Credit Scoring

Before lenders make the decision to give you a loan, they have to know that you're willing and able to pay back that loan. To understand whether you can repay, they look at your income and debt ratio. To assess your willingness 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 (high risk) to 850 (low risk). You can find out more on FICO here.

Credit scores only take into account the info in your credit reports. They do not take into account income, savings, down payment amount, or personal factors like gender, race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was developed to assess a borrower's willingness to repay the loan without considering any other demographic factors.

Your current debt load, past late payments, length of your credit history, and a few other factors are considered. Your score is calculated wtih positive and negative items in your credit report. Late payments will lower your credit score, but consistently making future payments on time will improve your score.

Your report should 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 credit to build an accurate score. Some folks don't have a long enough credit history to get a credit score. They may need to build up a credit history before they apply.

Ashok Lakshmanan can answer questions about credit reports and many others. Call us: 630-717-3600.