Before they decide on the terms of your loan, lenders want to know two things about you: your ability to pay back the loan, and if you will pay it back. To assess your ability to pay back the loan, they assess your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more about FICO here.
Your credit score comes from your repayment history. They do not take into account income, savings, amount of down payment, or personal factors like gender, ethnicity, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was envisioned as a way to take into account only what was relevant to a borrower's willingness to pay back the lender.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score comes from both the good and the bad of your credit history. Late payments lower your score, but consistently making future payments on time will improve your score.
Your report should have at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This payment history ensures that there is enough information in your credit to build 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.
Coastal Mortgage Corp. can answer questions about credit reports and many others. Call us at 504-866-5626.
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