Before deciding on what terms they will offer you a loan, lenders need to discover two things about you: your ability to repay the loan, and how committed you are to pay back the loan. To assess your ability to repay, they look at your income and debt 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. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score is a direct result of your history of repayment. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as bad a word when these scores were first invented as it is now. Credit scoring was envisioned as a way to assess willingness to pay without considering any other personal factors.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score comes from the good and the bad of your credit history. Late payments count against your score, but a record of paying on time will raise it.
Your credit report must 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 payment history ensures that there is sufficient information in your credit to calculate an accurate score. Should you not meet the criteria for getting a score, you may need to establish a credit history before you apply for a mortgage loan.
At SelectPlus Lending, we answer questions about Credit reports every day. Give us a call: 818-889-7300.