Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders must find out two things about you: your ability to pay back the loan, and if you are willing to pay it back. To assess whether you can pay back the loan, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.
The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only assess the info contained in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when these scores were first invented as it is today. Credit scoring was developed to assess willingness to repay the loan without considering other personal factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scores. Your score reflects both the good and the bad of your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.
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 enough information in your report to calculate a score. Some people 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.
Alternative Mortgage Group can answer questions about credit reports and many others. Give us a call: 561-395-4264.