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Before deciding on what terms lenders will offer you on a loan (which they base on the "risk" to them),
they want to know two things about you: your ability to pay back the loan, and your willingness to pay
back the loan. For the first, they look at your income-to-debt obligation ratio. For your willingness to pay
back the loan, they consult your credit score. |
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The most widely used credit scores are FICO scores, which were developed by Fair
Isaac & Company, Inc.
(and they're named after their inventor!). Your FICO score is between 350 (high
risk) and 850 (low risk). |
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Credit scores only consider the information contained in your credit profile.
They do not consider your
income, savings, down payment amount, or demographic factors like gender, race,
nationality or marital
status. In fact,
the fact they don't consider demographic factors is why they were invented in
the first place. "Profiling"
was as dirty a word when FICO scores were invented as it is now. Credit scoring
was developed as a way
to consider only what was relevant to somebody's willingness to repay a loan. |
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Past delinquencies, derogatory payment behavior, current debt level, length of
credit history, types of
credit and number of inquiries are all considered in credit scores. Your score
considers both positive
and negative information in your credit report. Late payments will lower your
score, but establishing or
reestablishing a good track record of making payments on time will raise your
score. |
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Different portions of your credit history are given different weights.
Thirty-five percent of your FICO score
is based on your specific payment history. Thirty percent is your current level
of indebtedness. Fifteen
percent each is the time your open credit has been in use (ten year old accounts
are good, six month old
ones aren't as good) and types of credit available to you (installment loans
such as student loans, car loans,
etc. versus revolving and debit accounts like credit cards). Finally, five
percent is pursuit of new credit,
credit scores requested. |
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Your credit report must contain 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 ensures
that there is enough information in your report to generate an accurate score.
If you do not meet the
minimum criteria for getting a score, you may need to establish a credit history
or ask our mortgage
consultants about Alternative Credit loan options. |
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