Before deciding on what terms they will offer you a mortgage loan, lenders want to discover two things about you: your ability to pay back the loan, and if you are willing to pay it back. To assess whether you can repay, they look at your income and debt ratio. To calculate your willingness to repay the mortgage loan, they look at your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). We've written more on FICO here.
Your credit score comes from your repayment history. They don't consider income or personal characteristics. 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 envisioned as a way to take into account only that which was relevant to a borrower's willingness to pay back the lender.
Deliquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scoring. Your score comes from both the good and the bad in your credit history. Late payments will lower your credit score, but consistently making future payments on time will raise your score.
For the agencies to calculate a credit score, you must have an active credit account with a payment history of at least six months. This history ensures that there is enough information in your report to calculate a score. Some folks don't have a long enough credit history to get a credit score. They should spend a little time building up a credit history before they apply.
At Channel Mortgage LLC, we answer questions about Credit reports every day. Give us a call at (718) 639-9500.