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Credit Reports and Credit Score

What Is A Credit (FICO) Score?

A mortgage lender looks a two things when they are deciding if they will offer you a loan and on what terms: first - your ability to pay back the loan, second - 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, For the second, they consult your credit score.

FICO scores are the most widely used credit scores. They 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).

Only information in your credit profile is used in determining your credit score. Information concerning your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status is not considered when determining your credit score. The FICO score was developed to reflect only what was considered as relevant to show somebody's willingness to repay a loan without regard to any demographic elements.

A history of over due payments, derogatory payment behavior, your current level of debt, the length of your credit history, the types of credit and the number of inquiries to your credit report are all considered in determining your credit score. Your score considers both the positive and the negative information in your credit report. Having a record of late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.

Different Areas Of Your Credit History Carry Different Weights

Different areas of your credit history carry 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.

You must have at least one account which has been open for six months or more on your credit report, and at least one updated account in the last 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 prior to applying for a mortgage.