A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a loan, lenders need to find out two things about you: whether you can pay back the loan, and if you are willing to pay it back. To assess your ability to pay back the loan, they look at your debt-to-income ratio. To assess how willing you are 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 (high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score is a 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 bad a word when these scores were invented as it is in the present day. Credit scoring was envisioned as a way to assess willingness to repay the loan while specifically excluding any other personal factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scoring. Your score is calculated from the good and the bad of your credit history. 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 at least six months of payment history. This history ensures that there is sufficient information in your report to generate a score. Some folks don't have a long enough credit history to get a credit score. They should spend a little time building credit history before they apply for a loan.
America's Money Source can answer questions about credit reports and many others. Call us at (407) 898-7559.
Get the Best Mortgage Rate! Tell us a little about your current needs and we can use that information to match you with just the right loan.