A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must find out 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 pay back the loan, they assess your income and debt ratio. In order to assess your willingness to pay back the loan, they look at your credit score.
Fair Isaac and Company built the first FICO score to assess creditworthines. We've written more on FICO here.
Credit scores only take into account the information contained in your credit reports. They don't consider your income, savings, down payment amount, or demographic factors like sex ethnicity, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when these scores were invented as it is in the present day. Credit scoring was envisioned as a way to take into account solely what was relevant to a borrower's willingness to pay back a loan.
Your current debt load, past late payments, length of your credit history, and a few other factors are considered. Your score is calculated from the good and the bad in your credit history. 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 at least six months of payment history. This history ensures that there is enough information in your credit to assign an accurate score. If you don't meet the criteria for getting a credit score, you may need to work on your credit history prior to applying for a mortgage loan.
Milestone Mortgage, Inc. can answer your questions about credit reporting. Give us a call: (317) 595-9600.