Crack the Code to Calculate Your Credit Score Like a Pro

Curious about how your credit score is calculated? First, think of your credit score as a secret number that reveals your borrowing power. It is shaped by factors like payment history, outstanding debts and how long you have been using credit. 

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A solid credit score can help you secure better loan rates and open doors to more credit options. In this guide, we will break down how is credit score calculated and show you some simple strategies to boost it.

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How to Calculate Credit Score?

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Your credit score is based on five key factors, each carrying a different weight. Understanding how your credit score is calculated can help you build a strong credit history and improve your financial health. 

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Here is how each factor impacts your score:

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1. Payment History (35%)—The Most Important Factor

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Your payment history is the biggest contributor to your credit score. Lenders want to see that you consistently repay your loans and credit card bills on time. 

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Late or missed payments can make you seem unreliable, lowering your score. To avoid this, you can set up automatic payments or reminders so that you never miss a due date.

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2. Credit Utilisation (30%)—How Much You Owe

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The amount you owe compared to your total credit limit is called your credit utilisation ratio. Keeping this ratio below 30% boosts your score. 

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If you max out your credit cards or carry high balances, lenders may think you are struggling with debt. Making early or extra payments can help keep your balances in check.

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3. Length of Credit History (15%)—The Longer, the Better

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The longer you have had credit accounts open, the better it is for your score. A long credit history shows lenders that you can handle credit responsibly over time. 

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Closing old accounts may shorten your history and impact your score, so it is often best to keep them open, especially if they are in good standing.

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4. New Credit (10%)—Be Careful with Too Many Applications

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Opening new credit accounts can help your score, but too many applications in a short time can make you look risky to lenders. 

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Every time you apply for credit, a hard inquiry is recorded, which can temporarily lower your score. Only apply for new credit when necessary and avoid multiple applications at once.

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5. Credit Mix (10%)—Variety Matters

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Lenders prefer borrowers with a balanced mix of credit, such as home loans, auto loans, or personal loans. 

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Managing both revolving and installment credit responsibly can strengthen your credit profile. A diverse credit mix shows that you can handle different types of credit effectively.

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What Are the Different Ways to Improve Your Credit Score?

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Boosting your credit score is achievable by following these simple steps:

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1. Pay Your Bills on Time

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Ensure you meet all due dates and settle bills promptly. Timely payments build a positive credit history, boosting your credit score over time.

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2. Reduce Your Debt

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High debt can drag down your credit score. Focus on paying down your existing debt to improve your financial standing and credit rating.

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3. Extend Your Credit History

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A longer credit history signals responsible credit usage. Keep old accounts open to show consistent credit behaviour and improve your score.

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4. Apply For Credit Sparingly

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Each credit application results in a hard inquiry that can lower your score. Avoid applying for too many credit accounts to keep your score healthy.

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5. Consider a Credit-Builder Loan

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If your credit score needs a boost, a credit-builder loan can help. With regular payments, you will gradually build a stronger credit history and increase your score.

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What Are the Benefits of a High Credit Score?

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A high credit score reflects responsible financial behaviour and makes you a low-risk borrower.

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Higher Loan and Credit Card Limits

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Lenders are more likely to approve higher loan amounts or increase credit card limits for borrowers with strong credit histories, as they pose a lower risk of default.

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Lower Interest Rates

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Banks and financial institutions often offer lower interest rates on home loans, personal loans and credit cards to individuals with high credit scores.

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Longer Loan Tenures

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A high credit score can help secure loans with longer repayment periods. It reduces EMI burdens and makes financial management easier.

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Higher Approval Chances

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A good credit score assures lenders that you manage credit responsibly. This increases the likelihood of loan and credit card approvals.

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Access to Pre-Approved Loans

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A strong credit score boosts your chances of getting pre-approved loans and credit card offers, allowing quicker access to funds with minimal documentation.

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Eligibility for Premium Credit Cards

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Credit card issuers prioritise applicants with high credit scores, making it easier to qualify for premium cards with enhanced cashback, rewards, and exclusive benefits.

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The Bottom Line

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Knowing how is credit score calculated helps you make smart financial decisions. You can maintain a strong credit score by paying bills on time, managing different types of credit and regularly monitoring your credit report.

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This score plays a crucial role in securing better loan terms and lower interest rates. It directly impacts your financial well-being. 

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With Jar, you can easily check your credit score and take steps to improve it. Apply for an instant loan with Jar today and start building a solid credit profile.

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Frequently Asked Questions

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1. Does salary affect credit score calculation?

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No, salary is not a factor in credit score calculation. Credit scores are based on credit behaviour rather than income, focusing on factors like payment history, credit utilisation, and account age.

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2. Can I calculate my credit score manually?

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No, you cannot manually calculate your credit score. Credit bureaus determine it using past credit behaviour and payment history, applying unique statistical models. 

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Since each bureau follows a different algorithm, the exact calculation is not accessible for individuals to compute on their own.

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3. How can I verify if my credit score calculation is accurate?

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Regularly check your credit report and if you spot any discrepancies, file a dispute with the credit bureau to get them corrected. 

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If the disputed factor affects your credit score, once it is fixed, you will notice an updated score reflecting the changes.