A Score that Really Matters: The Credit Score
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Before lenders decide to lend you money, they want to know that you're willing and able to pay back that mortgage loan. To assess your ability to pay back the loan, lenders assess 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. The FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.
Credit scores only take into account the information contained in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were invented as it is today. Credit scoring was envisioned as a way to consider solely what was relevant to a borrower's willingness to pay back the lender.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scoring. Your score results from positive and negative items in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Your report must contain 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 report to build a score. Some people don't have a long enough credit history to get a credit score. They may need to spend a little time building up credit history before they apply for a loan.
The Mortgage Partner can answer your questions about credit reporting. Call us at (949) 249-3067.