Your Credit Score: What it means

Before deciding on what terms they will offer you a loan, lenders need to discover two things about you: whether you can pay back the loan, and if you will pay it back. To assess your ability to pay back the loan, lenders look at your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

Fair Isaac and Company developed the first FICO score to help lenders assess creditworthines. You can find out more about FICO here.

Credit scores only assess the info contained in your credit profile. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was envisioned as a way to assess willingness to pay while specifically excluding other irrelevant factors.

Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scoring. Your score comes from the good and the bad of your credit history. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will improve your score.

Your report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This payment history ensures that there is enough information in your report to build an accurate score. Some folks don't have a long enough credit history to get a credit score. They should spend some time building a credit history before they apply.

Ashok Lakshmanan can answer your questions about credit reporting. Call us at 630-717-3600.


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