Before they decide on the terms of your loan (which they base on their risk), lenders want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. To assess whether you can repay, they assess your income and debt ratio. To calculate your willingness to repay the loan, they look at your credit score.
The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.
Credit scores only take into account the information contained 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 FICO scores were first invented as it is now. Credit scoring was envisioned as a way to assess willingness to pay without considering any other irrelevant factors.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scores. Your score is based on both the good and the bad of your credit report. Late payments will lower your score, but consistently making future payments on time will improve your score.
For the agencies to calculate a credit score, you must have an active credit account with a payment history of at least six months. This payment history ensures that there is enough information in your credit to calculate a score. If you don't meet the minimum criteria for getting a credit score, you may need to establish your credit history prior to applying for a mortgage.
Blue Door Mortgage can answer your questions about credit reporting. Give us a call: (617) 527-BLUE(2583).