A Score that Really Matters: Your Credit Score

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Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to know two things about you: whether you can pay back the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, they look at your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.

The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.

Your credit score is a direct result of your repayment history. They never consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to assess a borrower's willingness to repay the loan while specifically excluding any other irrelevant factors.

Past delinquencies, payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scores. Your score comes from both the good and the bad in your credit history. Late payments count against you, but a record of paying on time will raise it.

For the agencies to calculate a credit score, borrowers must have an active credit account with a payment history of at least six months. This payment history ensures that there is sufficient information in your credit to generate a score. Some folks don't have a long enough credit history to get a credit score. They should build up a credit history before they apply.