Your Credit Score: What it means

Before deciding on what terms they will offer you a loan, lenders need to know two things about you: whether you can pay back the loan, and your willingness to repay the loan. To assess whether you can pay back the loan, they assess your income and debt ratio. To assess your willingness to repay, they use your credit score.

Fair Isaac and Company formulated the original FICO score to help lenders assess creditworthiness. We've written a lot more about FICO here.

Your credit score is a direct result of your history of repayment. They don't take into account your income, savings, down payment amount, or personal factors like sex race, national origin or marital status. These scores were invented specifically for this reason. "Profiling" was as bad a word when FICO scores were first invented as it is today. Credit scoring was developed as a way to consider only what was relevant to a borrower's willingness to repay the lender.

Your current debt load, past late payments, length of your credit history, and other factors are considered. Your score reflects the good and the bad of your credit history. Late payments count against your score, but a record of paying on time will improve it.

Your report should 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 payment history ensures that there is sufficient information in your credit to assign an accurate score. Some borrowers 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.