A Credit Score is a portrait of a person’s credit profile made up of several factors. This numeric value is placed on a scale that helps prospective lenders evaluate how likely you are to pay your debts, this in turn determines what kind of loans you can get. So if you have good credit score its easier to get essential loans like car loans and home loans, because lenders are more confident on your ability to pay back the loan. Further more it enables you to make high cost purchases that you wouldn’t make otherwise. Credit score is a 3 digit number ranging from 200-900 given by credit bureaus to track your credit record. A good credit score can help you in lowering interest rates, higher loan amount, quicker loan approvals, and longer repayment periods.
A Credit score can be determined by 5 major factors that is Credit history, Amounts owed, length of the credit history, Types of credit and new credit. Credit history is a record of how you have handled your money and debt, this includes credit card accounts and other loans, A bad credit history can lead to a bad credit score. Credit History is the most important factor of your credit profile as it accounts for approximately 35% of your credit score. It usually start when you apply for a loan or a credit card. The second factor which account for approximately 30% is Amount owed. This is the area where people often make mistake as amount owed does not mean if you borrow more money it will lead to a bad credit score, in fact not using a credit is almost worse than using tons of it. The best way to optimize is to show that you can handle a reasonable amount of money without over spending or under spending . The third factor and one of the most obvious factor is length of the credit history, the longer a person is borrowing and repaying at the appropriate time helps him/her to create an optimal credit profile. Length of the credit history accounts for 15% of the actual credit score number. The fourth and fifth factors are types of credit and new credit accounting for 10% each. Types of Credits include how many sources of borrowing you use; like car loans, home loans; The more diverse these types of credits you owe helps you credit profile. New credit refers to the type of credit that you don’t need like applying for a credit in 5 different stores.
Although a perfect credit score is close to impossible these 5 factors will help a person in optimizing their credit profile, steps in the right direction focusing on these main factor will help make your credit profile optimal and even great.
Author – Aabhas Sharma
