Your Credit Score: What it means
Before they decide on the terms of your loan, lenders need to find out two things about you: your ability to repay the loan, and how committed you are to repay the loan. To figure out your ability to repay, lenders look at your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can find out more on FICO here.
Your credit score comes from your repayment history. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were first invented as it is now. Credit scoring was invented as a way to take into account only that which was relevant to a borrower's likelihood to repay the lender.
Deliquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scores. Your score considers positive and negative information in your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of six months. This history ensures that there is enough information in your report to assign an accurate score. If you don't meet the criteria for getting a score, you might need to work on your credit history prior to applying for a mortgage.
At Ashok Lakshmanan, we answer questions about Credit reports every day. Call us at 630-717-3600.