Before lenders decide to lend you money, they need to know if you're willing and able to pay back that loan. To figure out your ability to repay, lenders look at your debt-to-income ratio. To assess your willingness to repay the loan, they look at your credit score.
Fair Isaac and Company developed the first FICO score to help lenders assess creditworthines. We've written more on FICO here.
Credit scores only consider the information in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason. "Profiling" was as dirty a word when these scores were invented as it is in the present day. Credit scoring was developed to assess a borrower's willingness to pay without considering other demographic factors.
Past delinquencies, payment behavior, debt level, length of credit history, types of credit and number of credit inquiries are all considered in credit scoring. Your score results from both positive and negative information in your credit report. Late payments count against your score, but a record of paying on time will improve it.
For the agencies to calculate a credit score, borrowers must have an active credit account with six months of payment history. This history ensures that there is sufficient information in your credit to calculate an accurate score. Some folks don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply for a loan.
Great Mortgage NMLS#478647 can answer your questions about credit reporting. Call us at 708.966.9005.