Your Credit Score: What it means

Before deciding on what terms they will offer you a loan, lenders want to find out two things about you: your ability to repay the loan, and your willingness to repay the loan. To assess whether you can pay back the loan, they look at your income and debt ratio. In order to calculate your willingness to repay the loan, they consult your credit score.

The most commonly 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 consider the info contained in your credit reports. They never consider your income, savings, down payment amount, or demographic factors like sex ethnicity, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when FICO scores were invented as it is in the present day. Credit scoring was developed as a way to take into account only what was relevant to a borrower's likelihood to repay the lender.

Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score reflects both the good and the bad of your credit history. Late payments will lower your credit score, but consistently making future payments on time will raise your score.

Your credit report should have 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 payment history ensures that there is sufficient information in your report to assign an accurate score. Some folks 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 America's Home Loans, we answer questions about Credit reports every day. Give us a call at 701.222.0100.

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