Before they decide on the terms of your loan, lenders need to know two things about you: your ability to pay back the loan, and if you are willing to pay it back. To figure out your ability to repay, they look at your debt-to-income ratio. To calculate your willingness to repay the loan, they look at your credit score.
Fair Isaac and Company calculated the first FICO score to help lenders assess creditworthines. We've written more about FICO here.
Credit scores only take into account the information in your credit reports. They never take into account your income, savings, down payment amount, or personal factors like sex race, nationality or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when FICO scores were first invented as it is in the present day. Credit scoring was envisioned as a way to assess a borrower's willingness to pay without considering any other personal factors.
Deliquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scoring. Your score is calculated wtih both positive and negative information in your credit report. Late payments count against you, but a record of paying on time will improve it.
To get a credit score, borrowers must have an active credit account with a payment history of at least six months. This payment history ensures that there is sufficient information in your report to generate a score. Some folks 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.
At Milestone Mortgage, Inc., we answer questions about Credit reports every day. Give us a call: (317) 595-9600.