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: whether you can pay back the loan, and if you will pay it back. To figure out your ability to repay, they assess your debt-to-income ratio. To calculate your willingness to repay the 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). You can find out more about FICO here.
Credit scores only consider the information in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. Credit scoring was developed as a way to consider solely what was relevant to a borrower's likelihood to repay the lender.
Past delinquencies, 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 from both the good and the bad in your credit report. Late payments will lower your score, but consistently making future payments on time will raise 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 payment history ensures that there is enough information in your report to generate an accurate score. Should you not meet the minimum criteria for getting a score, you may need to establish your credit history prior to applying for a mortgage loan.
At C2 Financial Corporation, we answer questions about Credit reports every day. Call us at (727) 478-2797.
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