Your Credit Score: What it means

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Before deciding on what terms they will offer you a loan (which they base on their risk), lenders need to discover two things about you: your ability to pay back the loan, and if you are willing to pay it back. To assess your ability to repay, they look at your income and debt ratio. To assess your willingness to repay the mortgage loan, they look at your credit score.

The most widely used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.

Credit scores only consider the info in your credit profile. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was developed as a way to consider solely that which was relevant to a borrower's likelihood to pay back the lender.

Deliquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scoring. Your score results from positive and negative information in your credit report. Late payments lower your 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 an accurate score. Some people don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply for a loan.

James Culpepper can answer your questions about credit reporting. Please give him a call: 1-708-647-5248.