Your Credit Score: What it means

Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to know two things about you: whether you can repay the loan, and if you will pay it back. To assess your ability to pay back the loan, they assess your debt-to-income ratio. In order to assess your willingness to pay back the mortgage loan, they consult your credit score.

The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more on FICO here.

Credit scores only consider the info contained in your credit profile. They never take into account your income, savings, amount of down payment, or factors like sex race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was invented as a way to take into account solely what was relevant to a borrower's likelihood to repay a loan.

Your current debt load, past late payments, length of your credit history, and a few other factors are considered. Your score is calculated 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 raise your score.

For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This payment history ensures that there is sufficient information in your report to calculate an accurate score. Some borrowers don't have a long enough credit history to get a credit score. They should build up credit history before they apply.

At Ashok Lakshmanan, we answer questions about Credit reports every day. Give us a call at 6307173600.