Your Credit Score: What it means

Before they decide on the terms of your loan, lenders must find out two things about you: your ability to pay back the loan, and how committed you are to repay the loan. To understand whether you can pay back the loan, they assess 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 called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). We've written a lot more on FICO here.

Your credit score is a direct result of your history of repayment. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when these scores were invented as it is in the present day. Credit scoring was developed to assess willingness to repay the loan while specifically excluding other irrelevant factors.

Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score is based on both the good and the bad of your credit report. Late payments count against your score, but a record of paying on time will raise 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 report to assign a score. If you don't meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.

North American Financial can answer your questions about credit reporting. Give us a call at 702-524-1376.