A Score that Really Matters: The Credit Score

Before lenders decide to give you a loan, they must know if you're willing and able to repay that mortgage. To assess your ability to pay back the loan, they assess 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 were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.

Credit scores only assess the info in your credit profile. They never consider your income, savings, down payment amount, or personal factors like gender, race, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when FICO scores were invented as it is in the present day. Credit scoring was invented as a way to take into account solely what was relevant to a borrower's likelihood to repay the lender.

Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score reflects both the good and the bad in your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.

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 history ensures that there is enough information in your credit to build an accurate score. Some borrowers don't have a long enough credit history to get a credit score. They should spend a little time building up credit history before they apply.

Ashok Lakshmanan can answer questions about credit reports and many others. Call us: 6307173600.