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Before they decide on the terms of your loan (which they base on their risk), lenders want to know two things about you: your ability to repay the loan, and your willingness to repay the loan. To assess whether you can repay, they look at your income and debt ratio. To assess your willingness to repay, they use your credit score.
Fair Isaac and Company built the original FICO score to help lenders assess creditworthiness. We've written more about FICO here.
Credit scores only consider the info in your credit reports. They never consider income, savings, amount of down payment, or factors like sex race, 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 in the present day. Credit scoring was developed to assess willingness to pay without considering any other irrelevant factors.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scores. Your score considers positive and negative information in your credit report. Late payments lower your score, but establishing or reestablishing a good track record of making payments on time will improve your score.
To get a credit score, borrowers must have an active credit account with at least six months of payment history. This payment history ensures that there is enough information in your credit to assign an accurate score. Some borrowers 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 for a loan.
At Glendale Mortgage, we answer questions about Credit reports every day. Give us a call: 610-853-6500.