Before lenders decide to lend you money, they have to know if you are willing and able to repay that loan. To figure out your ability to pay back the loan, they assess your debt-to-income 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 were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (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 never take into account income, savings, amount of down payment, or demographic factors like gender, ethnicity, nationality or marital status. 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 in the present day. Credit scoring was developed to assess willingness to pay without considering any other personal factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scoring. Your score considers positive and negative information in your credit report. Late payments count against your score, but a record of paying on time will raise it.
To get a credit score, borrowers must have an active credit account with a payment history of six months. This payment history ensures that there is enough information in your credit to build an accurate 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 Cornerstone Home Mortgage, we answer questions about Credit reports every day. Give us a call at 360-570-0106.