A Score that Really Matters: The Credit Score

Before they decide on the terms of your loan, lenders must know two things about you: whether you can repay the loan, and if you will pay it back. To figure out your ability to pay back the loan, lenders look at your debt-to-income ratio. In order to assess your willingness to repay the mortgage loan, they consult your credit score.

The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more on FICO here.

Your credit score comes from your repayment history. They do not consider income, savings, down payment amount, or factors like sex race, nationality or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess a borrower's willingness to pay while specifically excluding any other demographic factors.

Deliquencies, payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score results from both positive and negative items in your credit report. Late payments count against your score, but a consistent record of paying on time will raise it.

For the agencies to calculate a credit score, you must have an active credit account with six months of payment history. This payment history ensures that there is enough information in your credit to calculate a score. Some folks don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.