A Score that Really Matters: The Credit Score
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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 how committed you are to pay back the loan. To understand whether you can repay, they look at your income and debt ratio. To calculate your willingness to pay back the mortgage loan, they look at your credit score.
The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (high risk) to 850 (low risk). You can learn more on FICO here.
Credit scores only assess the information contained in your credit reports. 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 assess willingness to repay the loan while specifically excluding other personal factors.
Deliquencies, payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score considers positive and negative information in your credit report. Late payments count against you, but a consistent record of paying on time will improve it.
For the agencies to calculate a credit score, borrowers must have an active credit account with six months of payment history. This history ensures that there is enough 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 spend some time building a credit history before they apply for a loan.
At Mortgage Xperts, we answer questions about Credit reports every day. Give us a call at 352-347-3303.