How Do Credit Bureaus Arrive At People's Scores

Credit scores have a huge impact on a person's ability to engage in various financial transactions

. Because of this, it is beneficial to understand how these numbers are arrived at.

Ratings are considered indicators of an individual's creditworthiness. The grades are computed by so-called credit bureaus, which use a set of criteria in making their calculations.

These criteria includes the following, one's payment history, his amount of existing debts, length of his payment history, new credit he may be applying for, and types of accounts he has availed himself of.

The first criterion is given a 35-percent weight. This shows how a person had serviced his financial obligations in the past. Was he paying bills on time? Was he settling his credit card debts promptly? This criterion has the biggest weight in the overall score because evaluating companies believe that a person who had been delinquent in the past is also likely to be delinquent in servicing new loans.

The second criterion carries a weight of 30 percent. This is about how much an individual's existing debts is and its proportion to his income. For evaluators, people who are already buried in debts most likely will not be able to promptly service new liabilities.

Third determining factor carries a weight of 15 percent. This is about how long one has been making payments and engaging in major financial transactions. One who has a longer history may be rated more favorably. This is because evaluators are given more bases in computing the scores.

The fourth determining factor has a 10-percent share of the total grade. This involves one's application for new borrowings. This should affect the overall rating because new loans, if approved, will affect one's financial standing.

The fifth and last item affecting the overall grade is about how many types of accounts one has. There are instances when having many of these positively affects a grade. These happen when all of these lines are properly serviced -- if savings accounts have considerable amounts of deposits or if loan accounts are regularly settled. However, if these are not properly attended to, it is better to close some of them and keep only a few.

It is important to understand how one's scores are computed to determine if these are accurate. If there is erroneous information used in computing grades -- say a debt that was paid, but was not recorded as settled -- then an individual may request for a re-computation of the ratings.

People must not hesitate to ask evaluators to re-compute scores if these are believed to be inaccurate. Everyone must remember that these numbers largely determine how they will be able to engage in various transactions.

by: Leo Chu

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