Before deciding on what terms they will offer you a 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 pay back the loan. To understand whether you can pay back the loan, they look at your income and debt ratio. To assess how willing you are to repay, they use your credit score.
The most commonly 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). You can find out more on FICO here.
Your credit score comes from 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 FICO scores were invented as it is now. Credit scoring was invented as a way to consider only what was relevant to a borrower's likelihood to pay back a loan.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scores. Your score results from both positive and negative items in your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.
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 history ensures that there is enough information in your credit to build a score. Some borrowers don't have a long enough credit history to get a credit score. They may need to build up a credit history before they apply for a loan.
At Longhorn Mortgage, we answer questions about Credit reports every day. Call us: 512-302-9410.
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