About Your Credit Score
Before they decide on the terms of your mortgage loan (which they base on their risk), lenders must find out two things about you: your ability to repay the loan, and if you will pay it back. To assess your ability to repay, they look at your income and debt ratio. In order to calculate your willingness to pay back 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. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can find out more about FICO here.
Credit scores only assess the information in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were invented as it is now. Credit scoring was developed to assess willingness to repay the loan while specifically excluding other irrelevant factors.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scoring. Your score is calculated wtih positive and negative information in your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.
Your credit report must contain 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 credit 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.
Hill Valley Financial Services Inc. can answer your questions about credit reporting. Give us a call at 503-631-3311.