Your Credit Score: What it means

Before they decide on the terms of your loan, lenders need to know two things about you: whether you can pay back the loan, and if you are willing to pay it back. To assess whether you can repay, they assess 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 were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can find out more on FICO here.

Credit scores only assess the information in your credit profile. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as bad a word when these scores were first invented as it is now. Credit scoring was invented as a way to consider solely that which was relevant to a borrower's willingness to pay back the lender.

Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all calculated into credit scoring. Your score is calculated wtih positive and negative information in your credit report. Late payments lower your credit score, but consistently making future payments on time will improve your score.

Your report should contain 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 history ensures that there is sufficient information in your report to calculate a score. Some folks don't have a long enough credit history to get a credit score. They should build up a credit history before they apply for a loan.

American Mortgage Advisers, Inc can answer questions about credit reports and many others. Call us: 214-865-7442.