Your Credit Score: What it means

Before deciding on what terms they will offer you a loan (which they base on their risk), lenders must know two things about you: your ability to pay back the loan, and how committed you are to pay back the loan. To figure out your ability to repay, lenders assess your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.

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

Your credit score is a result of your history of repayment. They don't take into account income, savings, amount of down payment, or personal factors like gender, ethnicity, national origin or marital status. These scores were invented specifically for this reason. Credit scoring was envisioned as a way to take into account solely what was relevant to a borrower's willingness to repay a loan.

Your current debt level, past late payments, length of your credit history, and a few other factors are considered. Your score is calculated from the good and the bad of your credit report. Late payments will lower your credit score, but consistently making future payments on time will improve your score.

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