Before deciding on what terms they will offer you a loan, lenders must discover two things about you: your ability to repay the loan, and how committed you are to repay the loan. 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 called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.
Your credit score is a result of your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was invented as a way to consider only what was relevant to a borrower's likelihood to pay back the lender.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score reflects both the good and the bad of your credit history. Late payments count against you, but a consistent record of paying on time will raise it.
To get a credit score, borrowers must have an active credit account with a payment history of at least six months. This payment history ensures that there is enough information in your report to calculate a score. Should you not meet the criteria for getting a score, you may need to work on a credit history before you apply for a mortgage.
Carter Financial Solutions can answer questions about credit reports and many others. Call us at 866-840-8745 x2.