Before deciding on what terms they will offer you a loan (which they base on their risk), lenders need to know two things about you: your ability to repay the loan, and if you are willing to pay it back. To figure out your ability to repay, they look at 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 Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only take into account the info in your credit profile. 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 first invented as it is now. Credit scoring was envisioned as a way to assess willingness to repay the loan while specifically excluding other personal factors.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scores. Your score reflects the good and the bad of your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
For the agencies to calculate a credit score, borrowers must have an active credit account with at least six months of payment history. This payment history ensures that there is sufficient information in your credit to generate a score. Some people 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.
At Financial Edge Mortgage Corp., we answer questions about Credit reports every day. Call us at 425-508-9988.
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.