We know it’s important, and it should be “high”, but what does that mean, anyway? Any why is that important? When purchasing a home and obtaining your new loan, the lender will look at your income (debt to income ratio) and credit score, among some other factors. Many people wonder what these are for. Well, the debt to income ratio will help dictate the amount for which you qualify, and the credit score will help dictate what interest rate you would qualify for.
-Your credit score is technically a statistical method of assessing your ability and likelihood to pay back your debt (creditworthiness).
-Credit scores are based on several different factors, including your payment history, amount of outstanding debt, length of credit history, use of new credit and types of credit used.
-Credit scores are primarily based on credit report information, which is typically sourced from credit bureaus.
-Credit scores often come from any of the three largest credit bureaus in the U.S. (Experian, Equifax and TransUnion).
-Credit scores range between 300 and 990, depending on the scoring system and algorithms used (i.e., FICO, NextGen, CE Score and VantageScore).
Before there were credit scores, human judgment was the primary factor used to evaluate a borrower’s credit worthiness and/or risk. This process was very subjective and created a lot of variability in the results. Many lenders spent an enormous amount of resources training employees on how to observe consumer credit behavior as the basis for judging risk when lending money. Not only was this a slow process, but due to human error, it was also inconsistent and unreliable.
