About Your Credit Score
Before they decide on the terms of your loan (which they base on their risk), lenders need to find out two things about you: whether you can repay the loan, and your willingness to pay back the loan. To understand whether you can repay, they look at your income and debt ratio. To calculate your willingness to repay the mortgage loan, they look at 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). We've written a lot more about FICO here.
Your credit score comes from your history of repayment. 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 FICO scores were first invented as it is today. Credit scoring was envisioned as a way to assess willingness to pay without considering any other demographic factors.
Past delinquencies, payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scores. Your score is calculated wtih both positive and negative items in your credit report. Late payments will lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.
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 sufficient information in your report to calculate an accurate score. Some folks don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply for a loan.
At Blue Door Mortgage, we answer questions about Credit reports every day. Call us at (617) 527-BLUE(2583).