personal use

>> A report obtained by the employer for employee verification, or

>> A report obtained by companies initiating pre-screened offers of loan or insurance

So these are the factors that go into calculating your score. I sincerely hope that this article makes you more knowledgeable about credit scores.