Before they decide on the terms of your loan (which they base on their risk), lenders need to know two things about you: whether you can repay the loan, and if you will pay it back. To figure out your ability to pay back the loan, they assess 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 Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more on FICO here.
Your credit score comes from your repayment history. They never consider income, savings, amount of down payment, or factors like gender, ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when these scores were first invented as it is today. Credit scoring was envisioned as a way to assess a borrower's willingness to pay without considering any other demographic factors.
Deliquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scores. Your score is calculated wtih both positive and negative information in your credit report. Late payments will lower your score, but consistently making future payments on time will improve your score.
To get a credit score, borrowers must have an active credit account with a payment history of six months. This payment history ensures that there is enough information in your credit to build a score. Some people don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.
At The Rate Kings Mortgage LLC, we answer questions about Credit reports every day. Call us: (610) 572-3635.