How Does The Credit Scoring System Work?

The credit scoring system has been confounding people all over the world. Therefore, it is not surprising that the people of South Africa also find themselves mystified by the elusive credit scoring system. In order to understand how the credit scoring system works, one needs to realise that it is not very different from how a teacher gives grades to his students.

In essence, the credit scoring system takes into account various aspects relating to the personal finances of an individual and, subsequently, aggregates it to arrive at a final credit score. It is also crucial to realise that the weight of different aspects of a person’s finances vary on the basis of its significance in his life. Here are the five primary aspects:

1. Payment history:

Thirty five percent of an individual’s total credit score is based on his payment history because for lenders nothing is more important than the prospect of the borrowed money being returned to them.

This is why the consistency of an individual’s past payments is so important. This aspect of an individual’s payment history focuses on variables such as the number of bills paid late, bills that went into collection and, especially, bankruptcies.

2. Outstanding debt:

The outstanding debt aspect accounts for 30 percent of the total credit score. This aspect would take into account everything from the size of pending car or home loans to the number of credit cards at their top limits in the name of the individual.

Needless to say, the trick is to just keep everything to a minimum. This means paying back the majority of your outstanding loans as well as keeping your credit cards well below their top limits.

3. Length of credit time:

The length of credit time often leaves people befuddled because the longer a person has had credit, the better the score will be. The reason for this is simply that a lengthier period allows for better analysis and assessment of the individual. The length of credit time amounts to around 15 percent of the individual’s credit score.

4. New credit:

Ten percent of the total credit score is based around new credit i.e. new loans or credit cards. Furthermore, this aspect would also be affected by hard enquiries into the credit history of the individual in question.

5. Types of credit:

Finally, 10 percent of the total credit score would rely on the variety of credit accounts that the individual has. In a nutshell, the greater the variety, the better the credit score.