Credit Scoring

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Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders need to discover two things about you: whether you can pay back the loan, and your willingness to pay back the loan. To understand your ability to repay, they look at your income and debt ratio. To assess your willingness to pay back the mortgage loan, they look at 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 (high risk) to 850 (low risk). We've written a lot more on FICO here.

Your credit score comes from your history of repayment. They don't consider income, savings, down payment amount, or factors like gender, race, nationality or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when FICO scores were invented as it is today. Credit scoring was invented as a way to take into account only what was relevant to a borrower's likelihood to pay back the lender.

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

Your report must 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 build an accurate score. Some people don't have a long enough credit history to get a credit score. They should build up a credit history before they apply.




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