Before they decide on the terms of your loan (which they base on their risk), lenders must find out two things about you: whether you can repay the loan, and your willingness to pay back the loan. To assess your ability to repay, lenders assess your debt-to-income ratio. To calculate your willingness to pay back the loan, they look at your credit score.
Fair Isaac and Company developed the original FICO score to assess creditworthines. For details on FICO, read more here.
Your credit score is a direct result of your repayment history. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were first invented as it is today. Credit scoring was envisioned as a way to consider only that which was relevant to a borrower's likelihood to repay a loan.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scoring. Your score is calculated from both the good and the bad of your credit report. Late payments count against you, but a consistent record of paying on time will improve it.
Your report should have 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 sufficient information in your report to assign a score. Should you not meet the criteria for getting a score, you may need to establish your credit history before you apply for a mortgage loan.
Carter Financial Solutions can answer questions about credit reports and many others. Call us: 866-840-8745 x2.