Credit Scores

Before they decide on the terms of your loan, lenders need to find out two things about you: whether you can repay the loan, and if you will pay it back. To figure out your ability to pay back the loan, they assess your debt-to-income ratio. To assess your willingness to pay back the loan, they consult 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 (high risk) to 850 (low risk). We've written more about FICO here.

Credit scores only assess the information in your credit profile. They do not take into account income, savings, amount of down payment, or factors like gender, race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. "Profiling" was as dirty a word when FICO scores were first invented as it is in the present day. Credit scoring was developed to assess willingness to repay the loan while specifically excluding other demographic factors.

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

To get a credit score, borrowers 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 assign a score. Some people don't have a long enough credit history to get a credit score. They may need to spend a little time building up a credit history before they apply for a loan.