A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must find out two things about you: whether you can repay the loan, and if you are willing to pay it back. To figure out your ability to repay, lenders look at 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. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.
Your credit score is a result of your repayment history. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was envisioned as a way to consider solely that which was relevant to a borrower's willingness to repay the lender.
Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score results from positive and negative information in your credit report. Late payments count against you, but a record of paying on time will improve it.
Your credit 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 sufficient information in your credit to build an accurate score. Some borrowers don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply for a loan.
At Custom Lending Group, we answer questions about Credit reports every day. Give us a call: (707) 252-2700.