How Your Credit Score Is Calculated

Credit Scores are determined by Credit scoring models that evaluate one of your consumer credit reports and then give a score (ranging from 300 to 850) based on complicated computations.

A higher credit score indicates that the person is less likely to miss a payment, which is why having a higher credit score can help you qualify for better rates and terms from lenders.

Elements that influence your credit score

  1. Payment History
  2. Amounts Owed
  3. Credit History Duration
  4. New Credit

Payment History

The most essential factor in determining your credit scores is your payment history, as it shows on your credit report. Within this category, the scoring models take into account:

Timeliness Of Payments:

A track record of paying your bills on time is beneficial to your credit score.

Late payments:

Payments that are more than 30 days late will usually be recorded by your lender and will harm your credit score. The amount of time you’ve been late on a bill payment, the number of accounts with late payments, and whether you’ve made the accounts current are all variables.

Public documents:

An example is Bankruptcy, it can have a substantial negative impact on your credit score.  The majority of bad marks, including late payments, can persist for up to years.

Amounts Owed/Due

When it comes to determining credit ratings, the amount you are owing, or your credit usage, comes in second only to payment history. This category includes information such as how much you owe on loans and how many of your accounts have balances. However, your credit usage ratio is the most important factor to examine in this.

Credit History Duration

Responsibly maintaining credit accounts over time can improve your credit scores. When considering credit history, credit scoring algorithms may use the age of your oldest account, the newest account, and the average age of all your accounts.

New/Added Credit

Recent credit activity isn’t a large factor in your credit score, but when you apply for and create a new account, numerous things can happen.

Opening a new account may also have an effect on other scoring elements. For example, it may reduce the average age of your accounts, which may lower your scores slightly. However, it boosts your available credit and provides an opportunity to make on-time payments on a new account in your credit report, which may help your scores in the long run.

Things to know about a Credit Bureaus

  1. Individual credit information is collected and researched by a credit bureau, which is then sold to creditors at a fee to make lending decisions.
  2. Individuals’ credit ratings are assigned by credit agencies depending on their credit history.
  3. Credit scores play a crucial role in determining whether or not you will be approved for credit or loans and can ease the loan terms or make them tougher based on your Credit History or Credit Score.
  4. Credit bureaus do not make decisions about whether or not you will be approved for credit; instead, they collect and synthesize information about your credit risk and provide it to lenders.
  5. There are 3 Credit Bureaus in Nigeria, where FirstCentral Credit Bureau is the first independent Credit Bureau