How Credit Score is Calculated?

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

Experian Credit Score Range

Equifax Credit Score Range

CRIF High Mark Credit Score Range

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