About Your Credit Score
Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must discover two things about you: whether you can pay back the loan, and your willingness to pay back the loan. To assess your ability to repay, they look at your income and debt ratio. To calculate your willingness to repay the loan, they consult your credit score.
The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (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. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was invented as a way to take into account only that which was relevant to a borrower's willingness to pay back a loan.
Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score considers positive and negative information in your credit report. Late payments count against your score, but a record of paying on time will improve it.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of at least six months. This history ensures that there is sufficient information in your credit to build an accurate score. If you don't meet the minimum criteria for getting a credit score, you may need to work on your credit history before you apply for a mortgage.
At Custom Lending Group, we answer questions about Credit reports every day. Give us a call at (707) 252-2700.