Your Credit Score: What it means

Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must know two things about you: whether you can repay the loan, and if you are willing to pay it back. To figure out your ability to repay, lenders assess your debt-to-income ratio. To calculate your willingness to repay the loan, they look at 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 (high risk) to 850 (low risk). You can learn more about FICO here.

Credit scores only take into account the information contained in your credit profile. They don't consider income, savings, amount of down payment, or demographic factors like sex race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were first invented as it is today. Credit scoring was developed as a way to consider solely what was relevant to a borrower's likelihood to pay back the lender.

Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score results from both positive and negative items in your credit report. Late payments lower your credit score, but consistently making future payments on time will improve your score.

For the agencies to calculate a credit score, borrowers must have an active credit account with at least six months of payment history. This history ensures that there is enough information in your report to assign a score. If you don't meet the minimum criteria for getting a score, you may need to work on a credit history before you apply for a mortgage.

American Mortgage Advisers, Inc can answer your questions about credit reporting. Give us a call: 2148657442.