Before they decide on the terms of your loan, lenders want to find out two things about you: whether you can pay back the loan, and if you will pay it back. To assess whether you can repay, 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. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Credit scores only assess the info in your credit profile. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when FICO scores were invented as it is today. Credit scoring was envisioned as a way to assess willingness to pay without considering any other demographic factors.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scoring. Your score is calculated from the good and the bad of 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 sufficient information in your report to calculate a score. Some borrowers don't have a long enough credit history to get a credit score. They should build up a 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.