Your Credit Score: What it means

Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must discover two things about you: your ability to pay back the loan, and how committed you are to repay the loan. To assess your ability to pay back the loan, lenders assess your debt-to-income ratio. To assess your willingness to pay back the mortgage loan, they look at your credit score.

The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). We've written more on FICO here.

Your credit score is a result of your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was envisioned as a way to assess willingness to repay the loan without considering any other personal factors.

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

For the agencies to calculate a credit score, you must have an active credit account with at least six months of payment history. This history ensures that there is enough information in your credit to build a score. If you don't meet the criteria for getting a credit score, you might need to establish a credit history prior to applying for a mortgage.

Alliance One Mortgage can answer questions about credit reports and many others. Call us at 626-363-9246.