Your Credit Score: What it means

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Before deciding on what terms they will offer you a loan, lenders need to find out two things about you: your ability to pay back the loan, and if you will pay it back. To understand your ability to repay, they look at your income and debt ratio. To calculate your willingness to repay the mortgage loan, they look at your credit score.

The most commonly used credit scores are called FICO scores, which Fair Isaac & Company, a financial analytics agency, developed. The FICO score ranges from 350 (high risk) to 850 (low risk). For details on FICO, read more here.

Your credit score is a result of your history of repayment. 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 invented as it is today. Credit scoring was developed as a way to consider only that which was relevant to a borrower's willingness to repay a loan.

Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score results from positive and negative information in your credit report. Late payments lower your credit score, but consistently making future payments on time will raise your score.

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 history ensures that there is enough information in your credit to generate an accurate score. Some people don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply.

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