A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a mortgage loan, lenders want to know two things about you: whether you can repay the loan, and if you are willing to pay it back. To assess your ability to pay back the loan, lenders assess your debt-to-income ratio. In order to assess your willingness to repay the mortgage loan, they look at your credit score.
The most commonly used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (high risk) to 850 (low risk). We've written more about FICO here.
Credit scores only assess the information contained in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when these scores were invented as it is in the present day. Credit scoring was developed to assess willingness to repay the loan while specifically excluding any other irrelevant factors.
Deliquencies, payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score comes from the good and the bad in your credit history. Late payments count against you, but a consistent record of paying on time will improve it.
Your report must 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 history ensures that there is enough information in your report to assign a score. Some people don't have a long enough credit history to get a credit score. They may need to spend a little time building a credit history before they apply.
At Hill Valley Financial Services Inc., we answer questions about Credit reports every day. Call us at 503-657-3311.