Credit Scoring

Before they decide on the terms of your loan, lenders need to find out two things about you: whether you can repay the loan, and if you are willing to pay it back. To assess your ability to repay, they assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.

Credit scores only take into account the information in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when these scores were invented as it is in the present day. Credit scoring was envisioned as a way to take into account only what was relevant to a borrower's willingness to repay the lender.

Deliquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score is calculated from both the good and the bad of your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.

For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This payment history ensures that there is sufficient 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.

The Rate Kings Mortgage LLC can answer questions about credit reports and many others. Give us a call: (610) 572-3635.