A Score that Really Matters: Your Credit Score

Before deciding on what terms they will offer you a loan, lenders must find out two things about you: whether you can pay back the loan, and if you are willing to pay it back. To figure out your ability to pay back the loan, they assess your debt-to-income ratio. To assess your willingness to repay, they use your credit score.

Usually, the lower your credit score the higher your interest rate.

The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. The FICO score ranges from 350 (high risk) to 850 (low risk). We've written more about FICO here.

Credit scores only consider the info contained in your credit profile. 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 first invented as it is now. Credit scoring was developed to assess a borrower's willingness to repay the loan without considering other personal factors.

Deliquencies, derogatory 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 reflects both the good and the bad of your credit report. Late payments count against your score, but a consistent record of paying on time will improve it.

For the agencies to calculate a credit score, borrowers 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 assign a score. Some folks don't have a long enough credit history to get a credit score. They may need to build up credit history before they apply.