Credit Reports and Credit Scores - There Is a BIG Difference
Here is a list, which will help you determine the types of transactions listed in your report:
>> Applications made for a credit card
>> Monthly phone or utility bills received by you
>> When you have accounts in arrears or payments in default, which have been sixty days late or more (i.e. the arrears and payment defaults are listed in your credit report as "Defaults ").
What is a Credit Score?
It is the actual numerical value assigned to the information in your Credit Report.
How is My Credit Score Calculated?
Credit Reporting Agencies calculate it via a "Credit Scoring model", which applies a complex mathematical formula to the information contained in your report.
A certain weight is assigned to a number of factors considered in the formula of "Credit Scoring model." Based on the evaluation of all of the factors, a Credit Score is assigned to you. Here is a list of typical factors considered in the model's formula:
>> Your payment record
>> Frequency of your payments
>> Amount of debts you have incurred
>> The total number of credit cards you are holding, and
>> Credit charge-offs
The majority of scores usually range from 300 on the poor end to 850 on the top end. Interestingly, the Veda credit scoring system begins at 200 and finishes at 1,200. A score of 200 means that you have a 50% chance of incurring an adverse credit event within the next 12 months.
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Whenever you apply for a loan package, lenders/credit providers have to make reasonable enquiries about your financial situation. They determine your credit worthiness and ability to make repayments by taking a look at your credit score. So, it is important that you know the components that make your score.
What are the Components of Credit Score?
Whilst the formulas for calculating scores are quite complex and secretive, its components are not a secret. To help you understand, here is a list of components along with their relevant percentage assigned to each component:
35% for your "Payment history" - Late payments on bills, such as a mortgage, credit card or automobile loan, etc. will cause score to drop. Bills paid on time will improve your score.
30% for "Credit utilisation" - The ratio of your current revolving debt (such as credit card balances) to your total available revolving credit or credit limit will determine your credit utilisation.
15% for Length of your credit history - The aging of your credit history can have a positive impact on your score.
10% for Types of credit used - You can benefit by having a history of managing different types of credit (e.g. mortgage loans, instalment loans, revolving credit, personal loans, etc.)
10% for Recent searches for credit - Hard credit enquiries, which occur when you apply for a credit card or home loan (revolving or otherwise), can hurt your score, especially, if done in great numbers. If you are "rate shopping" for a mortgage loan or auto loan (e.g. a fortnight or 45 days), you will likely not experience a meaningful decrease in your score as a result of the credit enquiries. As the scoring models consider all hard enquiries that occur within 14 or 45 days of each other, as only one.
