What is a Credit Score?Before discussing terms available for a loan, lenders want to know two things about you:
1. Your ability to pay back the loan, evidenced by your debt-to-income ratio.
2. Your willingness to pay back the loan, visible via your credit score.
Your FICO score is a measure of credit risk. FICO scores are available through all of the major consumer reporting agencies and they range between 300 (high risk) and 850 (low risk).
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality, or marital status. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information 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.
Different portions of your credit history are given different weights:
35% of your FICO score is based on your specific payment history.
30% is your current level of indebtedness.
15% to the time your open credit has been in use, the longer the better, and types of credit available to you, installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards.
5% is pursuit of new credit or how often you request new trade lines.
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 ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.