Your Credit Score: What it means
Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to know two things about you: your ability to repay the loan, and how committed you are to pay back the loan. To understand your ability to repay, they look at your income and debt ratio. To calculate your willingness to repay the loan, they look at your credit score.
The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score comes from 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 only that which was relevant to a borrower's likelihood to pay back the lender.
Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score is calculated wtih both positive and negative information in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.
For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of six months. 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 should spend a little time building up a credit history before they apply.
At Alternative Mortgage Group, we answer questions about Credit reports every day. Call us: 561-395-4264.