Your Credit Score: What it means

Before they decide on the terms of your loan (which they base on their risk), lenders want to find out two things about you: your ability to pay back the loan, and your willingness to repay the loan. To figure out your ability to repay, lenders look at 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 assess creditworthiness. We've written more on FICO here.

Your credit score comes from your repayment history. They do not take into account income, savings, down payment amount, or personal factors like sex race, national origin or marital status. Fair Isaac invented FICO specifically to exclude demographic factors. Credit scoring was developed to assess willingness to repay the loan while specifically excluding any other personal factors.

Deliquencies, derogatory payment behavior, debt level, length of credit history, types of credit and number of inquiries are all considered in credit scoring. Your score considers positive and negative information in your credit report. Late payments lower your credit score, but establishing or reestablishing a good track record of making payments on time will improve your score.

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 report to build a score. Should you not meet the criteria for getting a credit score, you might need to work on a credit history before you apply for a mortgage.