A Score that Really Matters: Your Credit Score

Before they decide on the terms of your loan (which they base on their risk), lenders need to find out two things about you: your ability to repay the loan, and your willingness to pay back the loan. To figure out your ability to repay, lenders assess your debt-to-income ratio. In order to assess your willingness to repay the loan, they look at 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). For details on FICO, read more here.

Credit scores only consider the information in your credit profile. They never consider income, savings, down payment amount, or personal factors like sex ethnicity, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was developed to assess a borrower's willingness to repay the loan while specifically excluding other demographic factors.

Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score considers both positive and negative items in your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.

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 report to generate an accurate score. Some folks don't have a long enough credit history to get a credit score. They may need to build up a credit history before they apply.