What Is A Credit Score

Before they decide on the terms of your loan, lenders want to find out two things about you: whether you can repay the loan, and how committed you are to pay back the loan. To assess your ability to repay, they look at your income and debt ratio. To assess your willingness to repay, they use your credit score.

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

Credit scores only assess the information contained in your credit profile. They don't consider income, savings, amount of down payment, or personal factors like sex ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was envisioned as a way to consider solely that which was relevant to a borrower's willingness to repay the lender.

Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scores. Your score is calculated with positive and negative information in your credit report. Late payments count against you, but a record of paying on time will raise it.

Your report should 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 enough information in your report to calculate a score. Some borrowers don't have a long enough credit history to get a credit score. They should build up credit history before they apply for a loan.


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