A Score that Really Matters: Your Credit Score
Before they decide on the terms of your loan, lenders need to discover two things about you: whether you can repay the loan, and if you will pay it back. To assess your ability to repay, they look at your debt-to-income ratio. To assess your willingness to pay back the loan, they consult your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your 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 info contained in your credit profile. They do not consider 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 today. Credit scoring was invented as a way to take into account solely that which was relevant to a borrower's willingness to repay the lender.
Deliquencies, payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scores. Your score reflects both the good and the bad of your credit history. Late payments lower your credit score, but establishing or reestablishing a good track record of making 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 credit to assign a score. Some people don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.
Real Property Finance can answer your questions about credit reporting. Give us a call at 310-379-5997.
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