A Score that Really Matters: The Credit Score
Before they decide on the terms of your loan (which they base on their risk), lenders need to find out two things about you: your ability to pay back the loan, and how committed you are to repay the loan. To assess your ability to repay, lenders look at your debt-to-income ratio. To calculate your willingness to pay back the loan, they look at your credit score.
Fair Isaac and Company built the original FICO score to help lenders assess creditworthines. For details on FICO, read more here.
Credit scores only consider the info contained in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were invented as it is now. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan while specifically excluding other personal factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score results from positive and negative information in your credit report. Late payments count against you, but a consistent record of paying on time will improve it.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of six months. This payment history ensures that there is sufficient information in your credit to build a score. Some folks 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 for a loan.
At America's Money Source, we answer questions about Credit reports every day. Call us: (407) 898-7559.
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