Credit Scoring

Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders need to know two things about you: your ability to pay back the loan, and if you are willing to pay it back. To figure out your ability to repay, lenders look at your debt-to-income ratio. To calculate your willingness to repay the 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. Your FICO score ranges from 350 (high risk) to 850 (low risk). You can find out more on FICO here.

Your credit score comes from your repayment history. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as dirty a word when these scores were first invented as it is now. Credit scoring was developed to assess a borrower's willingness to pay without considering other demographic factors.

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scores. Your score is calculated wtih both positive and negative items in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.

For the agencies to calculate a credit score, you must have an active credit account with at least six months of payment history. This history ensures that there is enough 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 spend a little time building up credit history before they apply.

Nationwide Home Loans can answer your questions about credit reporting. Give us a call at 5626935048.