Before deciding on what terms they will offer you a loan (which they base on their risk), lenders want to discover two things about you: whether you can pay back the loan, and if you are willing to pay it back. To assess your ability to repay, lenders look at your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. Your FICO score ranges from 350 (high risk) to 850 (low risk). We've written a lot more about FICO here.
Credit scores only assess the info contained in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when these scores were first invented as it is now. Credit scoring was invented as a way to consider solely what was relevant to a borrower's likelihood to repay the lender.
Past delinquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all calculated into credit scores. Your score is calculated wtih both positive and negative information in your credit report. Late payments count against you, but a consistent record of paying on time will raise it.
To get a credit score, borrowers 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. Some folks 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.
MidTowne Mortgage can answer your questions about credit reporting. Call us at (478) 746-2063.