Before they decide on the terms of your loan (which they base on their risk), lenders must find out two things about you: whether you can pay back the loan, and if you will pay it back. To assess your ability to repay, lenders look at your debt-to-income ratio. To assess your willingness to repay, they use your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). You can learn more about FICO here.
Your credit score comes from your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan without considering other demographic factors.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score is calculated wtih positive and negative items in your credit report. Late payments count against you, but a consistent record of paying on time will improve it.
To get a credit score, you must have an active credit account with at least six months of payment history. This payment history ensures that there is sufficient information in your report to generate 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.
At America's Home Loans, we answer questions about Credit reports every day. Call us at 701.222.0100.