Your Credit Score: What it means

Before deciding on what terms they will offer you a 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 repay the loan. To assess whether you can repay, they look at your income and debt ratio. To assess how willing you are to repay, they use your credit score.

The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more about FICO here.

Your credit score comes from your history of repayment. They don't consider income, savings, amount of down payment, or factors like sex race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these. Credit scoring was developed to assess willingness to repay the loan while specifically excluding any other personal factors.

Deliquencies, payment behavior, debt level, length of credit history, types of credit and the number of credit inquiries are all considered in credit scoring. Your score is calculated with both positive and negative information in your credit report. Late payments will lower your credit score, but establishing or reestablishing a good track record of making payments on time will raise your score.

To get a credit score, borrowers must have an active credit account with at least six months of payment history. This payment history ensures that there is enough information in your report to calculate an accurate score. Some people don't have a long enough credit history to get a credit score. They should build up a credit history before they apply for a loan.