A Score that Really Matters: Your Credit Score

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

Fair Isaac and Company developed the first FICO score to assess creditworthiness. We've written more about FICO here.

Your credit score comes from your history of repayment. They don't consider income, savings, amount of down payment, or factors like sex race, nationality or marital status. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were invented as it is now. Credit scoring was invented as a way to consider only what was relevant to a borrower's likelihood to repay a loan.

Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of inquiries are all calculated into credit scoring. Your score comes from the good and the bad of your credit history. Late payments count against your score, but a consistent record of paying on time will improve it.

Your credit report must 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 payment history ensures that there is sufficient information in your credit to assign a score. If you don't meet the minimum criteria for getting a score, you might need to work on a credit history before you apply for a mortgage.