Your Credit Score: What it means

Before deciding on what terms they will offer you a loan, lenders need to know two things about you: whether you can repay the loan, and how committed you are to pay back the loan. To figure out your ability to pay back the loan, they assess your debt-to-income ratio. To calculate your willingness to pay back the mortgage loan, they consult your credit score.

The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written a lot more on FICO here.

Your credit score comes from your history of repayment. They don't consider your income, savings, amount of down payment, or demographic factors like gender, race, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as dirty a word when FICO scores were first invented as it is now. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan while specifically excluding other demographic factors.

Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scoring. Your score is calculated from both the good and the bad in your credit report. Late payments count against your score, but a record of paying on time will raise it.

Your report must contain 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 enough information in your report to calculate an accurate score. Some people don't have a long enough credit history to get a credit score. They may need to build up a credit history before they apply for a loan.

At Harbor View Lending* a DBA of Megastar Financial, we answer questions about Credit reports every day. Call us at (207) 571-8034.