Your Credit Score: What it means

Before they decide on the terms of your loan, lenders need to find out two things about you: whether you can repay the loan, and how committed you are to pay back the loan. To understand your ability to pay back the loan, they look at your income and debt ratio. To assess your willingness to repay, they use your credit score.

The most widely used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.

Credit scores only assess the info in your credit profile. They never take into account income, savings, down payment amount, or factors like gender, ethnicity, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when these scores were first invented as it is in the present day. Credit scoring was envisioned as a way to consider only that which was relevant to a borrower's willingness to repay the lender.

Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scores. Your score results from both positive and negative items in your credit report. Late payments count against you, but a consistent record of paying on time will improve it.

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

American Mortgage Advisers, Inc can answer questions about credit reports and many others. Give us a call at 2147390569.