Your Credit Score: What it means

Before deciding on what terms they will offer you a mortgage loan (which they base on their risk), lenders want to find out two things about you: your ability to pay back the loan, and if you will pay it back. To assess your ability to repay, they look at your income and debt ratio. To assess your willingness to repay, they use your credit score.

The most commonly used credit scores are 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 about FICO here.

Credit scores only consider the information in your credit reports. They don't consider income or personal characteristics. Fair Isaac invented FICO specifically to exclude demographic factors. "Profiling" was as bad a word when FICO scores were first invented as it is today. Credit scoring was developed to assess willingness to pay while specifically excluding any other personal factors.

Deliquencies, payment behavior, debt level, length of credit history, types of credit and the number of inquiries are all considered in credit scores. Your score comes from the good and the bad of 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, you must have an active credit account with a payment history of at least six months. This payment history ensures that there is enough information in your credit to build an accurate score. Some people don't have a long enough credit history to get a credit score. They should spend a little time building up credit history before they apply for a loan.