Credit Scoring

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 pay back the loan, and how committed you are to repay the loan. To assess your ability to repay, they look at your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.

Your credit score is a direct result of your history of repayment. They do not consider income, savings, amount of down payment, or demographic factors like sex ethnicity, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as dirty a word when FICO scores were first invented as it is today. Credit scoring was developed to assess a borrower's willingness to repay the loan while specifically excluding any other personal factors.

Deliquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scores. Your score is calculated from both the good and the bad of your credit report. Late payments count against you, but a consistent record of paying on time will raise it.

To get a credit score, you must have an active credit account with a payment history of six months. This history ensures that there is sufficient information in your report to assign an accurate score. Should you not meet the criteria for getting a credit score, you might need to establish a credit history before you apply for a mortgage.