A credit score explains how credit-worthy a person is. There are different ways credit scores can be calculated, which we discuss in this article. We also look at how to improve a bad credit score.

Concept of Credit Scores
Your credit score is calculated based on information from banks and lenders. It uses parameters like payment due, length of credit, credit utilization, etc. to derive the final score. As and when you keep using your credit, the credit score can change.

The credit score helps a lender or bank to understand how risky it is to lend to you or issue you a credit card. If you have a high credit score, they would feel assured that they can recover their dues easily. A low credit score makes you a risky customer and you could face problems getting credit.

FICO Model
The most popular model for calculating a credit score is the FICO model developed by the Fair Isaac Corporation. Most lenders prefer the FICO model to calculate credit scores. The FICO credit score gives weightage to various factors as follows:

• Payment history: 35%
• Credit utilization: 30%
• Length of credit history: 15%
• Credit mix or types: 10%
• New credit taken: 10%

On the basis of the above parameters, a score is calculated in the range of 300 to 850.

VantageScore Model
The three credit bureaus TransUnion, Equifax, and Experian joined hands to create an alternate model called VantageScore. This model has weightage for different parameters as follows:

• Payment history: 41%
• Age of credit/ credit mix: 20%
• Utilization of available credit: 20%
• New credit application: 11%
• Credit balance: 6%
• Available credit: 2%

While earlier VantageScore used a different scoring scale, now their scoring is aligned with that of FICO in the range of 300 to 850.

What Does it Mean?
If you have a credit score of 300 to 499, it’s deep subprime and a credit score of 500 to 600 makes it subprime, indicating a high risk. A score of 601 to 660 is termed near-prime, 661 to 780 is considered a prime score, and 781 and above super-prime.

How to Improve Credit Score?
The answers to the question, how to improve a bad credit score can be obtained from the parameters used to calculate your credit score. You need to ensure a good payment history repaying loans and paying credit card bills on time without default. The longer you have loan or credit card accounts, the higher your score can be.

The different types of credit you use also contributes to your credit score. The balance you owe and how much credit you utilize affects your score so you need to keep it under control. When you apply for new credit, this affects your credit score. Applying too many times for new credit can negatively affect your credit score

The article on how to improve a bad credit score outlined the method using which credit scores are calculated. It also explained ways to improve your credit score. This information will be useful to those with low credit who want to understand why they have a low credit score.