In reviewing your application for a loan, two of the things that the lender will consider are your ability to repay the loan and your willingness to repay the loan. Your ability to pay the loan is most easily determined by looking at your income and the total amount of your monthly obligations, taking into account the new debt. However, to assess your willingness to repay the loan, they will look at your past history of repaying debts, which is represented by your credit report.
Credit score are also sometimes called FICO scores, named after the company that developed them, Fair Isaac & Company, Inc. Credit scores range from 350 to 850. The higher the score, the lower the perceived risk to the lender and thus, the better the rate and program for which you will qualify.
There are many factors that figure into the credit score and each are weighted differently. In order of level of importance they are:
- 1. Your payment history (weighted 35%)
- 2. Your current level of indebtedness (30%)
- 3. The amount of time your credit has been in use (15%)
- 4. The type of credit available to you i.e revolving credit, car loans, etc. (15%)
- 5. The number of inquiries into your credit (times you have sought credit) (5%)
You can see that the most importance is given to your payment history and currently level of indebtedness. Obviously, late payments and other derogatory payment information will have a more significant effect on your score than credit inquiries. However, numerous inquiries into your credit may have a negative impact on your credit and a few points could make a difference in qualifying for different programs.
You may have heard people say that don’t have a credit score. While this is not typical, it can happen. To ensure that there is adequate information to generate a credit score, you should have at least one account that has been open for at least six months and one that has been updated in the past six months. There are lenders who will lend to borrowers with no credit score, but other factors will be given greater consideration.