Identify the components of a Credit Score and the associated

Identify the components of a Credit Score and the associated percentages.

Solution

There are 5 components of the credit score. They are explained below as follows:

1. Payment History
This comprises 35% to the total credit score. It forms a very major component in the overall credit score. Past payment history is a good indicator of how future payments would be made.

The component assess the timliness, frequency of payments.Also a miss in the payments is not treated negatively unless it is a Credit Card payment.

2. Credit Utilization
This basically means the amount of Credit you use from the amount of credit alloted to you.
This component comprises 30% to the overall Credit Utilization.
It is basically focused on the fact that what is an average % of credit utilization from the available credit limit.
Too big a credit balance and that also too frequently would be taken as something to be monitored.

3.Length of credit history:
This comprises 15% to the overall score.
This helps to understand the length of time when the credit account as active and the credit limit has been active and been under use.
A longer time period would give more insights about the financial behaviour of the individual and hence future financial behaviour. However those having new credit accounts need not worry much as even their timely payments can help them with a good score.

4 & 5. New Credit and Credit Mix
This comprises 10% of the overall score.
Too many new credit lines would mean that the person would be in financial trouble. It is therefore imperative to have only a single credit line and use it properly along with timely payments.

Also a healthy credit mix, a long duration of no default payment would a long way in getting good credit scores