Your Credit Score: What it means
Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders want to discover two things about you: your ability to pay back the loan, and your willingness to pay back the loan. To understand whether you can repay, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.
Fair Isaac and Company formulated the first FICO score to assess creditworthines. You can learn more about FICO here.
Your credit score is a result of your history of repayment. They don’t consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. “Profiling” was as bad a word when these scores were first invented as it is now. Credit scoring was developed to assess a borrower’s willingness to repay the loan without considering any other personal factors.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scores. Your score reflects both the good and the bad in your credit report. Late payments will 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, you must have an active credit account with 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.