Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must find out two things about you: whether you can pay back the loan, and if you will pay it back. To understand your ability to pay back the loan, they look at your income and debt ratio. To assess your willingness to repay, they use your credit score.
The most commonly used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more on FICO here.
Your credit score is a result of your repayment history. They don’t consider income or personal characteristics. These scores were invented specifically for this reason. “Profiling” was as bad 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 any other personal factors.
Deliquencies, payment behavior, current 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 items in your credit report. Late payments count against your score, but a record of paying on time will improve it.
To get a credit score, you must have an active credit account with at least six months of payment history. This history ensures that there is enough information in your report to generate a score. Some people don’t have a long enough credit history to get a credit score. They should spend a little time building credit history before they apply.