Your Credit Score: What it means

Before lenders make the decision to lend you money, they have to know if you're willing and able to pay back that mortgage. To figure out your ability to repay, lenders assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). You can learn more on FICO here.

Credit scores only take into account the information in your credit profile. They never consider your income, savings, down payment amount, or demographic factors like sex ethnicity, national origin or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess willingness to repay the loan while specifically excluding other demographic factors.

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scoring. Your score is calculated from the good and the bad in your credit report. Late payments lower your credit score, but consistently making future payments on time will improve your score.

Your credit 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 history ensures that there is enough information in your report to calculate a score. Should you not meet the criteria for getting a credit score, you might need to establish your credit history before you apply for a mortgage.

Ashok Lakshmanan can answer your questions about credit reporting. Give us a call: 630-717-3600.