Your Credit Score: What it means

Before they decide on the terms of your mortgage loan, lenders need to discover two things about you: your ability to pay back the loan, and if you will pay it back. To understand whether you can repay, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.

The most commonly used credit scores are FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more about FICO here.

Your credit score is a direct result of your repayment history. They do not consider income, savings, amount of down payment, or factors like gender, race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as bad a word when these scores were first invented as it is today. Credit scoring was envisioned as a way to take into account solely that which was relevant to a borrower's likelihood to repay a loan.

Deliquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scores. Your score is based on the good and the bad in your credit history. Late payments will lower your credit score, but consistently making future payments on time will improve your score.

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

At PREMIERE MORTGAGE SERVICES INC., we answer questions about Credit reports every day. Call us at 978-422-2311.

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