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How Credit Score is Calculated?

How Credit Score is Calculated?

finance
August 1, 2022
5 min read
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How Credit Score is Calculated?
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A credit score is a three-digit number that banks use to decide whether or not a potential borrower is qualified to borrow a loan or credit card. The credit bureaus use the detailed credit history in your credit report to determine your credit score. Every credit agency uses a different credit scoring formula to determine your credit score. Although your credit score may vary, the variables that each bureau considers are the same. 

To calculate a credit score, credit bureaus have different algorithms. In India, there are four (4) major credit bureaus, namely - CIBIL, Experian, Equifax, and CRIF High Mark. All of these credit bureaus have different scoring models and hence, your credit score may vary from credit bureau to credit bureau. However, there is one common aspect when it comes to credit score calculation and that is the factors that are taken into consideration by these credit bureaus. Also, there could be another reason you have different credit scores. Lenders and banks may not report your financial activities to all the credit bureaus. This may lead to different credit score calculation. 

So, what are the common factors that are taken into account to calculate a credit score? Let’s find out. 

Factors Used for Credit Score Calculation

There are generally four (4) factors that are used to calculate a credit score. The weight each component has in terms of how it affects a credit score calculation can change depending on the scoring model being used by the credit bureau. 

  1. Payment History
    Credit cards, personal loans, car loans, bike loans, education loan, and home loans may all be included in your payment history. Your payment history provides facts on late or missed payments, bankruptcies, and information regarding how you have made your payments against the debts that you have. Credit score algorithms often consider your payment history, amount due, and how recently and frequently payments were missed. This is the reason your payment history is considered to calculate your credit score. 
  2. Credit Utilisation Ratio
    Your credit utilisation ratio is another major factor that plays a vital role in your credit score calculation. Credit utilisation ratio means the total amount of credit you have used against the total available credit to you. If your credit utilisation ratio is more than 30%, your credit score will be impacted. Maintain a credit utilisation ratio of 30-40% if you want to improve your credit score. 
  3. Total Number of Accounts
    The type of credit mix you have in your portfolio also impacts your credit score calculation. Having a variety of credit products such as a home loan, auto loan, a personal loan, and a credit card will help in boosting your credit score. Hence, the total number of accounts you have is taken into consideration for credit score calculation. 
  4. Age of Credit
    The older your loan or credit card, the better it is for your credit score calculation. Do not close your old accounts even if you have paid off the debt. Lenders can make an informed choice about whether to grant you credit if you have a long credit history. As a result, it is suggested that you maintain open older credit cards accounts.

However, the impact each of these factors has on your credit score calculation. Here’s a snapshot of how much impact these factors will have while calculating your credit score:

  1. Payment History – High Impact
  2. Credit Utilisation Ratio – High Impact
  3. Age of Credit – Medium Impact
  4. Total Number of Accounts – Low Impact

Factors that are not Considered for Credit Score Calculation

It is critical to realise that your credit score simply represents the details of your credit report. Your lender or bank may take additional data into account while assessing your profile for a loan or credit card. There are other details such as your age, present salary, or tenure of employment, are not taken into consideration for calculation of credit score. 

What is the Credit Score Range of Different Credit Bureaus in India?

CIBIL Credit Score Range

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CIBIL Credit Score Range

Credit Rating

750-900

Excellent

650-750

Good

550-650

Average

300-550

Poor

Experian Credit Score Range

Credit Rating

850+

Excellent

750-850

Very Good

650-750

Good

500-650

Low

300-500

Very Low

Equifax Credit Score Range

Equifax Credit Score Range

Credit Rating

800-850

Excellent

740-699

Very Good

670-739

Good

580-669

Fair

300-579

Poor

CRIF High Mark Credit Score Range

CRIF High Mark Credit Score Range

Credit Rating

750-900

Excellent

650-750

Great

500-650

Low

300-500

Very Low

What is a Good Credit Score?

Typically, most of the lenders and banks consider a credit score of 750 or more as preferable. However, each lending institution has its own system for assessing risk. For instance, a bank may accept a loan application if your credit score is above 750 while another bank may consider a score above 700 to be good enough for your loan application. 

However, lenders and banks rely heavily on your credit score. It is crucial that you monitor your credit report regularly and maintain a good credit score. 

FAQs Related to Credit Score Calculation

Who calculates CIBIL score?

CIBIL - Credit Information Bureau (India) Limited is one of the four major credit bureaus in India that calculates credit score. The credit score calculated by CIBIL is known as CIBIL score and it is updated on your CIBIL credit report to denote your financial journey. 

What is the formula for credit score calculation?

There is no fixed formula that is used for calculating a credit score. Different credit bureaus have different algorithms that are used for credit score calculation. The algorithms vary from credit bureau to credit bureau and hence, your credit score will vary from each of the credit bureau. 

Is salary considered while calculating a credit score?

Your take home salary may be considered by lenders while assessing your credit report to determine your creditworthiness for when you apply for a credit card or loan . However, salary is not considered for credit score calculation by any of the credit bureaus. 

How to know if my credit score calculation on the report is correct?

Review your credit report regularly and if you find some errors, raise a dispute to the credit bureau for getting it rectified. If the factor that you have dispute on is considered for credit score calculation, then post the rectification, you will see the updated credit score.