A Score that Really Matters: The Credit Score
Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must find out two things about you: your ability to repay the loan, and if you are willing to 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.
Fair Isaac and Company calculated the first FICO score to help lenders assess creditworthines. We've written a lot more about FICO here.
Credit scores only assess the info in your credit profile. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were first invented as it is today. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan while specifically excluding other demographic factors.
Deliquencies, payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score considers both positive and negative information in your credit report. Late payments will lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise 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 history ensures that there is sufficient 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 should build up a credit history before they apply.
At The Lending Source, we answer questions about Credit reports every day. Call us at (973) 601-2122.