Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to know two things about you: whether you can pay back the loan, and how committed you are to repay the loan. To understand whether you can pay back the loan, they assess your income and debt ratio. In order to assess your willingness to repay the loan, they look at your credit score.
The most commonly used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more on FICO here.
Credit scores only assess the information in your credit reports. They do not take into account income, savings, down payment amount, or personal factors like sex ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan without considering other irrelevant factors.
Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all calculated into credit scores. Your score is calculated wtih both positive and negative information in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will improve your score.
Your credit 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 history ensures that there is sufficient information in your credit to assign a score. Some borrowers don't have a long enough credit history to get a credit score. They may need to spend some time building credit history before they apply.
Main Street Mortgage Company can answer your questions about credit reporting. Give us a call: (713) 528-1245.