Credit Scoring

Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must discover two things about you: your ability to repay the loan, and if you are willing to pay it back. To understand your ability to pay back the loan, they assess your income and debt ratio. To assess how willing you are to repay, they use your credit score.

The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more about FICO here.

Your credit score is a direct result of your history of repayment. They never consider income, savings, down payment amount, or personal factors like gender, ethnicity, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when these scores were first invented as it is today. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering other demographic factors.

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 information in your credit report. Late payments count against you, but a record of paying on time will improve it.

For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of at least six months. This history ensures that there is enough information in your report to generate an accurate score. Should you not meet the minimum criteria for getting a credit score, you might need to establish a credit history prior to applying for a mortgage.

Tenby J. Dahman can answer questions about credit reports and many others. Call us at 3038627760.