Credit Score, FICO Score, Credit Rating Income-to-Debt
Ratio
Before deciding on what terms they will offer you a
loan (which they base on their "risk"), lenders
want to know two things about you: your ability to pay
back the loan, and your willingness to pay back the
loan. For the first, they look at your income-to-debt
obligation ratio. For your willingness to pay
back the loan, they consult your credit
score.
FICO
Scores
The most widely used credit scores are FICO
scores, which were developed by Fair Isaac
& Company, Inc. (and they're named after their inventor!).
Your FICO score is between 350 (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. In fact, the fact they don't consider
demographic factors is why they were invented in the
first place. "Profiling" was as dirty a word
when FICO scores were invented as it
is now. 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. Thirty-five percent
of your FICO score is based on your
specific payment history. Thirty percent is your current
level of indebtedness. Fifteen percent each is the time
your open credit has been in use (ten year old accounts
are good, six month old ones aren't as good) and types
of credit available to you (installment loans such as
student loans, car loans, etc. versus revolving and
debit accounts like credit cards). Finally, five percent
is pursuit of new credit -- credit scores requested.
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.
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