The credit score is the outcome of a complex process based on statistical modules. These modules, developed and refined over decades, process
the thousands of data points which are present in the credit file of an individual.
Credit-scoring systems were originally designed for lenders, not consumers. This means that credit scores continue to be difficult to
understand. Actual formulae and details of how credit scores work are closely guarded trade secrets.
There are constant changes in the data pertaining to consumers. In order to be accurate, the scorecard (statistical model that calculates the credit score) takes all these changes into account. Built to be dynamic, the score is able to assess risk based on the changes that occur inevitably over time, in every person’s credit profile.
There are several factors which impact a person’s credit profile.
1. Payment history (covering all current and past records and delinquency, if any)
2. Amount owed
3. Length of credit history
4. New credit
5. Types of credit
“Payment history” is a log of all current and past repayments of a borrower. The regularity of the borrower on repayments before the due dates is what forms the basis of this parameter. Has the borrower paid all his dues in time? Has he delayed payments? How recent are these delays? The answers to all of these questions impact an individual’s payment history. Other factors influencing this parameter are the types of credit products where the borrower has defaulted and the duration of such defaults.
“Amount Owed” measures how much of his available credit limit an individual has utilized. It also takes into account the total amount which is owed by an individual apart from how much an individual currently owes in relation to the amount originally borrowed.
“Length of credit history” is based on the length of time each account has remained open and the accounts’ most recent action. As a result, it is difficult for a person who is new to credit to have a great credit score. A longer credit history provides more information and offers more insights into an individual’s long-term credit behavior.
“New Credit” takes into account the time elapsed since the last credit facility was sanctioned by any lending institution. It also factors in the amount approved and the type of credit facility/ loan.
“Types of Credit” takes into account the variety of credit facilities an individual has currently or has availed in the past. A good credit mix is indicative of the fact that the borrower can handle all types of credit. Historical data indicates that borrowers with a good blend of all types of credit generally represent a lower level of risk for lenders.