Credit Scores

Before they decide on the terms of your mortgage loan, lenders need to discover two things about you: whether you can pay back the loan, and your willingness to repay the loan. To assess your ability to repay, lenders look at your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

The most commonly 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). We've written a lot more on FICO here.

Credit scores only assess the information in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering any other demographic factors.

Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score is calculated from both the good and the bad in your credit report. Late payments lower your score, but consistently making future payments on time will improve your score.

To get a credit score, you must have an active credit account with a payment history of at least six months. This history ensures that there is sufficient information in your credit to generate a 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 for a loan.

At Ashok Lakshmanan, we answer questions about Credit reports every day. Give us a call at 630-717-3600.