Question

How does credit scoring systems works? List factors for predicting credit quality.

Please explain carefully in points for natural persons and enterprises

Answer 1

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Credit scoring system works based on creditworthiness.

Your creditworthiness is determined by your credit score.

The credit score is a 3 digit number which tells the lender on how likely the borrower will pay back the loan taken.

Factors which determines your credit score.

1. 35% of your credit score determined by your payment history.

2. 30% of your credit score determined by how much you are in debt that is by your current loans and credit card debt.

3.15% of your credit score determined by your discipline to make timely payments.

4.10% of your credit score determined by your type of credit you have availed.

5.Rest 10% of your credit score determined by your Recent credit activities.

The ways to build your credit are:

1. Pay down your existing debt & it's recommended to keep balance 30% below your credit limit.

2.Make extra payments in a billing cycle, so that your utilisation looks low when the balance is reported to the bureau. Few small payments are better than one large payment.

3. Request for increase in credit limit. It will Effectively help you lower your utilisation percentage of the credit limit.

4.Become an authorized user on another person credit card who had a good credit history. It will help you build your reputation.

5.Open a credit-builder account.

6.Get a secured credit card and do timely payments.