Your Credit Score: What it means

Before they decide on the terms of your loan (which they base on their risk), lenders need to find out two things about you: your ability to repay the loan, and if you are willing to pay it back. To assess your ability to repay, they assess your debt-to-income ratio. To calculate your willingness to repay the mortgage loan, they consult your credit score.

The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.

Your credit score is a direct result of 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 dirty a word when these scores were invented as it is today. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan without considering any other irrelevant factors.

Your current debt level, past late payments, length of your credit history, and other factors are considered. Your score is calculated wtih both positive and negative items in your credit report. Late payments will lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.

To get a credit score, you must have an active credit account with six months of payment history. This history ensures that there is sufficient information in your credit to calculate a score. If you don't meet the criteria for getting a credit score, you may need to work on a credit history prior to applying for a mortgage.

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