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Before they decide on the terms of your loan (which they base on their risk), lenders need to find out two things about you: your ability to pay back the loan, and if you are willing to pay it back. To assess your ability to pay back the loan, they look at your income and debt ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). For details on FICO, read more here.
Your credit score comes from your history of repayment. They do not consider income, savings, amount of down payment, or demographic factors like sex race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when FICO scores were first invented as it is today. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering other personal 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 scoring. Your score is calculated from the good and the bad of your credit history. Late payments count against your score, but a record of paying on time will improve it.
To get a credit score, you must have an active credit account with a payment history of at least six months. This payment history ensures that there is enough information in your credit to assign a score. Some borrowers don't have a long enough credit history to get a credit score. They should build up a credit history before they apply for a loan.
Alpine Capital Mortgage can answer your questions about credit reporting. Call us at (208) 726-5466.
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