Your Credit Score: What it means

Before they decide on the terms of your loan, lenders need to find out two things about you: whether you can pay back the loan, and your willingness to repay the loan. To assess your ability to pay back the loan, they assess your income and debt ratio. In order to assess your willingness to repay the 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. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can find out more on FICO here.

Credit scores only consider 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 take into account only what was relevant to a borrower's willingness to pay back the lender.

Deliquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score is based on both the good and the bad of your credit history. Late payments count against you, but a record of paying on time will raise it.

To get a credit score, you must have an active credit account with at least six months of payment history. This payment history ensures that there is enough information in your credit to build an accurate score. Should you not meet the minimum criteria for getting a score, you might need to work on a credit history before you apply for a mortgage.

Ashok Lakshmanan can answer questions about credit reports and many others. Give us a call at 630-717-3600.


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